Financial Accounting Tools for Business Decision Making, 9th Canadian Edition Paul SOLUTIONS MANUAL by ACADEMIAMILL

SOLUTIONS MANUAL FOR Financial Accounting: Tools for Business Decision Solution Manual For 9th Edition Paul Kimmel; Making, Canadian Edition Financial Accounting Tools for Business Decision Making, 9th Canadian Edition Paul Weygandt; D. Kimmel, Jerry J. Weygandt, Jill E. Mitchell, Barbara Trenholm, Wayne Jerry Jill Mitchell; Barbara Trenholm; Irvine, Christopher D. Burnley Chapter 1-14 Wayne Irvine; Christopher CHAPTER 1

THE PURPOSE AND USE OF FINANCIAL STATEMENTS LEARNING OBJECTIVES 1. 2. 3. 4.

Identify the uses and users of accounting information. Describe the primary forms of business organization. Explain the three main types of business activity. Describe the purpose and content of each of the financial statements.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO

13.

19.

25.

14.

20.

26.

15.

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27.

10.

16.

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28.

11.

17.

23.

29.

12.

18.

24.

30.

Brief Exercises 1.

10.

11.

Exercises 1.

10.

13.

11.

14.

12.

Problems: Set A and B 1.

10.

1,3

Cases 1.

3,4

Legend: The following abbreviations will appear throughout the solutions manual file.

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex

Difficulty:

Time:

Estimated time to prepare in minutes

AACSB

Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

Accounting is the information system that identifies and records the economic events of an organization, and then communicates them to a wide variety of interested users.

LO 1 BT: K Difficulty: S TIME: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

Internal users of accounting information work for the company and include finance directors, marketing managers, human resource personnel, production supervisors, and company officers. Internal users have access to company information that is not available to external users.

(b)

Some external users may be individuals who are employees of the company but are not directly involved in managing the company. As a result, they do not have access to much information. External users of accounting information generally do not work for the company. The primary external users are investors and creditors. Other external users include labour unions, customers, the Canada Revenue Agency (CRA), and securities commissions.

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Internal users may want the following questions answered:  Is there enough cash to purchase a new piece of equipment?  What price should we sell our product for to cover costs and to maximize net income?  How many employees can we afford to hire this year?  Which product line is the most profitable?  How much of a pay raise can the company afford to give me? External users may want the following questions answered:  Is the company earning enough to give me my required return on investment?  Will the company be able to repay its debts as the debts come due?  Will the company stay in business long enough to service the products I buy from it?

LO 1 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Primary users of accounting information include investors and creditors. These external users need to make decisions concerning their ongoing business relationship with the company. They need to be able to assess the company‘s performance and financial health because they intend to start, continue, or discontinue having transactions with the company. Other decision makers who have specific needs for certain financial information, such as the amount of taxes paid by the company, are not considered primary users.

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Decision makers rely on financial statement information and expect the accounting information to have been prepared ethically. Without the expectation of ethical behaviour, the information presented in the financial statements would have no credibility for the users of the accounting information. Without credibility, financial statement information would be useless to financial statement users.

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics

Descriptive data analytic provides information about what happened. On the other hand, predictive data analytics helps the organization look into the future and gives some visibility into what is likely to happen. Predictive data analytics is of the most use to management

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics

7. (a) Proprietorship: Proprietorships are easier to form (and dissolve) than other types of business organizations. They are not taxed as separate entities; rather, the proprietor pays personal income tax on the company‘s net income. Depending on the circumstances, this may be an advantage or disadvantage. Disadvantages of a proprietorship include unlimited liability (proprietors are personally liable for all debts of the business) and difficulty in obtaining financing compared to other forms of organization. In addition, the life of the proprietorship is limited as it is dependent on the willingness and capability of the proprietor to continue operations.

7. (continued) (b) Partnership: Partnerships are easier to form (and dissolve) than a corporation, although not as easy as a proprietorship. Similar to proprietorships, partnerships are not taxed as separate entities. Instead, the partners pay personal income tax on their share of income. Depending on the circumstances, this may be an advantage or disadvantage. Disadvantages of partnerships include unlimited liability (partners are jointly and severally liable for all debts of the business) and difficulty in obtaining financing compared to corporations. In addition, the life of a partnership can be limited depending on the terms of the partnership agreement and actions of the other partners. (c) Private corporation: Advantages of a private corporation include limited liability (shareholders not being personally liable for corporate debts), indefinite life, and transferability of ownership. In many cases, depending on the size of the corporation, a creditor such as a bank will ask for a personal guarantee which will void the limited liability advantage. In addition, transferability of ownership may be limited since shares are not publicly traded. Disadvantages of a private corporation include increased government regulations and paperwork. The fact that corporations are taxed as a separate legal entity may be an advantage or a disadvantage. Corporations often receive more favourable income tax treatment than other forms of business organizations. As mentioned above, depending on the size of the corporation, many of the advantages of the corporate form are not available to a small private corporation. (d) Public corporation: The advantages of a public corporation include limited liability, indefinite life, and transferability of ownership. These features make it easier for publicly traded corporations to raise financing compared to other forms of business organizations. Corporations often receive more favourable income tax treatment than other forms of business organizations. Disadvantages include increased government regulations and paperwork. In addition, because the shares of public companies are listed and traded on Canadian or other exchanges such as the Toronto Stock Exchange (TSX), these corporations are required to distribute their financial statements to investors, creditors and other interested parties, and the general public. This requirement involves greater costs to the corporation. LO 2 BT: C Difficulty: M TIME: 20 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

While both public and private corporations enjoy many of the same advantages and disadvantages, one key difference is that public corporations list their shares for sale to the public on Canadian or other stock exchanges. In contrast, while private corporations issue shares, they do not make them available to the general public or trade them on public stock exchanges. Private corporations may also not enjoy the advantages of limited liability and ease of transfer of ownership that public corporations generally experience because of their size and distribution of shares.

LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Shareholders who invest in public corporations do not have any personal involvement in the management of the company. While the shareholders legally own the corporation, they manage it indirectly through a board of directors they elect. The board, in turn, sets the broad strategic objectives for the company and hires the company's officers, such as the CEO, to execute policy and perform the daily management functions.

LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

(a)

Public corporations must apply International Financial Reporting Standards (IFRS). Private corporations can apply either IFRS or Accounting Standards for Private Enterprises (ASPE).

(b)

The information needs of users of public corporations and private corporations are different. Users of financial information of public corporations require more extensive disclosure. They may also benefit from the enhanced comparability to global companies provided by international standards. Since private corporations tend to be smaller with easier access to company information, their users do not require as extensive reporting.

LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

A private company that has plans to grow significantly in the near future, and that wishes to have access to large amounts of capital obtained from external investors will want to go public. In order to go public, the company would be required to have several years of past financial statements prepared using IFRS. In addition, some businesses choose to follow IFRS to be able to compare their performance with businesses in the same industry that are public and whose financial information is readily available.

LO 2 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

The reporting entity concept means that economic activity of any business organization or economic entity is kept separate and distinct from the activities of the owner and all other economic entities. In the case of corporations such as The North West Company Inc., it also means that economic activities of related corporations that are owned or controlled by one corporation are consolidated. The results of these individual companies are also reported separately as separate economic entities.

LO 2 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

(a) (b) (c)

(d) (e)

Assets are what the company owns such as cash and equipment. A liability is an amount the company owes such as accounts payable and income tax payable. Shareholders‘ equity represents the residual interest (assets less liabilities) of a company at a point in time and includes share capital and retained earnings, in addition to other possible components. Revenues are increases in a company‘s economic resources from operating activities such as the sale of a product. Expenses are the cost of assets that are consumed or services that are used in the process of generating revenues. Examples include cost of goods sold, rent expense, and salaries expense.

LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

Operating activities are the activities that the organization undertakes to earn net income. They include the day-to-day activities that generate revenues and cause expenses to be incurred. In order to earn net income, a company must first purchase resources they need to operate. The purchase of these resources (assets) is considered to be an investing activity. Finally, the company must have sufficient funds to purchase assets and to operate. While some of the necessary cash will be generated from operations, often the company needs to raise external funds by either issuing shares or borrowing money. Financing activities involve the activities undertaken by the company to raise cash externally.

LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

(a)

Two examples of operating activities are revenue generated from providing auto repair services (an inflow of cash) and the expenses related to paying employee salaries (an outflow of cash).

(b)

Two examples of investing activities are the purchase of property, plant, and equipment, such as a building (an outflow of cash), and the sale of a long-term investment (an inflow of cash).

(c)

Two examples of financing activities for a corporation are borrowing money (debt), which is an inflow of cash, and declaring and paying dividends (equity), an outflow of cash

LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

After lending money to a company, a bank would monitor the dividend paying practices of that company to ensure that the funds that were lent are not being used to pay larger than normal dividends. When the loan was requested, the company would have described the purpose of the loan. Examples include the purchase of some equipment or the refinancing of existing debt. Some banks specify in the loan agreement that the funds cannot be used to pay dividends to ensure that the cash is put to work in the business and not distributed to shareholders.

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

I agree. Net income is the result of the revenues less the expenses of a business for a specified period of time. It is the final amount appearing on the statement of income. The statement of changes in equity lists all the transactions that change equity accounts. Retained earnings is increased by net income. Therefore, net income appears as an addition to retained earnings on the statement of changes in equity.

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Retained earnings is an account that reports that sum of all the net income for the business less any dividends that have been declared since its inception. The sources of increases and decreases in retained earnings is reported on the statement of changes in equity. The statement shows the beginning balance in retained earnings plus the net income for the year or less the net loss for the year, followed by a deduction for the dividends that were declared during the year. The final result is the ending balance in retained earnings, which also appears on the statement of financial position.

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

A fiscal year is an accounting time period that is one year in length but does not have to end on December 31. Corporations can select their fiscal year end based on when their operations are low or when inventory is low. Selecting a fiscal year end when operations are low provides more time for accounting staff to complete the year-end reporting requirements. If inventories are low, this simplifies the inventory count and minimizes the business disruption caused by counting the inventory.

LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

The internal accounting records do use exact figures. However, for presentation purposes, it is unlikely that the use of rounded figures would change a decision made by the users of the financial statements. As well, presenting the information in this manner makes the statements easier to read and analyze thereby increasing their utility to the users. Rounding the numbers to the nearest million does not have a material impact on decision-making using the financial statements.

LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Assets = Liabilities + Shareholders‘ Equity $1,219,273 = $639,069 + $580,204 (amounts are in thousands of dollars)

LO 4 BT: AP Difficulty: M TIME: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

22.

A statement of changes in equity explains the changes in the components of shareholders‘ equity, such as share capital and retained earnings. Examples of items that increase the components are issue of shares (increases share capital) and net income (increases retained earnings). Examples of items that decrease the components are repurchases of shares (decreases share capital) and declaration of dividends (decreases retained earnings).

LO 4 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

(a)

The primary purpose of the statement of cash flows is to provide financial information about the cash receipts (inflows) and cash payments (outflows) of a company for a specific period of time.

(b)

The three categories of the statement of cash flows are operating activities, investing activities, and financing activities. These categories represent the three principal types of business activities.

LO 4 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

24.

The cash obtained from operating activities is not necessarily expected to be positive in the early years of a company‘s life. If a business offers credit to its customers and needs to hold a significant amount of inventory to satisfy customer demands, a large amount of working capital obtained from selling goods will be tied up in accounts receivable and inventory. Creditors on the other hand will have little leniency on a new business when expecting to be paid. Consequently, the amount of cash from operating activities could very likely be negative. For investing activities, a negative cash outflow would also be expected as the business must invest in long-lived assets needed for operations.

LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

25.

The statement of financial position is prepared as at a specific point in time because it shows what the business owns (its assets) and what it owes (its liabilities). These items are constantly changing. It is necessary to select one point in time at which to present them. The other statements (statement of income, statement of changes in equity, and statement of cash flows) cover a period of time as they report activities and measure performance for a specific period of time.

LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

26.

(a)

The statement of income reports net income for the period. The net income figure from the statement of income is shown on the statement of changes in equity as an addition to beginning retained earnings. If there is a loss, it is deducted from beginning retained earnings.

(b)

The statement of changes in equity explains the change in the balances of the components of shareholders‘ equity (for example, common shares and retained earnings) from one period to the next. The ending balances are reported in the shareholders‘ equity section of the statement of financial position.

(c)

The statement of cash flows explains the change in the cash balance from one period to the next. The ending balance of cash reported in the statement of cash flows agrees with the ending cash balance reported in the current assets section on the statement of financial position.

LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

27.

(a)

Companies using IFRS must report a statement of income, statement of changes in equity, statement of financial position, and statement of cash flows. In addition, companies using IFRS may also need to prepare a statement of comprehensive income.

(b)

Companies using ASPE must report a statement of income, statement of retained earnings, balance sheet, and a statement of cash flows.

LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

28.

The management discussion and analysis (MD&A) section of the annual report provides management‘s perspective on the financial results and can provide important context for interpreting them. In the MD&A, management also provides a forward-looking perspective (how the company‘s operations and results are expected to change in the future).

LO 4 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

29.

The auditor's report provides shareholders with an opinion on whether the company's financial statements are fairly presented in accordance with the applicable accounting principles (which is IFRS for public companies). For public companies, the auditor's report will also identify key audit matters, which are the matters that the auditor concluded were of most significance in the audit of the financial statements. These include areas involving significant risks of misstatement, significant risks that have been identified by the auditor, financial statement items involving significant management estimates, and the effect on the audit of significant events or transactions that have taken place.

LO 4 BT: C Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

30.

Explanatory notes and supporting schedules accompany every set of financial statements and are an integral part of the statements. The notes to the financial statements clarify the financial statements and provide additional detail. Information in the notes does not have to be quantifiable (numeric). Examples of notes are descriptions of the significant accounting policies and methods used in preparing the statements, explanations of uncertainties and contingencies, and various statistics and details too voluminous to be included in the statements. The notes are essential to understanding a company‘s operating performance.

LO 4 BT: C Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1.1 (a) Type of Evaluation

(b) Type of User

5 4 1 6 2 3

External Internal External Internal External External

Investor Marketing manager Creditor Chief financial officer Canada Revenue Agency Labour union

LO 1 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.2

1 2 3

(a) Type of Data Analytics

(b) Perspective

Descriptive Diagnostic Predictive

Hindsight Insight Foresight

LO 1 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.3 a. 1 b. 4 c. 3 d. 2 e. 4

Proprietorship Private corporation Public corporation Partnership Private corporation

LO 2 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.4 a. F b. O c. I d. F e. F f. F g. O h. I i. O

Inflow Inflow Inflow Outflow Inflow Outflow Outflow Outflow Outflow

Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying dividends paid as an operating or financing activity. We have chosen to classify dividends paid as financing activities in this textbook. LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 1.5

1. 2. 3. 4. 5. 6. 7. 8.

O F O O O O F I

NE + + NE -

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.6 a.

Total assets

= = =

Total liabilities + Shareholders‘ equity $55,000 + $120,000 $175,000

(Liabilities + Shareholders‘ equity = Assets)

Total assets

= = =

Total liabilities + Shareholders‘ equity (share capital + retained earnings) $170,000 + ($100,000 + $90,000) $360,000

(Liabilities + Shareholders‘ equity = Assets)

Total liabilities

= = =

Total assets – Shareholders‘ equity (share capital + retained earnings) $150,000 – ($50,000 + $25,000) $75,000

(Assets – Shareholders‘ equity = Liabilities)

Shareholders‘ equity

= = =

Total assets – Total liabilities $500,000 – ($500,000 ÷ 2) $250,000

(Assets – Liabilities = Shareholders‘ equity) LO 4 BT: AP Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.7 Beginning of Year: Assets = Liabilities + Shareholders‘ equity Beginning of Year: $720,000 = $420,000 + Shareholders‘ equity Beginning of Year: Shareholders‘ equity = $300,000 a.

($720,000 + $250,000) = ($420,000 – $80,000) + Shareholders‘ equity Shareholders‘ equity = $630,000

[(Assets ± Change in assets) – (Liabilities ± Change in liabilities) = Shareholders‘ equity]

Assets = ($420,000 – $100,000) + ($300,000 + $90,000 + $125,000) Assets = $835,000

[(Liabilities ± Change in liabilities) + (Shareholders‘ equity ± Change in shareholders‘ equity) = Assets]

($720,000 – $90,000) = Liabilities + ($300,000 + $120,000) Liabilities = $210,000

[(Assets ± Change in assets) – (Shareholders‘ equity ± Change in shareholders‘ equity) = Liabilities] LO 4 BT: AP Difficulty: C TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.8 a. SI b. SFP c. SCE d. SCF e. SFP f. SCF g. SI h. SCE LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.9 a. L b. A c. L d. L e. A f. A g. A h. SE i. L j. SE k. A LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.10

a. b. c. d. e. f. g. h.

Net income Repayment of bank loan Declared dividends Issue of common shares Cash purchase of inventory Repurchase of common shares Net loss Issue of long-term debt

Share Capital

Retained Earnings

Total Shareholders' Equity

NE NE NE + NE NE NE

+ NE NE NE NE NE

+ NE + NE NE

LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.11 a.

Beginning balance Issue additional shares Net income Dividends declared Ending balance b.

Beginning balance Issue additional shares Net loss Ending balance

(1)

(2)

Common Shares $100,000 50,000

Retained Earnings $475,000

$150,000

75,000 (15,000) $535,000

(1)

(2)

Common Shares $100,000 50,000

Retained Earnings $475,000

$150,000

(75,000) $400,000

(3) Total Shareholders' Equity $575,000 50,000 75,000 (15,000) $685,000 (3) Total Shareholders' Equity $575,000 50,000 (75,000) $550,000

(Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AN Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 1.1 a.

Chief Financial Officer – Does Meta Platforms generate enough cash to expand its operations and purchase other businesses? Human Resource Manager – What is Meta Platforms‘s annual salary expense?

Creditor – Does Meta Platforms have enough cash available to make its monthly debt payments? Investor – How much did Meta Platforms pay in dividends last year?

Other examples are also possible. LO 1 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.2 Proprietorship Partnership 1. 2. 3. 4. 5.

No personal liability Owner(s) pay(s) personal income tax on company income Generally easiest form of organization to raise capital Ownership indicated by shares Required to issue quarterly financial statements

Public Corporation

Private Corporation

Owned by one person

Limited life

8. 9.

Usually, the easiest form of organization to set up Required to use IFRS as its accounting standards

10. Shares are closely held

LO 2 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

EXERCISE 1.3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

O I O F F F O O O F

Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying payments of interest as an operating or financing activity. We have chosen to classify payments of interest as operating activities in this textbook. LO 3 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

(a) O F I F I I O O I F F O

(b) + + + + + -

Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying payments of dividends and interest as an operating or financing activity. We have chosen to classify payments of dividends as financing activities and the payments of interest as operating activities in this textbook. LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.5 1. 2. 3. 4. 5. 6. 7. 8.

SI SFP, SCF SCF SI SCE, SFP SCE SI, SCE SFP

9. 10. 11. 12. 13. 14. 15.

SFP SI SI SCF SFP SCE, SFP SFP

LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.6 a.

Assets – Liabilities = Shareholders‘ equity 2023: $550,000 – $400,000 = $150,000 2024: $630,000 – $420,000 = $210,000

(Assets – Liabilities = Shareholders‘ equity)

Change in shareholders‘ equity $210,000 – $150,000 = $60,000 increase

1. Net income is $60,000 = the increase in shareholders‘ equity 2. Net income is $70,000 = the increase in shareholders‘ equity + dividends declared of $10,000 3. Net income is $30,000 = the increase in shareholders‘ equity – common shares issued of $30,000 4. Net income is $50,000 = the increase in shareholders‘ equity + dividends declared of $10,000 – common shares issued of $20,000

LO 4 BT: AP Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.7 [1]

Total revenues – Net income = Total expenses $1,000,000 – $150,000 = $850,000

[2]

Common shares, end of year $100,000 = Beginning balance of common shares + Issue of shares of $100,000

[3]

$150,000 equal to Net income given above

[4]

Beginning balance of retained earnings plus net income less dividends declared = Ending balance of retained earnings. $0 + $150,000 – Dividends declared = $100,000 Dividends declared = $50,000

[5]

Beginning balance in shareholders' equity + Issue of shares + Net income – Dividends declared = Ending balance in shareholders‘ equity $0 + $100,000 + $150,000 – $50,000 = $200,000

[6]

Total assets – Total liabilities = total Shareholders‘ equity $1,050,000 – $850,000 = $200,000 or [5] above

[7]

Total revenues – Total expenses = Net income Total revenues – $250,000 = $50,000 Total revenues = $300,000

[8]

Beginning balance of common shares + Issue of shares = Common shares, end of year $0 + Issue of shares = $20,000 Issue of shares = $20,000

[9]

$50,000 equal to Net income given above

[10]

Common shares, end of year + Retained Earnings, end of year $20,000 + $40,000 = $60,000 Total shareholders‘ equity, end of year

[11]

Total liabilities + Total shareholders‘ equity = Total assets $150,000 + $60,000 (from [10]) = $210,000

[12]

$60,000 (from [10]) or $210,000 (from [11]) − $150,000 total liabilities = $60,000 total shareholders‘ equity

LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.8 [1]

Total expenses + Net income = Total revenues $1,700,000 + $1,100,000 = $2,800,000

[2]

Common shares, end of year $200,000 = Beginning balance of common shares (nil) + Issue of shares of $200,000

[3]

$1,100,000 equal to Net income given above

[4]

Beginning balance of retained earnings plus net income less dividends declared + Beginning balance of common shares + Issue of shares = Ending balance in shareholders‘ equity. $0 + $1,100,000 – $300,000 + $0 + $200,000 = $1,000,000 Ending balance in total shareholders‘ equity = $1,000,000

[5]

Total liabilities + Total Shareholders‘ equity = Total assets $1,600,000 + $1,000,000 or [4] above = $2,600,000

[6]

[4] above $1,000,000

[7]

Total revenues – Net income = Total expenses $3,200,000 – $1,500,000 = $1,700,000

[8]

Beginning balance of common shares + Issue of shares = Common shares, end of year $0 + Issue of shares = $500,000 Common shares, end of year $500,000

[9]

$1,500,000 equal to Net income given above

[10]

Beginning balance of retained earnings plus net income less dividends declared = Ending balance of retained earnings. $0 + $1,500,000 – Dividends declared = $1,200,000 Dividends declared = $300,000

[11]

Common shares, end of year + Retained Earnings, end of year $500,000 (from [8]) + $1,200,000 = $1,700,000 Total shareholders‘ equity, end of year

[12]

Total assets – Total Shareholders‘ equity = Total liabilities $3,100,000 – $1,700,000 = $1,400,000

LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.9 ($ in thousands) a. Assets – Liabilities = Shareholders‘ equity 2021: $4,385,806 – $2,349,880 = $2,035,926 2020: $3,860,205 – $1,927,741 = $1,932,464 b.

Assets = Liabilities + Shareholders‘ equity 2021: $4,385,806 = $2,349,880 + $2,035,926 Assets = Liabilities + Shareholders‘ equity 2020: $3,860,205 = $1,927,741 + $1,932,464

Change in shareholders‘ equity $2,035,926 – $1,932,464= $103,462 increase

Shareholders‘ equity, Dec. 31, 2020 Add: Net income Deduct: Dividends declared Other shareholders‘ equity items Shareholders‘ equity, Dec. 31, 2021

$1,932,464 ? 89,054 89,693 $2,035,926

Solving for Net income: $2,035,926 + $89,054 + $89,693 − $1,932,464 = $282,209. (Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.10 (a) L A L A A SE A (b)

Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Equipment

L A A L SE A

Income tax payable Inventory Land Mortgage payable Retained earnings Supplies

Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts.

EXERCISE 1.10 (CONTINUED) AVENTURA INC. Statement of Financial Position November 30, 2024 Assets Cash Accounts receivable Inventory Supplies Land Buildings Equipment Total assets

$ 20,000 19,500 18,000 700 44,000 100,000 30,000 $232,200

Liabilities and Shareholders‘ Equity Liabilities Accounts payable Income tax payable Bank loan payable Mortgage payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$ 26,200 6,000 34,000 97,500 163,700 20,000 48,500 68,500 $232,200

(Assets = Liabilities + Shareholders‘ equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.11 a. E E NR E R E NR R b.

Selling, general and administrative expenses Cost of goods sold Dividends declared Finance expenses Finance income Income tax expense Inventories Sales LEON‘S FURNITURE LIMITED Statement of Income

Year Ended December 31, 2021 (in thousands) Revenues Sales Finance income Total revenues Expenses Selling, general and administrative expenses Cost of goods sold Finance expenses Total expenses Income before income tax Income tax expense Net income

$2,512,670 5,767 2,518,437 $ 819,091 1,404,446 20,752 2,244,289 274,148 69,221 $ 204,927

[Revenues – Expenses = Net income or (loss)] LO 4 BT: AP Difficulty: M TIME20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.12 KON INC. Statement of Income Year Ended December 31, 2024 Revenues Service revenue Expenses Salaries expense Rent expense Utilities expense Office expense Total expenses Income before income tax Income tax expense Net income

$61,000 $30,000 12,400 2,400 1,600 46,400 14,600 3,000 $11,600

[Revenues – Expenses = Net income or (loss)]

KON INC. Statement of Changes in Equity Year Ended December 31, 2024

Common Shares

Retained Earnings

Total Equity

Balance, January 1 Net income Dividends declared Issued common shares Balance, December 31

$20,000

$58,000 11,600 (5,000) ______ $64,600

10,000 $30,000

$78,000 11,600 (5,000) 10,000 $94,600

(Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.13 a.

Camping revenue Expenses Operating expenses Income tax expense Net income

$283,000 $245,000 10,000

255,000 $ 28,000

[Revenues – Expenses = Net income or (loss)]

Balance, January 1 Net Income Dividends declared Issued common shares Balance, December 31

SEA SURF RESORTS INC. Statement of Changes in Equity Year Ended December 31, 2024 Common Shares $30,000

15,000 $45,000

Retained Earnings $18,000 28,000 (12,000) _______ $34,000

Total Equity $48,000 28,000 (12,000) 15,000 $79,000

(Beginning equity ± Changes to equity = Ending equity) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts.

EXERCISE 1.13 (CONTINUED) b. (continued) SEA SURF RESORTS INC. Statement of Financial Position December 31, 2024

Assets Cash Supplies Equipment Total assets Liabilities and Shareholders‘ Equity Liabilities Accounts payable Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

19,000 2,500 124,000 $145,500

$ 16,500 50,000 66,500 45,000 34,000 79,000 $145,500

(Assets = Liabilities + Shareholders‘ equity) LO 4 BT: AP Difficulty: M TIME: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.14 1.

Yu Corporation is distributing nearly all of this year's net income as dividends. This suggests that Yu is not pursuing rapid growth. Companies that are pursuing opportunities for growth normally retain their net income and pay low, or no dividends.

Surya Corporation is not generating sufficient cash from operating activities to fund its investing activities. The company is borrowing to finance its investing activities. This is common for companies in their early years of existence. It could also be in an expansion stage.

Naguib Ltd. is financing its assets in a slightly higher proportion through equity than through debt. The company has $450,000 ($200,000 + $250,000) of total assets, which are funded 44.4% ($200,000 ÷ $450,000) by liabilities and 55.6% ($250,000 ÷ $450,000) by equity. Since equity does not have to be repaid and does not require interest payments, the company appears to be in a healthy financial position.

Rijo Inc. does not have any liabilities and its assets are completely financed by equity. This places it in a very strong financial position since there are no outside claims on the company‘s assets. This also means that the company is using its own funds to finance assets. While this reduces risk, it may also reduce return if borrowed funds can be employed to generate an internal return higher than the cost of borrowing.

LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 1.1A a.

1. The South Face Inc. is an external user of accounting information in assessing the creditworthiness of their customer. 2. An investor purchasing common shares of Orbite Online Inc. is an external user. 3. In deciding whether to extend a loan, Caisse d‘Économie Base Montréal is an external user. 4. As an employee of Tech Toy Limited, the CFO is an internal user.

1. In deciding to extend credit, South Face would focus its attention on the statement of financial position of the new customer. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from cash on hand and other current assets. The statement of financial position of the new customer will show if the company has enough current assets to meet its current obligations. 2. Since the investor intends to hold the shares for a long period of time (at least five years), s(he) should focus on the company‘s statement of income. The statement of income reports the company‘s past performance in terms of revenues, expenses, and net income. This is generally regarded as a good indicator of the company‘s future performance. 3. The Caisse is interested in two things—the ability of the company to make interest payments on a monthly basis for the next three years and the ability to repay the principal amount at the end of the three years. In order to evaluate both of these factors, the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operations on an ongoing basis. It also tells whether the company is currently borrowing or repaying debt. 4. The CFO should focus on the statement of cash flows as this statement clearly sets out the cash generated from operating activities and the amount the company has spent in the past on purchasing equipment and paying dividends.

Note to instructors: Other answers may be valid provided they are properly supported. LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.2A a.

Randi is most likely to select to operate her business as a private corporation. This will assist her with the potential liability of storing RVs for others. She will be able to raise funds to purchase carports as needed and hire employees to install and remove the carports. It is easier to raise funds through a private corporation rather than a proprietorship or partnership.

The graduate students should incorporate their business. A public corporation would give them easier access to capital which would help fund clinical trials. However, public corporation focus on short term results where companies try to meet or exceed analysts‘ expectations. In the past, public companies had more ways to raise capital, however that as changed as the private markets have become flush with cash. The students could start off as a private corporation to minimize the pressure of short-term results and impatient shareholders and then go public once the company has met some long-term goals and objectives.

Stella should operate her ice cream cart as a proprietorship as this is the simplest and least costly form of business organization to establish and eventually dissolve. She is the only person involved in the business and is planning to operate for a limited time.

Palmieri should incorporate his business as a private corporation. Providing a transport service on water involves a potential liability and a corporation is the only business form that provides limited liability. The business is not too capital intensive, and a private corporation has sufficient flexibility to raise funding if required.

A partnership would be the most likely form of business for Alexandro and Alexis to choose. It is simpler to form than a corporation and less costly.

1. 2.

ASPE IFRS (IFRS is recommended if the goal is to become a public corporation although as a private corporation, they may choose ASPE) ASPE* ASPE ASPE*

3. 4. 5.

* proprietorships and partnerships don‘t have to follow any particular set of accounting standards although they generally follow ASPE for external financial reporting purposes. Solutions Manual 1-30 Chapter 1 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.3A a. Operating

Investing

Financing

Indigo Books & Music

Sale of books

Purchase of store equipment

Issue of shares

High Liner Foods

Payment for fish

Purchase of production equipment

Borrowing money from a bank

Mountain Equipment Co-op

Payment for inventory

Purchase of store fixtures

Borrowing money from a bank

Ganong Bros.

Payment of salaries and benefits

Purchase of production equipment

Payment of dividends to shareholders

Royal Bank

Payment of interest on savings accounts

Purchase of office Issue of bonds equipment

b. Financing Issuing shares is common to all corporations. Issuing debt is common to most corporations. Borrowing from a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large public corporations. Investing Purchasing property, plant, and equipment is common to most companies—the types of assets would vary according to the nature of the business. Some types of companies require a larger investment in long-lived assets. A new business or expanding business would be more apt to be acquiring assets. Operating The general activities identified above would be common to most corporations with the exception of the payment of interest on savings accounts. The source of the cash receipt (for example, from the sale of books) and cash payment (for example, for the payment for fish) would vary by the nature of the business. LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.4A

Accounts payable Building Cash Common shares Deferred revenue Depreciation expense Dividends payable Intangible assets Interest expense Interest payable Inventory Land Long-term debt Prepaid rent Repairs and maintenance expense Rent expense Retained earnings Salaries expense Supplies expense LO 4 BT: K Difficulty: S TIME: t001 CM: Reporting

L A A SE L E L A E L A A L A E E SE E E

SFP SFP SFP SFP, SCE SFP SI SFP SFP SI SFP SFP SFP SFP SFP SI SI SFP, SCE SI SI

20 min. AACSB: None CPA: cpa-

PROBLEM 1.5A

a. and b. b.

Accounts payable Accounts receivable Bank loan payable Cash Common shares Deferred revenue Equipment Income tax payable Intangible assets Interest payable Inventory Prepaid insurance Retained earnings Salaries payable

$15,600 13,100 32,000 9,350 20,000 1,800 30,500 1,800 5,000 300 9,200 1,000 21,250 700

a. L A L A SE L A L A L A A SE L

Assets

Liabilities $ 15,600

Shareholders‘ Equity

$13,100 32,000 9,350 $ 20,000 1,800 30,500 1,800 5,000 300 9,200 1,000 21,250 700

Supplies Vehicles Totals

2,800 22,500

A A

2,800 22,500 $93,450

______ $52,200

______ $41,250

Assets = Liabilities + SE $93,450 = $52,200 + $41,250 c.

Beginning balance in Retained Earnings + Revenues – Expenses – Dividends declared = Ending balance in Retained Earnings $18,000 + $296,750 – $278,500 – $15,000 = $21,250

LO 4 BT: AP Difficulty: M TIME 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.6A a.

(All amounts are in millions of dollars)

Home Depot, Inc. [1]

Total assets = Total liabilities + Total shareholders‘ equity Total assets = $67,282 + $3,299 Total assets = $70,581

[2]

Total liabilities = Total assets – Total shareholders‘ equity Total liabilities = $71,876 – $(1,696) Total liabilities = $73,572

[3]

Shareholders‘ equity, beginning of year + Total revenues – Total expenses – Repurchase of shares – Dividends declared + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year $3,299 + $151,157 – [3] – $15,001 – $6,985 + $558 = $(1,696) [3] Total expenses = $134,724

Canadian Tire [4]

Total liabilities = Total assets – Total shareholders‘ equity Total liabilities = $20,377.1 – $5,834.7 Total liabilities = $14,542.4

[5]

Total assets = Total liabilities + Total shareholders‘ equity Total assets = $15,291.4 + $6,510.8 [6] Total assets = $21,802.2

[6]

Shareholders‘ equity, beginning of year – Repurchase of shares – Dividends declared + Total revenues – Total expenses + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year

$5,834.7 − $131.1 – $291.2 + $16,292.1 – $15,031.4 – $162.3 = $6,510.8

PROBLEM 1.6A (CONTINUED) b.

At the end of the most recent fiscal year, Canadian Tire financed 29.9% ($6,510.8 million ÷ $21,802.2 million) of its assets with equity and 70.1% of its assets with debt ($15,291.4 million ÷ $21,802.2 million). For the equivalent fiscal year end, Home Depot‘s financed -2.4% ($(1,696) million ÷ $71,876 million) of its assets with equity and 102.4% ($73,572 million ÷ $71,876 million) of its assets with debt. Home Depot had more liabilities than assets and negative equity financing. Home Depot is riskier because all of its assets are financed by debt.

Both retailers typically have low inventories at the end of December and at the end of January as a result of the holiday sales, with little or no new inventory purchased during the month of January so no major differences in financial position at the end of December compared to January would be anticipated. As long as there were no significant economic events that affected one company more than the other in the intervening period (January), it is unlikely that the different year-end dates would affect the comparison in b.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.7A a. ONE THINGAMAJIG CORP. Statement of Income Month Ended October 31, 2024 Revenues Service revenue Expenses Salaries expense Repair and maintenance expense Utilities expense Supplies expense Interest expense Total expenses Income before income tax Income tax expense Net income

$35,400 $4,000 5,700 2,000 2,000 3,000 16,700 18,700 1,700 $17,000

[Revenues – Expenses = Net income or (loss)]

ONE THINGAMAJIG CORP. Statement of Changes in Equity Month Ended October 31, 2024

Balance, October 1 Issued common shares Net income Dividends declared Balance, June 30

Common Shares $ 0 40,000

$40,000

Retained Earnings $ 0 17,000 (7,000) $10,000

Total Equity $ 0 40,000 17,000 (7,000) $50,000

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 1.7A (CONTINUED) a. (continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts. ONE THINGAMAJIG CORP. Statement of Financial Position October 31, 2024 Assets Cash Accounts receivable Supplies Vehicles Total assets

$ 20,000 8,500 4,000 50,000 $82,500 Liabilities and Shareholders‘ Equity

Liabilities Accounts payable Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$ 8,000 24,500 32,500 40,000 10,000 50,000 $82,500

(Assets – Liabilities = Shareholders‘ equity)

PROBLEM 1.7A (CONTINUED) b.

The financial statements must be prepared in the order of (1) statement of income, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The net income from the statement of income flows to the retained earnings account on the statement of changes in equity. The shareholders‘ equity totals in the statement of changes in equity (for example, for common shares and retained earnings) then flow to the shareholders‘ equity section of the statement of financial position.

LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.8A

Cash dividends paid Cash paid to purchase equipment Cash payments for operating activities Cash receipts from operating activities Cash received from issue of long-term debt Cash received from issue of shares

$ 10,000 35,000 120,000 140,000 20,000 20,000

Activity financing investing operating operating financing financing

b. MAISON CORPORATION Statement of Cash Flows Year Ended December 31, 2024 Operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities

$140,000 (120,000)

Investing activities Purchase of equipment Net cash used by investing activities

$(35,000)

Financing activities Issue of long-term debt Issue of shares Payment of dividends Net cash provided by financing activities

$ 20,000 20,000 (10,000)

Net increase in cash Cash, January 1 Cash, December 31

$20,000

(35,000)

30,000 15,000 12,000 $27,000

(Cash flows from operating, investing, and financing activities = Net change in cash)

PROBLEM 1.8A (CONTINUED) c.

The company is generating less cash from operating activities (+$20,000) than it is using for its investing activities (–$35,000). The company, however, is making up for the deficiency by generating cash from financing activities. Cash from financing activities is not a renewable source of cash and usually entails future cash payments in the form of interest on debt, principal repayment, and dividend payments for shares.

LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.9A

a. [1]

Operating expenses = Service revenue – Income before income tax Operating expenses = $450,000 – $240,000 Operating expenses = $210,000

[2]

Income tax expense = Income before income tax - Net income [4] Income tax expense = $240,000 – $225,000 Income tax expense = $15,000

[3]

Net income (from [4]) = $225,000

[4]

Net Income = Ending retained earnings [6] + Dividends declared [5] – Beginning retained earnings Net Income = $215,000 + $10,000 - $0 Net Income = $225,000

[5]

Dividends Declared = $10,000

[6]

Ending retained earnings = Total equity – Common Shares Ending retained earnings = $515,000 - $300,000 Ending retained earnings = $215,000

[7]

Net Income [4] = $225,000 Net income can also be calculated from the total equity column from the statement of changes in equity = Ending shareholders‘ equity + Dividends declared – issued common shares – beginning shareholders‘ equity = $515,000 + $10,000 - $275,000 - $25,000 = $225,000

[8]

Buildings = Total assets – Cash – Accounts receivable – Land – Equipment Buildings = $895,000 – $25,000 – $50,000 – $280,000 – $215,000 Buildings = $325,000

[9]

Bank loan payable = Total liabilities + Accounts payable Bank loan payable = $380,000 – 80,000 Bank loan payable = $300,000

[10]

Common shares = $300,000 (from the Statement of Changes in Equity)

[11]

Retained earnings = $215,000 [6] (from the Statement of Changes in Equity)

[12]

Total shareholders' equity = Common shares + Retained earnings Total shareholders' equity = $300,000 (from [10]) + $215,000 (from [11]) Total shareholders‘ equity = $515,000 Total shareholders‘ equity is also provided in the statement of changes in equity

PROBLEM 1.9A (CONTINUED) a. (continued) [13]

(1)

Total liabilities and shareholders' equity = Total liabilities + Total shareholders equity Total liabilities and shareholders' equity = $380,000 + $515,000 (from [12]) Total liabilities and shareholders‘ equity = $895,000 Total liabilities and shareholders‘ equity is also = Total assets of $895,000 In preparing the financial statements, the first statement to be prepared is the statement of income, followed by the statement of changes in equity, and then the statement of financial position. Note to instructors: While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most ―permanent‖ statement.

(2)

The reason the statements must be prepared in the order indicated above is that each statement depends on information in the previously prepared statement. For example, the net income figure from the statement of income is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders‘ equity section of the statement of financial position is then completed using the ending balances of common shares and retained earnings, as calculated in the statement of changes in equity.

LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.10A a.

1. Remove the boat from the listing of assets since it does not belong to the corporation. Remove the boat loan payable from the listing of liabilities since this is a personal loan of Guy Gélinas. 2. Remove the $10,000 outstanding receivable from Guy‘s brother. This is not a company receivable and should not be listed on the company‘s statement of financial position. 3. Correct the Common Shares account to remove the extra amount that had been added to ―balance‖: Remove accounts receivable $10,000 Remove boat asset 24,000 Remove bank loan (40,000) Net adjustment to common shares $ 6,000 Provide separate totals for liabilities and shareholders‘ equity as the two components that are financing the assets of the company.

PROBLEM 1.10A (CONTINUED) b.

GG CORPORATION Statement of Financial Position July 31, 2024

Assets Cash Accounts receivable ($50,000 − $10,000) Inventory Total assets Liabilities and Shareholders‘ Equity Liabilities Accounts payable Total liabilities Shareholders‘ equity Common shares [$50,000 + $6,000 (from (3) above)] Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$20,000 40,000 36,000 $96,000

$34,000 34,000

56,000 6,000 62,000 $96,000

(Assets – Liabilities = Shareholders‘ equity)

(c)

As a private company, GG Corporation should also prepare a statement of income, a statement of retained earnings, and a statement of cash flows.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.1B a.

1. An investor purchasing common shares of Fight Fat Ltd. is an external user. 2. As a potential creditor, Comeau Ltée is an external user. 3. The chief financial officer is an internal user. 4. As a potential creditor, Drummond Bank is an external user.

1. In making an investment in common shares, the Ontario investor is becoming a partial owner (shareholder) of the company. In this case, the investment will be held for at least three years. The information that will be most relevant to him/her will be on the statement of income. The statement of income reports the past performance of the company in terms of its revenue, expenses, and net income. This is the best indicator of the company‘s future potential. 2. In deciding to extend credit to a new customer, Comeau would focus its attention on the new customer's statement of financial position. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from current assets. The statement of financial position of the new customer will show whether the company has enough current assets to meet its current obligations. 3. In order to determine whether the company is generating enough cash to increase the amount of dividends paid to investors, the CFO of Private Label needs information on the amount of cash generated and used in various activities of the business. The statement of cash flows is the most useful statement for this purpose. This statement presents the amount of cash at the beginning and end of the period as well as the details of the amount of cash generated by operating activities and the amount spent on expanding operations (investing activities).

PROBLEM 1.1B (CONTINUED) 4. In deciding whether to extend a loan, Drummond Bank is interested in two things: the ability of the company to make its monthly interest payments for the next five years and the ability to repay the principal amount at the end of five years. In order to evaluate both of these factors the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operating activities on an ongoing basis. This will be the most important factor in determining if the company will survive and be able to repay the principal and interest on the loan. Note to instructors: Other answers may be valid provided they are properly supported. LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.2B a.

1. Dawn will likely operate her vegetable stand as a proprietorship because she is planning on operating it for a short time period. A proprietorship is the simplest and least costly business organization to form and dissolve. 2. Joseph and Sabra should form a private corporation when they combine their operations. A private corporation will be easier and less expensive to form than a public corporation. It will also be an easier type of organization in which to raise funds than a proprietorship or partnership. A corporation may also receive more favourable income tax treatment. 3. The professors should incorporate their business as a private corporation because of their concerns about the legal liabilities. A corporation is the only form of business that provides limited liability to its owners. 4. Abdul would likely form a public corporation because he needs to raise funds to invest in inventories and property, plant, and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation than through a proprietorship or partnership. A public corporation will allow Abdul to raise larger amounts of funds by selling shares to the public. 5. A partnership would be the most likely form of business for Mary, Richard, and Jigme to choose. It is simpler to form than a corporation and less costly.

1. ASPE* 2. ASPE 3. ASPE 4. IFRS 5. ASPE* * proprietorships and partnerships don‘t have to follow any particular set of accounting standards although they generally follow ASPE for external financial reporting purposes.

LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.3B

Operating

Investing

Financing

CargoJet

Payment for jet fuel

Purchase of airplanes

Issue of shares

University of Calgary Students‘ Union

Payment of salaries and benefits Payment of research expenses Payment for facilities rentals

Purchase of office equipment Purchase of other companies Purchase of equipment

Borrowing money from a bank Issue of bonds

Receipt of revenue from sales of food

Purchase of real estate to build grocery stores

Repaying money to a bank

GlaxoSmithKline

Maple Leaf Sports & Entertainment

Loblaw Companies

Payment of dividends to shareholders

Financing Issuing shares is common to all corporations. Borrowing from and repaying money to a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large corporations. Investing Purchasing property, plant, and equipment would be common to most companies—the types of assets would vary according to the type of business. Some types of businesses require a larger investment in longlived assets. A new business or expanding business would be more likely to engage in investing activities (for example, acquiring assets). The purchase of other companies would not be common to all companies. Operating The general activities identified above (sales and expenditures) would be common to most businesses, although the service or product might change.

LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.4B

Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Deferred revenue Equipment Income tax expense Income tax payable Intangible assets Interest expense Land Mortgage payable Office expense Prepaid insurance Retained earnings Salaries payable Service revenue

L A L A A SE L A E L A E A L E A SE L R

SFP SFP SFP SFP SFP SFP, SCE SFP SFP SI SFP SFP SI SFP SFP SI SFP SFP, SCE SFP SI

LO 4 BT: K Difficulty: S TIME: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.5B a. and b. b.

Accounts payable Accounts receivable Bank loan payable Cash Common shares Deferred revenue Equipment Income tax payable Interest payable Inventory Prepaid insurance Retained earnings Salaries payable Supplies Totals

$23,100 6,950 25,000 17,750 20,000 3,500 66,200 1,900 500 21,300 950 39,850 3,050 3,750

a. L A L A SE L A L L A A SE L A

Assets

Liabilities $23,100

Shareholders‘ Equity

$ 6,950 25,000 17,750 $ 20,000 3,500 66,200 1,900 500 21,300 950 39,850 3,750 $116,900

3,050 ______ $57,050

______ $59,850

Assets = Liabilities + Shareholders‘ equity $116,900 = $57,050 + $59,850 c.

Beginning balance in Retained Earnings + Revenues – Expenses – Dividends Declared = Ending balance in Retained Earnings $8,850 + $365,000 – $333,000 – $1,000 = $39,850

LO 4 BT: AP Difficulty: M TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.6B a.

(All amounts are in U.S. millions of dollars) Restaurant Brands [1]

Total liabilities = Total assets – Total shareholders‘ equity Total liabilities = $22,777 – $3,721 Total liabilities = $19,056

[2]

Total shareholders' equity = Total assets – Total liabilities Total shareholders' equity = $23,246 – $19,393 Total shareholders' equity = $3,853

[3]

Shareholders‘ equity, beginning of year + Issuance of shares – Repurchase of shares – Dividends declared + Total revenues – Total expenses + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year $3,721 + $12 − $551 − $[3] + $5,739 – $4,486 + $76 = $3,853 [3] Dividends declared = $658

Starbucks [4]

Total assets = Total liabilities + Total shareholders‘ equity ( - Deficit) Total assets = $37,173.9 - $7,799.4 Total assets = $29,374.5

[5]

Total assets = Total liabilities + Total shareholders‘ equity ( - Deficit) Total assets = $36,707.1 + ($5,314.5) (from [6]) Total assets = $31,392.6

[6]

Shareholders‘ equity, beginning of year + Issuance of shares – Repurchase of shares – Dividends declared + Total revenues – Total expenses + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year − $7,799.4 + $42.4 - $0 − $2,697.2 + $24,607.0 – $20,406.7 + $939.4 = ($5,314.5)

PROBLEM 1.6B (CONTINUED) b.

At the end of the most recent fiscal year, all of Starbuck‘s assets were financed by debt since total liabilities of $36,707.1 exceeded total assets of $31,392.6. Starbucks had effectively no equity financing. Restaurant Brands has lower debt financing. Restaurant Brands financed 16.6% (U.S. $3,853 million ÷ U.S. $23,246 million) of its assets with equity and 83.4% of its assets with debt (U.S. $19,393 million ÷ U.S. $23,246 million). Starbucks is far riskier because more of its assets are financed by debt.

As long as there are no unusual transactions or economic events that affect one company differently than another during the intervening period of time (October through December), or at each company‘s year-end date, the differing year ends should not have a significant impact on the assessment of the financial position and performance for the two companies.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.7B a.

AERO FLYING SCHOOL LTD. Statement of Income Month Ended May 31, 2024

Revenues Service revenue Expenses Fuel expense Rent expense Office expense Salaries expense Repairs and maintenance expense Interest expense Income before income tax Income tax expense Net income

$215,300 $85,400 12,100 12,700 36,600 40,900 12,500

200,200 15,100 2,800 $ 12,300

[Revenues – Expenses = Net income or (loss)]

AERO FLYING SCHOOL LTD. Statement of Changes in Equity Month Ended May 31, 2024

Balance, May 1 Issued common shares Net income Dividends declared Balance, May 31

Common Shares $ 0 180,000

$180,000

Retained Earnings $ 0 12,300 (2,700) $9,600

Total Equity $ 0 180,000 12,300 (2,700) $189,600

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 1.7B (CONTINUED) a. (continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts. AERO FLYING SCHOOL LTD. Statement of Financial Position May 31, 2024 Assets Cash Accounts receivable Supplies Equipment Total assets

$ 26,900 22,600 15,000 372,500 $ 437,000 Liabilities and Shareholders‘ Equity

Liabilities Accounts payable Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

6,400 241,000 247,400

180,000 9,600 189,600 $437,000

(Assets – Liabilities = Shareholders‘ equity)

PROBLEM 1.7B (CONTINUED) b.

The financial statements must be prepared in the order of (1) statement of income, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The net income from the statement of income flows to retained earnings in the statement of changes in equity. The shareholders‘ equity totals (for example, for common shares and retained earnings) in the statement of changes in equity then flow to the shareholders‘ equity section of the statement of financial position.

LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.8B a. Cash payments for operating activities Cash paid for equipment Repayment of long-term debt Cash dividends paid Cash receipts from operating activities

$109,000 40,000 15,000 13,000 158,000

Activity operating investing financing financing operating

b. FURLOTTE CORPORATION Statement of Cash Flows Year Ended June 30, 2024 Operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities

$158,000 (109,000)

Investing activities Purchase of equipment Net cash used by investing activities

$(40,000)

Financing activities Repayment of long-term debt Payment of dividends Net cash used by financing activities

$(15,000) (13,000)

Net decrease in cash Cash, July 1, 2023 Cash, June 30, 2024

$49,000

(40,000)

(28,000) (19,000) 40,000 $21,000

(Cash flows from operating, investing, and financing activities = Net change in cash)

PROBLEM 1.8B (CONTINUED) c.

The company is generating sufficient cash from its operating activities ($49,000) to pay for the total of its investing activities ($40,000). However, the cash used for financing activities caused the cash balance to decline. If the company expects to continue to use cash for investing activities, it will either have to generate more cash from its operating activities or from its financing activities (for example, borrow money) as its ending cash balance will not sustain this cash outflow on its own.

LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.9B a.

[1]

Operating expenses = Service revenue – Income before income tax Operating expenses = $325,000 – $116,000 Operating expenses = $209,000

[2]

Net income = Income before income tax – Income tax expense Net income = $116,000 – $23,000 Net income = $93,000

[3]

Net income = $93,000 (same as [2])

[4]

Dividends declared = Beginning retained earnings + Net income – Ending retained earnings Dividends declared = $440,000 + $93,000 – $521,000 Dividends declared = $12,000

[5]

Beginning total equity = Beginning common shares + Beginning retained earnings Beginning total equity = $250,000 + $440,000 Beginning total equity = $690,000

[6]

Total common shares issued = $60,000

[7]

Net income = $93,000 (same as [3])

[8]

Dividends declared = $12,000 (same as [4])

[9]

Ending total equity = Ending common shares + Ending retained earnings Ending total equity = $310,000 + $521,000 Ending total equity = $831,000

[10]

Cash = Total assets – (Accounts receivable + Land + Buildings + Equipment)

Cash = $1,351,000 (from [11]) – ($34,000 + $310,000 + $616,000 + $364,000) Cash = $27,000 [11]

Total assets = Total liabilities and shareholders‘ equity Total assets = $1,351,000

[12]

Common shares = $310,000 (as per statement of changes in equity)

[13]

Retained earnings = $521,000 (as per statement of changes in equity)

PROBLEM 1.9B (CONTINUED) b.

(1)

In preparing the financial statements, the first statement to be prepared is the statement of income, followed by the statement of changes in equity, and then the statement of financial position. While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most ―permanent‖ statement.

(2)

The reason the statements must be prepared in the order indicated above is that each statement depends on information in the previously prepared statement. For example, the net income figure in the statement of income is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders‘ equity section of the statement of financial position is then completed using the ending balances of the shareholders‘ equity components (such as common shares and retained earnings) as calculated in the statement of changes in equity.

LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.10B a.

Remove accounts receivable from the revenue section of the statement of income since it is a current asset and does not belong on the statement of income.

Remove the $3,000 of service revenue that has not yet been earned.

Remove the $12,000 rent expense. This is not an actual transaction and cannot be listed on the company‘s statement of income.

Remove the $4,000 vacation expense. This is not a business expense but rather a personal expense of the business owner.

Deduct expenses from revenues rather than adding them. INDEPENDENT BOOK SHOP LTD. Statement of Income Year Ended March 31, 2024

Revenues Service revenue ($41,000 – $3,000) Expenses Office expense Income before income tax Income tax expense Net income

$38,000 5,000 33,000 5,000 $28,000

[Revenues – Expenses = Net income or (loss)]

As a private company, Independent Book Shop should also prepare a statement of financial position, a statement of retained earnings, and a statement of cash flows.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT1.1

FINANCIAL STATEMENT IMPACT

Item Common shares Service revenue Retained earnings Deferred revenue Cash payments for operating activities Dividends declared Cash Prepaid insurance Salaries expense Cash payments to purchase equipment Accounts payable Net income

Statement of Income

Statement of Changes in Equity Y

Statement of Financial Position Y

Y Y

Statement of Cash Flow

Y Y Y Y

LO 3,4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

CT1.2

DATA VISUALIZATION CASE

a. Visual 2 is more useful to users in understanding the extent to which assets are financed with debt or equity. The line for debt shows the decline over the three-year period for the percentage of financing that is provided by debt while the equity line shows the increase in the percentage of financing that is provided by equity. The graph shows a trend of how assets are financed and the changing proportion of debt versus equity financing. b. Visual 1 is an example of a descriptive analytic as it is a restatement of the facts for the amounts of total assets, total liabilities and total equity at the end of each fiscal year in a bar graph. Visual 2 is more useful to users from a predictive perspective as the line graph shows a trend over a three-year period and a user would expect the trend to continue if the operations don‘t change in the coming years.

CT1.3

FINANCIAL REPORTING CASE

North West presents the following five financial statements: Consolidated Statement of Earnings (which we call statement of income in the chapter), Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet (which we call statement of financial position), Consolidated Statement of Changes in Shareholders‘ Equity (which we call statement of changes in equity), and Consolidated Statement of Cash Flows. All the above financial statements, except the Comprehensive Income, were discussed in this chapter.

Statement

As demonstrated in the table below, North West‘s sales decreased, yet net income increased in fiscal 2022.

($ in thousands) Sales Net income (net earnings)

2022 $2,248,796 157,451

2021

Change

$2,359,239 143,560

$(110,440) 13,891

Net income is affected by revenue and expenses incurred by a company during the year. A decrease in sales does not always translate into a decrease in net income. For North West, while revenue decreased, net income increased.

c. ($ in thousands)

(1) January 31, 2022

Total assets Total liabilities Total shareholders‘ equity

$1,219,273 639,069 580,204

(2) January 31, 2021 $1,191,168 685,937 505,231

(Assets = Liabilities + Shareholders‘ equity)

CT1.3 (CONTINUED) d.

($ in thousands)

Share capital Retained earnings

January 31, 2022

$173,081 355,674

January 31, 2021

$174,213 282,088

Yes, the above balances taken from the statement of changes in equity agree with the amounts reported in the shareholders‘ equity section of the balance sheet. Note that these do not comprise all of North West‘s shareholders‘ equity. Other shareholders‘ equity items make up the remainder of the total shareholders‘ equity balances reported on both statements as shown below. ($ in thousands) Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Non-controlling interest Total shareholders‘ equity

($ in thousands) Cash

January 31, 2022

January 31, 2021

$173,081 12,530 355,674

$174,213 13,394 282,088

22,350 16,569 $580,204

21,605 13,931 $505,231

January 31, 2022 $49,426

January 31, 2021 $71,536

This information can be obtained on the balance sheet (statement of financial position) or on the statement of cash flows. LO 3,4 BT: AN Difficulty: M TIME: 40 min. AACSB: Communication and Analytic CPA: cpa-t001, cpat005 CM: Reporting and Finance

CT1.4 a. and b.

FINANCIAL ANALYSIS CASE

[North West ($ in thousands)]

1. Assets Liabilities Shareholders‘ equity

2022 $1,219,273 639,069 580,204

2021 $1,191,168 685,937 505,231

% change 2.4% (6.8)% 14.8%

2. Sales Net income

2022 $2,248,796 157,451

2021 $2,359,239 143,560

% change (4.7)% 9.7%

Sobeys ($ in millions) 1. Assets Liabilities Shareholders‘ equity

2022 $15,366.1 11,245.6 4,120.5

2021 $14,088.2 10,443.0 3,645.2

% change 9.1% 7.7% 13.0%

2. Sales Net income

2022 $30,162.4 754.6

2021 $28,268.3 762.2

% change 6.7% (1.0)%

Both North West and Sobeys experienced growth in assets and shareholders‘ equity. From a profitability standpoint, North West‘s net income increased 9.7% despite a 4.7% decrease in sales which demonstrates a strong management of expenses. In the case of Sobeys, net income decreased 1.0% despite the increase of 6.7% in sales.

In 2022, Sobey‘s fiscal year (May 2, 2021 through May 7, 2022) covers the majority of the same period as North West‘s fiscal year (Feb. 1, 2021 through January 31, 2022). The same is true for their previous fiscal years. Consequently, unless there was a significant economic impact that affected the stores in the non-overlapping period of three months (February through April), I would have no concerns about the comparisons made in c. as they both cover a single fiscal year.

LO 3,4 BT: AN Difficulty: M TIME: 40 min. AACSB: Communication and Analytic CPA: cpa-t001, cpat005 CM: Reporting and Finance

CT1.5

FINANCIAL ANALYSIS CASE

Both North West and Sobeys declared dividends in the current fiscal years as revealed in their respective statement of changes in equity, as follows: North West Sobeys (in thousands) (in millions) Dividends

$70,420

$499.4

Both North West and Sobeys generated positive cash flows from their operations as revealed in their respective statement of cash flows, as follows: North West Sobeys (in thousands) (in millions) Cash from operating activities

(A)

$224,135

$2,005.5

Cash used in investing activities

(B)

75,861

769.4

295%

261%

A divided by B

Both companies are reinvesting cash from operations back into the business. c.

The financing activities section of each company‘s statement of cash flows during the 2022 fiscal year is as follows: North West Sobeys (in thousands) (in millions) Repayment of long-term debt

$85,393

$96.8

Although it appears as if Sobeys paid off debt, this is really not the case since new debt of $94.6 million was obtained. In addition, although it appears North West did repay its long-term debt, its‘ statement of cash flows presentation shows new debt was issued in the amount of $44,071 million. LO 3,4 BT: AN Difficulty: M TIME: 30 min. AACSB: Communication and Analytic CPA: cpa-t001, cpat005 CM: Reporting and Finance

CT1.6 a.

PROFESSIONAL JUDGEMENT CASE

Both public and private companies are separate legal entities owned by shareholders. One of the key differences between the two types of companies is the availability of the shares. Shares of public companies are traded on organized stock exchanges and are available to the general public. In contrast, shares of a private company are not made available to the general public, nor are they traded on a public stock exchange. Another difference is access to capital. Since public companies are traded on organized stock exchanges, they generally have more access to capital than do private companies. Private companies tend to rely upon bank financing for capital. Public and private companies also differ in terms of the amount of information they disclose publicly. Public companies are required to file financial statements with the regulators of the stock exchange. This makes their statements widely available. In contrast, private companies do not have any requirement to make their financial statements publicly available.

The key users of public company financial statements are shareholders, creditors, regulators, analysts, and the general public. In contrast, the key users of private company financial statements are generally creditors as well as private shareholders.

The key difference between the users of public and private financial statements is the different areas of emphasis of the users‘ objectives and needs when reviewing the financial statements. Users of public company financial statements can represent a wide range with varying levels of understanding about the company and its operations. They tend to be a broad group of users who benefit from detailed disclosure that will help them make the appropriate financial decision to invest or to lend, etc. On the other hand, users of private company financial statements tend to be a small group, who usually have a high degree of understanding of the company and its operations. They consist mostly of creditors and a small group of shareholders. These users tend to place a greater emphasis on liquidity, solvency, and short-term cash flow planning.

CT1.6 (CONTINUED) d.

One of the main reasons that Canada adopted IFRS is that these global set of standards will be beneficial to investors, creditors, and other financial statement users by increasing the comparability and quality of financial statements. In other words, users will be able to make an ―apples to apples‖ comparison. If Canadian public companies had a choice of which GAAP to use, then it would entirely defeat the purpose of increasing comparability among public companies.

Since most private companies in Canada are small to medium-sized businesses, the Canadian Accounting Standards Board (AcSB) decided that IFRS, with its extensive disclosure reporting requirements and sophisticated reporting, was not appropriate for most of these companies. However, since private companies can represent a wide range of companies – from large multinationals to small local restaurants, the AcSB decided it was best if private companies have a choice of which standard to adopt. A company‘s choice of which GAAP to adopt is generally driven by users‘ objectives and needs.

LO 1, BT: C Difficulty: M TIME: 30 min. AACSB: Communication CPA: cpa-t001, cpa-e003 CM: Reporting and Comm.

CT1.7

FINANCIAL ANALYSIS CASE

Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS. a. Divide revenue by the hourly rate charged to clients: IMS: $1,320,000 ÷ $22 per hour = 60,000 hours PCS: $900,000 ÷ $30 per hour = 30,000 hours b. Knowing the hours worked from the above, we can derive the hourly salary by dividing total salary expense for each company by the hours worked as follows: IMS: $900,000 ÷ 60,000 hours = $15 per hour PCS: $480,000 ÷ 30,000 hours = $16 per hour c. IMS uses larger facilities because its rent expense is higher. This makes sense because they have larger types of cleaning equipment that will need to be stored. Furthermore, the company has a larger staff given the size of its operations and may need more office space. d. PCS has higher other operating expenses because that company owns and operates vehicles. e. Given that both companies pay interest at the same rate, IMS has the larger bank loan because its interest expense is higher. f. The most significant factor that makes PCS more profitable is the fact that this company charges its clients an hourly rate that is almost double the hourly wage rate paid to its employees. IMS is not able to charge its clients at double the wage rate. LO 4 BT: AN Difficulty: M TIME20 min. AACSB: Communication and Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT1.8

ETHICS CASE

The stakeholders in this situation are the new CEO and CFO, and the creditors and investors who rely on the financial statements to make business decisions.

The CEO and CFO should not sign the certification until they have taken steps to assure themselves that the most recent reports accurately and completely reflect the activities of the business. However, as the current management of the company, they cannot refuse to sign the certification just because they are new. They are the management team now and must assume the responsibilities that go with these positions.

The CEO and CFO have no alternative other than to take the steps necessary to assure themselves of the accuracy and completeness of the financial information, and, if accurate, sign the certification. If the information is not accurate or complete, they need to make the required corrections to the financial information. The company may need to delay issuing its financial statements.

LO 1 BT: E Difficulty: M TIME15 min. AACSB: Communication and Ethics CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT1.9 SERIAL CASE a.

Compu-Tech Consulting is a proprietorship. A proprietorship has the advantage of lower administrative costs than a corporation—fewer regulations and procedures to adhere to. Emily may also have more flexibility in working for herself (or less depending on the demands of the business). In addition, as a separate proprietorship, all of the income of the business belongs to Emily. However, the disadvantage of a proprietorship is that Emily has personal and unlimited liability for the debts of the business. She may also have difficulty in raising capital to grow the business. Anthony Business Company Ltd. (ABC) is a private corporation. It has the advantage of limited liability for the shareholders‘ investments in the business compared to a proprietorship. However, this advantage may be negated by a demand from creditors (such as the bank) for a personal guarantee by the shareholders. Another disadvantage is that if net income is distributed by declaring dividends, it must be shared with all shareholders in proportion to their shareholdings. More regulations and paperwork are required for a corporation compared to that of a proprietorship; however, more opportunities exist to share the administrative burdens and to grow the business.

Given its current size, Compu-Tech Consulting likely has no requirements to produce financial statements used by external creditors. It could choose to follow Accounting Standards for Private Enterprises (ASPE) if it was required to produce financial statements. Anthony Business Company Ltd. would most likely use Accounting Standards for Private Enterprises (ASPE) but could also, if it wished, choose to use International Financial Reporting Standards (IFRS). We will assume the former for the purpose of this case.

CT1.9 (CONTINUED) c.

Emily will need information on the revenues and cost of the services performed so she can determine if new contracts are profitable. She will need this information more often initially (for example, on a weekly basis) so she can monitor the results of the contracts and their impact on the operations of the company. She will also need forecasts of future services to plan the work, estimate staffing and other costs, and determine delivery schedules. Emily would also find financial statements useful to better understand ABC‘s business and identify financial issues as early as possible. Monthly financial statements would be best as the more timely the information is, the more useful it is for managing the business.

The users of ABC‘s accounting information include the existing shareholders (Emily‘s parents), potential shareholders such as Emily, creditors such as the bank, and taxing authorities such as the CRA. Emily‘s parents are internal users and they need accounting information to plan, organize, and run the company and determine if they can obtain the financing to meet the increased demand. Emily needs accounting information to determine if her parents‘ business is a sound investment for her and what her responsibilities as administrator would be. Creditors and taxing authorities are external users. The bank and the CRA require financial statements—statement of income, statement of retained earnings (since it is assumed that ABC follows ASPE; however, if it follows IFRS then it would be required to prepare a statement of changes in equity), statement of financial position, statement of cash flows, in addition to accompanying notes to the financial statements—to assess the financial health of the company.

CT1.9 (CONTINUED) e.

The following are examples of activities that ABC is likely to be engaged in: Operating activities include cash collection from revenue generated from providing business services. Cash payments would be made for products, accessories, supplies, salaries, utilities, and interest on bank loans. Investing activities include the purchase of equipment or the sale of used equipment no longer in use. Financing activities include borrowing money from the bank (debt) and paying dividends to shareholders (equity).

LO 1,3 BT: C Difficulty: M TIME: 50 min. AACSB: Comm. CPA: cpa-t001 CM: Reporting

Legal Notice

Copyright © 2023 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved. The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence. 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. MMXXIII iii F1

CHAPTER 2 A FURTHER LOOK AT FINANCIAL STATEMENTS LEARNING OBJECTIVES 1. Identify the sections of a classified statement of financial position. 2. Identify and calculate ratios for analyzing a company‘s liquidity, solvency, and profitability. 3. Describe the framework for the preparation and presentation of financial statements.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO BT

15.

22.

29.

16.

23.

30.

10.

17.

24.

31.

4. 5.

11.

18.

25.

32.

12.

19.

26.

33.

13.

20.

27.

34.

14.

21.

28.

35.

Brief Exercises 1.

10.

11.

12.

Exercises 1.

10.

Problems: Set A and B 1.

10.

Cases 1.

1,2

2,3

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation

Difficulty:

Level of difficulty S Simple M Moderate C Complex

Time:

Estimated time to complete in minutes

AACSB

Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflec. Thinking Reflective Thinking

CPA CM

CPA Canada Competency Map Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

(a)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company‘s financial statement date or its operating cycle, whichever is longer.

(b)

Examples of current assets include cash, accounts receivable, inventory, and supplies. Current assets are listed in order of liquidity in the current asset section of the statement of financial position.

LO 1 BT: K Difficulty: S Time: 3 min. AACSB: None CPA: cpa.t001 CM: Reporting

The term operating cycle stands for the average time it takes to go from cash to cash in producing revenue. In a merchandising business, this means the time it takes to purchase inventory on account, pay cash to suppliers, sell the inventory on account, and then collect cash from customers. In a service business, it stands for the time it takes to pay employees, provide services on account, and then collect the cash from customers. An operating cycle can be longer than one year. For example, for a shipyard that builds an ocean liner, the time it takes for the completion of the building of the ship may be years. In this case, the operating cycle would be the length of time it takes for the completion of the project. When solving problems taken from the text, we assume that the operating cycle is less than one year.

LO 1 BT: C Difficulty: M Time: 3 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Noncurrent assets are assets that are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date or its operating cycle. In other words, noncurrent assets are all assets that are not classified as current assets.

(b)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Current liabilities are obligations that are to be paid or settled within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Ideally, current assets will exceed current liabilities for a company.

Showing items as current in nature matters because doing so assists the user of the financial statements to assess the business‘s liquidity. LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Current liabilities are obligations that are to be paid or settled within one year of the company‘s financial statement date or its operating cycle, whichever is longer.

(b)

Examples of current liabilities include bank indebtedness, accounts payable, accrued liabilities, and current maturities of long-term debt. Current liabilities are listed in the order in which they are expected to be paid, in the current liability section of the statement of financial position.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Current liabilities are obligations that are to be paid or settled within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Non-current liabilities are obligations that are expected to be paid or settled after one year or its operating cycle, whichever is longer. In other words, noncurrent liabilities are all liabilities that are not classified as current liabilities.

(b)

Some liabilities, such as bank loans, appear on the statement of financial position with a current and non-current portion. Included in the balance of the bank loan payable are principal payments that will be due in the next year. That amount must be shown as a current liability as at the company‘s financial statement date. The remaining principal balance is classified as a non-current liability.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Contra accounts are accounts that offset the account to which they relate. Contra accounts serve to keep track of and disclose the amount of the reduction to the balance of the related account and arrive at its carrying amount. An example is accumulated depreciation, which is offset against the related asset account to arrive at the asset‘s carrying amount.

(b)

In the case of property, plant, and equipment, users find it useful to know the historical cost of assets as well as the cumulative amount of depreciation (contra account called accumulated depreciation) that has been recorded to date on them. The difference between cost and accumulated depreciation is referred to as the carrying amount, also commonly known as net book value or just simply book value.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

Current assets and liabilities are listed in the statement of financial position in the order in which they are expected to be converted into cash, sold or used up in the case of assets and paid or settled, in the case of liabilities; that is, in their order of liquidity. Liquidity is enhanced when an asset can be converted to cash more quickly than another asset. In the case of liabilities, some liabilities will be paid more quickly than others and so they would be deemed to be more liquid. Other assets are listed in the order of permanency. Long-term assets, such as property, plant, and equipment, are usually presented in order of permanence, with the most permanent (land) being presented first.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

The two components of shareholders' equity and the purpose of each are: (1) Share capital is used to record investments of assets, i.e. cash, in the business by the owners (shareholders). If there is only one class of shares, it is known as common shares. (2) Retained earnings is used to record accumulated profit, net of any losses and dividends declared, retained in the company.

(b)

Under ASPE, the ending balances of share capital and retained earnings would appear on the statement of financial position and the ending balance of retained earnings would also appear on the statement of retained earnings. Under IFRS, the presentation on the statement of financial position would be the same, and both share capital and retained earnings would appear on the statement of changes in shareholders‘ equity.

LO 1 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

Data analytics is the process of analyzing enormous amounts of data to find patterns and correlations, trends, and other valuable insights to enhance decision-making. Big Data refers to a situation where the volume, velocity, and variety of data require cost-effective, innovative forms of information processing in order to provide useful information.

LO 2 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

10.

Examples of large amount of data available to businesses include customer credit history, customer demographics, and customer on-line activity.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

11.

(a)

Variety refers to the many different types of data that Walmart records with more than 1 million customer transactions every hour. Data collected includes the items purchased, customer information, method of payment, online activity records, and store location.

(b)

With this information, Walmart would be better able to decide which items to stock in a particular store, how the economy is doing in different parts of the country, where to expand and so on.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

12.

Intracompany ratio comparisons compare elements and ratios within the same financial statements (example, current assets and current liabilities) or between the statement of income and the statement of financial position (example, basic earnings per share) from the same company. Intracompany ratio comparisons can also involve comparing elements or ratios in two or more accounting periods for the same company. Intercompany ratio comparisons compare elements or ratio results between different companies.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

13.

(a)

Liquidity ratios measure a company‘s short-term ability to pay its current liabilities and meet its unexpected needs for cash. Examples of liquidity ratios include working capital and current ratios.

(b)

Solvency ratios measure a company‘s ability to survive over a long period of time. An example of a solvency ratio is the debt to total assets ratio.

(c)

Profitability ratios measure a company‘s operating success for a given period of time. Examples of profitability ratios include basic earnings per share and the price-earnings ratio.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

14.

(a)

Working capital is arrived at by deducting current liabilities from current assets.

(b)

Positive working capital means that there are more current assets than current liabilities. Whenever there is positive working capital, the current ratio is greater than 1:1.

(c)

Having positive working capital does not mean that a company has enough cash to operate. It could mean the company has significant accounts receivable or inventory. The working capital may be a very large amount and yet the company may have no cash as it is instead borrowing all of the necessary cash from the bank to make day-to-day payments to suppliers and employees.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

15.

The current ratio is a better measure of liquidity than working capital when making comparisons between different businesses. The amount of working capital is an absolute amount. It could vary tremendously depending on the size of the operations of the business. The current ratio on the other hand presents a relationship of current assets to current liabilities and is therefore appropriate as a tool to compare the liquidity of different sized businesses.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

16.

Current assets include accounts receivable and inventory. These may have increasing balances because of uncollectible receivables or slowmoving inventory. This would cause the current ratio to increase. Even though the current ratio may seem high, it is an artificial measure of liquidity if receivables and inventory cannot be easily or quickly converted into cash. Consequently, the current ratio alone does not provide a complete assessment of liquidity.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

17.

Dong Corporation is more solvent as only 45% of its assets are financed by debt whereas 55% of Du's assets are financed by debt. A company carrying a higher proportion of debt has an increased likelihood of encountering financial difficulties and is therefore considered less solvent.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

18.

Raising money using debt increases a company‘s level of risk compared to raising money through equity because the terms of repayment of debt require cash outflows for the payment of interest and repayment of principal. These payments tap into cash balances and could hurt the company‘s liquidity. In contrast to debt, equity does not have to be repaid.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

19.

Basic earnings per share comparisons among different companies are difficult due to variations in the financing structure of the companies and in the number of shares issued. Hence, there is no industry average for basic earnings per share. On the other hand, since the price-earnings ratio uses basic earnings per share relative to the market price of the common shares, the ratio can be compared among companies.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

20.

Investors appear to favour TD Bank. Its higher price-earnings ratio indicates that investors are willing to pay proportionately more for TD's shares and have more favourable expectations of future growth.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

21.

Increases in the basic earnings per share, price-earnings ratio, and current ratio are considered to be signs of improvement because: 

An increase in the basic earnings per share means that the amount of net income per share is greater than in the previous period.



An increase in the price-earnings ratio means that the share price has increased at a greater rate than the company‘s basic earnings per share, which implies the market believes future net income will continue to increase.



An increase in the current ratio indicates that the company has more current assets available to settle its current liabilities and is more liquid (assuming the components of current assets (e.g., receivables and inventory) are also liquid.

On the other hand, the debt to total assets ratio measures how much of the company is financed by debt. The more debt a company has, the higher the debt to total assets ratio. A company with a higher debt level has increased financial risk due to higher fixed interest and principal repayments, and is less solvent than a company with a lower level of debt. An increase in the debt to total assets ratio might be considered a positive event in the case where the additional debt is long-term and was obtained to increase an investment in the productive capacity of the business (such as an expansion) without being overly risky (such as where the company has a good record of profitability and of ability to service the debt). LO 2 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

22.

(a)

The debt to assets ratio indicates the company‘s ability to repay the face value of the debt at maturity and make periodic interest payments.

(b)

The current ratio and working capital indicate a company‘s liquidity and short-term debt-paying ability.

(c)

Earnings per share and price-earnings ratio. Earnings per share indicates the earning power (profitability) of an investment and the price-earnings ratio indicates investors‘ perception of the company‘s earning potential in the future.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

23.

(a)

The conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. The framework prescribes the nature, function, and limits of financial accounting statements. It guides choices about what to present in financial statements, decisions about alternative ways of reporting economic events, and the selection of appropriate ways of communicating such information.

(b)

The conceptual framework under IFRS and ASPE are fundamentally similar so that public companies reporting under IFRS and private companies reporting under ASPE use the same framework.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

24.

(a)

The primary objective of financial reporting is to provide information useful to existing and potential investors and creditors in making decisions about providing resources to the company.

(b)

The main users of financial reporting are investors and creditors.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

25.

Stewardship stands for the management of a business‘ assets. Shareholders often delegate the management of a business to employees. It is important to users of financial information that a business have good stewardship to ensure that the highest return on investment is realized for investors and that risk is lowered for the providers of debt.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

26.

The going concern assumption states that the business will remain in operation for the foreseeable future. The timing of when assets will be converted to cash or used in operations and when liabilities are to be paid determines their classification on the statement of financial position. Since the business is expected to remain in operation for the foreseeable future, these elements can continue to be reported in accordance with their respective current or non-current classifications. If the company were about to be shut down, all of its assets and liabilities would be classified as current.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

27.

The fundamental qualitative characteristics are (1) relevance and (2) faithful representation. Relevant information will impact a user‘s decision by having predictive value, confirmatory value, or both. Faithful representation means that the financial statements should reflect the economic reality of what really exists or has happened. The information must be complete, neutral, and free from material error.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

28.

Enhancing qualitative characteristics make useful financial information more useful (i.e. they enhance its usefulness). To be useful, financial information must reflect the two fundamental qualitative characteristics of relevance and faithful representation. Enhancing characteristics bring more specific support to the objectives achieved by using the fundamental qualitative characteristics. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. Enhancing qualitative characteristics cannot enhance the usefulness of financial information that is not useful (i.e. information which does not reflect the fundamental qualitative characteristics).

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

29.

Materiality is related to relevance in that they are both defined in terms of what influences or makes a difference to the decision-maker. In order to be relevant to a financial statement user, a transaction, a narrative explanation in the notes to the financial statements, or an amount reported for an element must make a difference to the user in the making of a decision. An item is considered to be material if its omission or misstatement could influence the decision.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

30.

Neutrality is achieved by exercising prudence. Prudence means exercising caution when making judgements. It does not mean being overly conservative when making a judgement. Often estimates need to be arrived at in the measurement of financial statement elements. A fair and neutral approach should be used in arriving at estimates. There should be no bias in interpreting the facts of a situation to arrive at a prudent, yet realistic estimate.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

31.

The four enhancing qualitative characteristics are (1) comparability, (2) verifiability, (3) timeliness, and (4) understandability. There is no prescribed order in applying these characteristics. Company information is more useful when it can be compared over time or to information from other companies. If information is verifiable, it can be relied on more than information that is less verifiable. Information that is presented in a timely fashion is more useful than information that is less current. Information that can be understood by persons with a reasonable knowledge of business is more useful than information that is not as understandable.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

32.

The cost constraint means that information will be presented only when the benefit associated with it exceeds the cost of obtaining and providing it. In attempting to fulfill a completeness objective when obtaining financial information, one could expend considerable resources. The cost of this search may greatly outweigh any benefit in achieving the completeness objective. Consequently, the search for completeness will be restricted by this constraint.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

33.

The elements of financial statements are broad categories or classes of financial statement effects of transactions and other events. They include assets, liabilities, equity, income (which includes revenues and gains), and expenses (which include losses). The grouping is selected in accordance with the economic characteristics of the transactions.

LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

34.

The two bases are historical cost and fair value. The fair value basis of accounting is applied to those assets that are intended to be sold and whose fair value is readily available. Securities traded on the stock exchanges would be a good example of assets reported at their fair value. The historical cost basis of accounting is used for most of the remaining assets used by the business. Since in most cases the intention is to use the assets to earn revenue, the fair value of the asset is not as relevant as its historical cost.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

35.

In order to be relevant for decision making, the measurement of elements of financial statements need to reflect amounts that are reliable. For assets that are intended to be sold, the fair value of the assets becomes the most relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset. On the other hand, for assets held for use by the corporation, the value at resale is not as relevant to the financial statement user. In that case, the historical cost of the assets is the better measurement for reporting the financial statement element. An example of a revenue generating asset is land used for a parking lot. It is relevant to compare the actual cost of the land to the amount of the revenue generated from its use. Using the historical cost basis of accounting gives a faithful representation to the financial statement users.

LO 3 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa.t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2.1 a. b. c. d. e. f.

5 1 3 3 1 7

Accounts payable Accounts receivable Accumulated depreciation Buildings Cash Common shares

i. j. k. l. m. n.

8 5 1 3 2 6

Current portion of mortgage payable Deferred revenue

Dividends declared Income tax payable Inventory Land Long-term investments Mortgage payable, due in 20 years Patents

p. q.

1 1

Prepaid insurance Supplies

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.2 a. b. c. d.

4 2 4 5

Accounts payable Accumulated depreciation Bank indebtedness Bank loan payable, due

e. f. g. h.

1 6 4 2

Cash Common shares Deferred revenue Equipment

i. 3 Goodwill j. 1 Interest receivable k. 1 Inventory l. 1 Notes receivable, due in six in three years months m. 1 Prepaid rent n. 6 Retained earnings o. 4 Salaries payable p. 1 Supplies q. 1 Trading investments

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.3 SHUM CORPORATION Statement of Financial Position (Partial) Assets Current assets Cash Accounts receivable Inventory Supplies Prepaid insurance Total current assets Property, plant, and equipment Buildings Less: Accumulated depreciation—buildings Equipment Less: Accumulated depreciation—equipment Total property, plant, and equipment Total assets

$16,400 14,500 9,000 4,200 3,900 48,000 Land $110,000 33,000 $70,000 25,000

77,000 45,000 187,000 $235,000

(Assets = Liabilities + Shareholders‘ equity) LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.4 HIRJIKAKA INC. Statement of Financial Position (Partial) Current liabilities Accounts payable Salaries payable Interest payable Income tax payable Deferred revenue Current portion of mortgage payable Total current liabilities

$22,500 3,900 5,200 6,400 900 5,000 $43,900

LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.5 MOOSE JAW TRUCKS LTD. Statement of Financial Position December 31, 2024 Assets Current assets Non-current assets ($50,000 x 3) Total assets

$ 50,000 150,000 $200,000

Liabilities and Shareholders‘ Equity Current liabilities ($50,000 x 60%) Non-current liabilities ($30,000 x 3) Total liabilities Shareholders' equity Common shares Retained earnings (to balance) Total shareholders‘ equity Total liabilities and shareholders' equity

$30,000 90,000 120,000 $ 60,000 20,000 80,000 $200,000

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.6 a.

($ in thousands) 2021

2020

Working capital:

$302,232 – $129,926 = $172,306

$289,609 – $168,825 = $120,784

Current Assets – Current Liabilities

Current ratio: Current ratio:

$302,232 $129,926

= 2.3:1

$289,609 $168,825

= 1.7:1

Current Assets Current Liabilities

The working capital increased in 2021 and the current ratio also increased. Rogers Sugar's liquidity is stronger in 2021 compared with 2020.

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.7 a.

(in $ thousands) 2021 Debt to total assets ratio: ($552,347 + $2,083,907) = 68.4% ($398,975 + $3,457,642)

2020 Debt to total assets ratio: ($549,340 + $2,373,123) = 73.6% ($360,597 + $3,610,285)

Total Liabilities Total Assets

The company‘s solvency was stronger in 2021 compared with 2020 because total debt has decreased as a proportion of total assets.

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.8 a. 2024

2023

Current ratio:

($15,000 + $104,000 + $121,000) $120,000 $240,0001 $120,000

($44,000 + $71,000 + $87,000) = $118,000 $202,0002 $118,000

= 2.0:1

= 1.7:1

Current Assets Current Liabilities

2024

2023

Debt to total assets ratio: ($120,000 + $300,000) ($240,0001 + $500,000)

= 56.8%

Debt to total assets ratio: ($118,000 + $200,000) ($202,0002 + $476,000)

= 46.9%

Total Liabilities Total Assets

The liquidity has improved and the solvency has deteriorated in 2024 for Oshawa Industries Ltd. One possible reason for this trend is that new long-term debt of $100,000 was added during 2024 which helped in financing the additional accounts receivable and inventory, thereby increasing the current ratio. Another explanation for the increase in the liquidity is that accounts payable increased modestly in 2024 while accounts receivable and inventory increased substantially.

LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.9 a.

($ in millions) 2021

2020

Basic earnings per share:

$44,804 43,483

= $1.03 per share

$101,619 42,929

= $2.37 per share

Income available to common shareholders Weighted average number of common shares

Price-earnings ratio: $41.67 $1.03

= 40.5 times

Price-earnings ratio: $26.21 $2.37

= 11.1 times

Market price per share Basic earnings per share

The large decrease in income available to common shareholders and in the basic earnings per share during the year would indicate that profitability has deteriorated in 2021. In spite of the decrease in income available to common shareholders, investors appear to have more confidence in Laurentian Bank of Canada‘s future income as indicated by the substantial increase in the price-earnings ratio in 2021.

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.10 a. b. c. d. e. f.

Faithful representation Verifiability Understandability Cost Going concern Fair value

LO 3 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.11 a. b. c. d. e. f. g. h. i. j. k. l. m.

10 5 13 8 12 9 1 2 4 3 11 6 7

LO 3 BT: C Difficulty: C Time: 15 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.12 a.

Sosa Ltd. has purchased the land for sale and not for use. The fair value of the land becomes the more relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset.

Mohawk has purchased land for use and not for sale. The fair value is not as relevant to the financial statement user in this case. The historical cost of the land is the better measurement for reporting the land on the statement of financial position.

LO 3 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 2.1 a. 5 b. 1 c. 3 d. 3 e. 7 f. 5 g. 5 h. 4 i. 5 j. 1 k. 1 l. 3 m. 6 n. 1

Accounts payable and accrued liabilities Accounts receivable Accumulated depreciation Buildings and leasehold improvements Common shares Current portion of long-term debt Dividends payable Patents Income and other taxes payable Income and other taxes receivable Inventories Land Long-term debt Prepaid expenses

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.2 a. BUHLER INDUSTRIES INC. Statement of Financial Position (partial) September 30, 2021 (in thousands) Assets Current assets Accounts receivable $ 33,142 Income tax receivable 263 Inventory 156,406 Prepaid expenses 5,259 Total current assets Long-term investments Long-term other receivables and other assets $ 8,247 Investments 6,254 Property, plant, and equipment Land $ 2,281 Buildings $26,610 Less: Accumulated depreciation 19,737 6,873 Equipment $58,410 Less: Accumulated depreciation 54,139 4,271 Computer equipment $ 7,229 Less: Accumulated depreciation 6,426 803 Total property, plant, and equipment Total assets

$ 195,070

14,501

14,228 $223,799

b. Buhler Inc. does not report any cash as it is operating with a negative bank balance likely covered by a line of credit which would be reported as bank indebtedness in current liabilities on the statement of financial position. LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.3 TRANSCONTINENTAL INC. Statement of Financial Position (partial) October 31, 2021 (in millions) Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities Income taxes payable Deferred revenue Current portion of lease liabilities Current portion of long-term debt Total current liabilities Non-current liabilities Long-term debt Lease liabilities Deferred income tax Other long-term liabilities Total non-current liabilities Total liabilities Shareholders' equity Common shares Retained earnings Accumulated other comprehensive income (loss) Total shareholders‘ equity Total liabilities and shareholders' equity

$ 439.2 28.9 12.3 23.1 187.3 $ 690.8 $ 778.2 137.3 137.3 105.0 1,157.8 1,848.6 $ 640.0 1,159.5 ( 41.3) 1,758.2 $3,606.8

LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.4 a.

Net income

= Revenues – Expenses = $183,040 – $158,680– $4,550 – $5,200 = $14,610

Retained earnings = Beginning retained earnings + Net income – Dividends declared = $116,520 + $14,610 – $0 = $131,130 b.

SUMMIT LTD. Statement of Financial Position December 31, 2024 Assets

Current assets Cash Accounts receivable Supplies Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings $133,800 Less: Accumulated depreciation 50,600 Equipment $ 66,100 Less: Accumulated depreciation 21,470 Total property, plant, and equipment Total assets

$ 24,040 20,780 1,240 1,420 $47,480 28,970 $194,000 83,200 44,630 321,830 $398,280

Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Current portion of mortgage payable Total current liabilities Mortgage payable ($104,000 – $30,500) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$21,050 2,100 30,500 $ 53,650 73,500 127,150 $140,000 131,130 271,130 $398,280

LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting Solutions Manual 3-103 Chapter 3 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

EXERCISE 2.5 BATRA CORPORATION Statement of Income Year Ended July 31, 2024 Revenues Service revenue Rent income Total revenues Expenses Salaries expense Operating expenses Rent expense Depreciation expense Utilities expense Interest expense Supplies expense Total expenses Income before income tax Income tax expense Net Income

$113,600 18,500 132,100 $44,700 32,500 10,800 3,000 2,600 2,000 900 96,500 35,600 5,000 $30,600

[Revenues – Expenses = Net income or (loss)]

BATRA CORPORATION Statement of Changes in Equity Year Ended July 31, 2024

Balance, August 1, 2023 Issued common shares Net income Dividends declared Balance, July 31, 2024

Common Shares

Retained Earnings

$ 15,000 10,000

$17,940

000 000 $25,000

30,600 (12,000) $36,540

Total Equity $32,940 10,000 30,600 (12,000) $61,540

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

EXERCISE 2.5 (CONTINUED) BATRA CORPORATION Statement of Financial Position July 31, 2024 Assets Current assets Cash Trading investments Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$ 5,060 20,000 17,100 1,500 $ 43,660 $62,900 6,000 56,900 $100,560

Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Deferred revenue Bank loan payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$ 4,220 1,000 12,000 21,800 $ 39,020 $25,000 36,540 61,540 $100,560

(Assets = Liabilities + Shareholders‘ equity) LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.6 a.

Current ratio: $60,000 $40,000

= 1.5:1

Current Assets Current Liabilities

Current ratio: ($60,000 – $20,000) = 2.0:1 ($40,000 – $20,000)

The request of the CFO to pay off an accounts payable ahead of the due date is clearly done to manipulate the current ratio. Her instructions to make the payment came after she was presented with the calculation of the current ratio. In this case the current ratio that is meant to show Padilla‘s liquidity position has been altered by a simple payment on account. That said, it is not unethical to pay an account payable in advance of its due date.

LO 2 BT: E Difficulty: M Time: 15 min. AACSB: Analytic and Ethics CPA: cpa.e001, cpa.t001 and cpa.t005 CM: Reporting

EXERCISE 2.7 a.

(in thousands) 2021

2020

Working capital: $1,447.2 – $463.6 = $983.6

Working capital: $1,544.4 – $359.6 = $1,184.8

Current Assets – Current Liabilities

Current ratio: $1,447.2 $463.6

= 3.1:1

$1,544.4 $359.6

= 4.3:1

Current Assets Current Liabilities

Debt to total assets ratio: ($463.6 + $753.7) ($1,447.2 + $1,689.4)

= 38.8%

($359.6 + $1,102.4) ($1,544.4 + $1,476.5)

= 48.4%

Total Liabilities Total Assets

Gildan‘s liquidity deteriorated in 2021 when compared to 2020, while remaining strong. Its solvency improved and also remained strong.

EXERCISE 2.7 (CONTINUED) c. 2021

Working capital (in thousands) Current ratio Debt to total assets ratio

Gildan

Aritzia

Canada Goose

$983.6 3.1:1 38.8%

$106.1 1.4:1 68.4%

$634.8 3.4:1 60.2%

n/a 1.8 :1 22.8%

Industry

2020

Working capital (thousands) Current ratio Debt to total assets ratio

Gildan

Aritzia

Canada Goose

Industry

$1,184.8 4.3:1 48.4%

$77.6 1.5:1 68.0%

$322.9 2.5:1 53.6%

n/a 1.4:1 21.6%

Based on working capital and the current ratio, Aritzia‘s liquidity for 2021 and 2020 is the worst (lowest) of the three companies, as the current ratio is below that of Gildan and Canada Goose. Aritzia‘s current ratio is below industry average in 2021, but is slightly above in 2020. In 2021, Aritzia and Canada Goose improved working capital while Gildan‘s declined. Both the working capital and current ratios deteriorated for Gildan. The industry average current ratio also improved. Based on the debt to total assets ratio, Gildan‘s solvency is the best (lowest) of the three companies but worse than the industry average. Canada Goose and Aritzia‘s solvency deteriorated. Aritzia‘s solvency is the worst of the three companies. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

EXERCISE 2.8 a.

(in millions) 2021

2020

Basic earnings per share:

$625.6 409.8

$582.8 400.3

= $1.53 per share

= $1.46 per share

Income available to common shareholders Weighted average number of common shares

Price-earnings ratio: $37.79 $1.53

= 24.7 times

Price-earnings ratio: $33.84 $1.46

= 23.2 times

Market price per share Basic earnings per share

The increase in the basic earnings per share during the year would indicate that profitability has improved in 2021.

Saputo's income rose by 7.3% in 2021. On a per share basis, earnings per share increased by 4.8% because there were more shares outstanding. Since earning per share is the denominator in the priceearnings ratio, one would expect the price-earnings ratio to decline. Instead, the price-earnings ratio increased due to the 11.7% increase in share market price.

Investors appear to be more optimistic about Saputo's future profitability as its price-earnings ratio has increased

LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

EXERCISE 2.9 a. 7 b. 10 c. 11 d. 3 e. 2 f. 8

g. h. i. j. k. l.

1 6 4 5 9 12

LO 3 BT: K Difficulty: M Time: 20 min. AACSB: None CPA: cpa.t001 CM: Reporting

EXERCISE 2.10 1.

a. b.

The historical cost basis of accounting is involved in this situation. The historical cost basis of accounting has been followed. The land is for use and should be reported at its historical cost.

The fair value measurement basis of accounting is involved in this situation. The historical cost principle has not been violated since the parcel of land is being held for resale and not for use. The land should be reported at fair value.

a. b.

The assumption involved in this situation is the going concern assumption. The going concern assumption has been violated. The elements on the statement of financial position should have been classified between current and non-current. The cost constraint is involved in this situation along with materiality. There has been no violation of the cost constraint. The practice adopted is acceptable. The fundamental qualitative characteristic is relevance. By disclosing the additional information, the financial statement user is informed of relevant information in decision making. There is no violation of any assumption, constraint or measurement basis. The fundamental qualitative characteristic is timeliness. By releasing the financial statements on a timely basis, the financial statement user is informed sooner of relevant information in decision making. There is no violation of any assumption, constraint or measurement basis.

EXERCISE 2.10 (CONTINUED) 7.

The fundamental qualitative characteristic is free from material error. By counting the inventory, the asset measurement is verified and the information on the financial statements becomes more reliable and the amounts are faithfully represented. There is no violation of any assumption, constraint or measurement basis.

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 2.1A

Item

Statement of Financial Position Category

Accounts receivable

Current assets

Accounts payable

Current liabilities

Accumulated depreciation - buildings

Non-current assets

Accumulated depreciation - machinery

Non-current assets

Bank loan payable (due after one year)

Non-current liabilities

Cash

Current assets

Common shares

Shareholders‘ equity

Deferred revenue

Current liabilities

Goodwill

Non-current assets

Inventory

Current assets

Land and buildings

Non-current assets

Machinery

Non-current assets

Prepaid expenses

Current assets

Retained earnings

Shareholders‘ equity

LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.2A a. Item

Statement of Financial Position Category

Accounts receivable Accumulated amortization—intangibles Accumulated depreciation—aircraft Accumulated depreciation—buildings Accumulated depreciation—machinery and equipment Accumulated depreciation—simulators Aircraft Buildings and land Cash Machinery and equipment Intangible assets Inventory Other assets (non-current) Prepaid expenses

Current assets Intangible assets (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment (contra account)

Simulators Other assets (current) Assets under construction

Property, plant, and equipment Current assets Property, plant, and equipment

Property, plant, and equipment (contra account) Property, plant, and equipment Property, plant, and equipment Current assets Property, plant, and equipment Intangible assets Current assets Other assets Current assets

PROBLEM 2.2A (CONTINUED) b. CAE Inc. Statement of Financial Position (partial) March 31, 2021 (in millions)

Assets Current assets Cash Accounts receivable Inventory Prepaid expenses Other current assets Total current assets Property, plant, and equipment Aircraft Less: Accumulated depreciation Machinery and equipment Less: Accumulated depreciation Simulators Less: Accumulated depreciation Buildings and land Less: Accumulated depreciation Assets under construction Total property, plant, and equipment Intangible assets Less: Accumulated amortization

$ 926.1 518.6 647.8 52.1 1,234.0 $3,378.6 $

91.9 15.8

$ 192.9 144.6 $2,140.6 717.5 $ 513.8 231.7

76.1

48.3 1,423.1 282.1 139.8 1,969.4 $2,750.7 694.9

Other assets Total assets

2,055.8 1,344.6 $8,748.4

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.3A a. Item Accounts payable and accrued liabilities Current portion of long-term debt Deferred income tax liabilities (long-term) Income taxes payable Long-term debt Other current liabilities Other long-term liabilities Other shareholders‘ equity items Retained earnings Share capital

Statement of Financial Position Category Current liabilities Current liabilities Non-current liabilities Current liabilities Non-current liabilities Current liabilities Non-current liabilities Shareholders‘ equity Shareholders‘ equity Shareholders‘ equity

PROBLEM 2.3A (CONTINUED) b.

CAE Inc. Statement of Financial Position (partial) Liabilities and Shareholders' Equity March 31, 2021 (in millions)

Current liabilities Accounts payable and accrued liabilities Income taxes payable Other current liabilities Current portion of long-term debt Total current liabilities Non-current liabilities Long-term debt Other long-term liabilities Deferred income tax liabilities Total non-current liabilities Total liabilities Shareholders' equity Share capital Retained earnings Other shareholders‘ equity items Total shareholders‘ equity Total liabilities and shareholders' equity

$ 945.6 16.2 1,455.2 216.3 $2,633.3 $2,135.2 643.6 123.5 2,902.3 5,535.6 $1,516.2 1,543.7 152.9 3,212.8 $8,748.4

c. Yes, these two amounts agree. Assets of $8,748.4 million equal total liabilities plus shareholders‘ equity of the same amount. LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.4A a. BISKANE CORPORATION Statement of Income Year Ended December 31, 2024 Revenues Service revenue Interest income Total revenues Expenses Salaries expense Operating expense Depreciation expense Repairs and maintenance expense Insurance expense Utilities expense Interest expense Supplies expense Total expenses Income (loss) before income tax Income tax expense Net income (loss)

$167,900 600 $168,500 $135,000 43,500 2,800 3,700 2,000 1,700 2,500 500 191,700 (23,200) 0 ($23,200)

[Revenues – Expenses = Net income or (loss)]

PROBLEM 2.4A (CONTINUED) BISKANE CORPORATION Statement of Changes in Equity Year Ended December 31, 2024

Balance, January 1 Issued common shares Net income (loss) Dividends declared Balance, December 31

Common Shares

Retained Earnings

$45,000 15,000

$167,800

_ _____ $60,000

(23,200) (4,000) $140,600

Total Equity $212,800 15,000 (23,200) (4,000) $200,600

(Beginning equity ± Changes to equity = Ending equity) [Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

PROBLEM 2.4A (CONTINUED) a. (continued) BISKANE CORPORATION Statement of Financial Position December 31, 2024 Assets Current assets Cash Trading investments Accounts receivable Supplies Prepaid insurance Total current assets

$ 17,000 40,000 22,400 100 2,400

Property, plant, and equipment Land $106,000 Buildings $65,000 Less: Accumulated depreciation—buildings 17,500 47,500 Equipment $45,000 Less: Accumulated depreciation—equipment 18,500 26,500 Total property, plant, and equipment Total assets Liabilities and Shareholders' Equity Current liabilities Accounts payable $12,000 Salaries payable 19,300 Current portion of bank loan payable 5,500 Total current liabilities Non-current liabilities Bank loan payable ($30,000 - $5,500) Total liabilities Shareholders' equity Common shares $ 60,000 Retained earnings 140,600 Total shareholders‘ equity Total liabilities and shareholders' equity

$ 81,900

180,000 $261,900

$ 36,800 24,500 61,300

200,600 $261,900

(Assets = Liabilities + Shareholders‘ equity)

PROBLEM 2.4A (CONTINUED) b.

The statement of income reports the net income or loss for the period. This figure is then used in the statement of changes in equity, along with dividends declared and any issues (or repurchases) of shares, to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position to determine shareholders‘ equity and complete the accounting equation.

LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.5A a. 1.

Working capital

Current assets – Current liabilities $ 162,565 – $98,000 = $64,565

Current ratio

Current assets Current liabilities $162,565

1.7 :1

35.4%

$98,000 3.

Debt to total assets

Total liabilities Total assets $363,000 $1,026,765

Basic earnings per share

Price-earnings ratio

Income available to common shareholders Weighted average number of common shares $125,100 = $1.79 70,000 Market price per share Basic earnings per share $24.00 = 13.4 times $1.79

Ogimaa‘s liquidity has deteriorated dramatically as evidenced by a reduction in the working capital relative to 2023 as well as the lower current ratio. In addition, the solvency has also deteriorated as the debt to total assets ratio is higher in 2024. Ogimaa‘s profitability has also suffered as the basic earnings per share ratio decreased in 2024, as have investors‘ expectations for future profitability as indicated by the decrease in price-earnings ratio. This is assuming the weighted average number of shares has not materially changed in 2024.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance.

PROBLEM 2.6A a. Working capital Chen Caissie

= = =

Current ratio

Current assets – Current liabilities $407,200 – $166,325 = $190,400 – $133,700 = Current assets Current liabilities

Chen $407,200

$240,875 $56,700

Caissie =

2.4 :1

$166,325

$190,400

1.4 :1

$133,700

Chen is significantly more liquid than Caissie. It has a higher current ratio and more current assets available to pay current liabilities as they come due. b. Debt to total assets

Chen ($166,325 + $108,500) ($407,200 + $532,000)

Total liabilities Total assets Caissie

= 29.3%

($133,700 + $40,700)

52.8%

($190,400 + $139,700)

Caissie is considerably less solvent than Chen. Caissie's debt to total assets ratio of 52.8% is almost double that of Chen‘s ratio of 29.3%. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.

PROBLEM 2.6A (CONTINUED) c. Service revenue Operating expenses Interest expense Income tax expense Total expenses

Chen $1,800,000 1,458,000 10,000 85,000 1,553,000

Caissie $620,000 438,000 4,000 35,400 477,400

Net income

$ 247,000

$142,600

Basic earnings per share =

Income available to common shareholders Weighted average number of common shares

Chen

Caissie

$247,000 = $3.25 76,000 Price-earnings ratio Chen $25.00 $3.25

= 7.7 times

$142,600 62,000 =

= $2.30

Market price per share Basic earnings per share Caissie $15.00 $2.30

= 6.5 times

Based on the price-earnings ratio, investors believe that Chen will be more profitable than Caissie in the future. It is not meaningful to compare basic earnings per share between companies. LO 2 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.7A a. Oats Ltd. Barley Ltd. 1.

Working capital

$3,000 + $8,000 + $40,000 $8,000 + $5,500 + $14,000 – $20,000 – $18,000 = $31,000 = $9,500

Current ratio

$51,000 $20,000

Debt to total assets

Basic earnings per share

$12,000 3,500

= $3.43

$27,000 4,500

= $6.00

Price-earnings ratio

$95 $3.43

= 27.7 times

$10 $6

= 1.7 times

= 2.6:1

$20,000 + $75,000 = 54.0% $51,000 + $125,000

$27,500 $18,000

= 1.5:1

$18,000 + $25,000 = 22.3% $27,500 + $165,000

Liquidity With a current ratio of 2.6:1, Oats is more liquid than Barley and Oats has a stronger ratio than the industry average of 1.7:1 whereas Barley is lower than the industry average. Solvency Barley is more solvent than Oats as evidenced by its lower debt to total assets ratio, which is better than the industry average of 49%. Oats‘ debt to total assets is higher than the industry average, so it is less solvent than the industry standard. Profitability Although the basic earnings per share ratio does not provide a basis for comparison by investors, the price-earnings ratio can be calculated to compare to each other or to the industry average of 20.0 times. The price-earnings ratio, which reveals investors‘ sentiment concerning future profitability, shows that Oats is favoured over Barley. Oats also has a higher price-earnings ratio than the industry‘s ratio of 20.0. Barley is substantially lower than the industry ratio indicating that investors are not as optimistic about its future earning potential even though it has a higher earnings per share than Oats. There is a large difference in the debt to total assets ratio of the companies. Debt to total assets is very high for Oats, increasing the risk

of the investment made by shareholders. Oats may be financing future growth with debt and their investors may be comfortable with a high debt to total assets ratio. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.8A a.

The higher the amount of working capital, the better a company‘ liquidity. From 2022 to 2024 Pitka Corporation‘s working capital deteriorated and showed a constant downward trend over the three-year period. A higher current ratio is evidence of better liquidity for a company (assuming the components of the current assets are also liquid). Although the current ratio stayed the same from 2022 to 2023, it deteriorated 2023 to 2024 and is low. A smaller (lower) debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2022 to 2023, showing deterioration in the solvency for Pitka. On the other hand, the ratio improved substantially from 2023 to 2024. The higher the basic earnings per share, the better the profitability. Profitability decreased from 2022 to 2023, but improved from 2023 to 2024. The investors appeared to have less confidence in the future net income of Pitka as evidenced by Pitka's price-earnings ratio, which declined from 2022 to 2023. This view changed as demonstrated by the climb in the price-earnings ratio from 2023 to 2024.

Liquidity Pitka‘s current ratio, although steady in 2022 and 2023, declined slightly in 2024. This trend is of concern given the low level of liquidity the company has with a current ratio of 1.1:1.

Solvency Pitka‘s debt to total assets ratio improved in the last year. It appears to be reasonable in size, as does the solvency of the company in 2024. Profitability Pitka‘s profitability declined and then recovered as is demonstrated by the basic earnings per share ratio. The price-earnings ratio in 2024 indicates expectations of improving profitability.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.9A a.

The objective of financial reporting is to provide information that is useful to existing and potential investors and creditors in making decisions about providing resources to the company. In this case, the information will be used by the team‘s bank. Bucky‘s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. His suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray economic reality and would not faithfully represent the performance of the business and its financial position at December 31, 2024. Bucky‘s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.

1. Failing to include the estimated expenses for utilities and the corresponding liability for the utilities already consumed by December 31, 2024 violates accrual accounting. The expense was incurred and a liability exists, and although the exact amount is not known, a reasonable estimate can be made as this type of expense occurs often. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the company at December 31, 2024. 2. Unless the company uses the revaluation model for all of its longlived assets, increasing the value of the building to its fair value would violate the historical cost basis of accounting. It is likely far more relevant to the financial statement user of this company to see the original purchase price of the building rather than its fair value as it is unlikely to be resold soon. Assets and revenue (from the recording of an unrealized gain from the increase in the value of the asset) would be overstated if Bucky‘s instructions were followed. 3. The signing bonus paid to Wayne Crosby does not represent an asset at December 31, 2024. No future benefit can be derived from this payment as it was not conditional upon the occurrence of a future event. Consequently, the expenditure does not fit the definition of an asset.

LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting

PROBLEM 2.10A a.

The advantage of the fair value basis of accounting is that it represents a more up-to-date measurement of the value of the asset reported. Consequently, the amounts reported are more relevant to the financial statement users. The disadvantage of the fair value basis of accounting and corresponding advantage of historical cost is that historical cost is more reliable and shows the amount paid for the asset. The historical cost might provide a more faithful representation because it can be easily verified and is neutral.

The reason a company might choose to adopt the fair value basis of accounting for real estate is that assets reported on the statement of financial position will have higher values than they would using the historical cost basis. It is inherent in the nature of real estate that the land will increase in value over time. Creditors will find the fair value a more relevant basis for making lending decisions. The increase in the assets will cause a corresponding increase in equity.

The reason a company might choose to adopt the historical cost basis of accounting for real estate is that assets reported on the statement of financial position will have more faithful representation because it reports the actual cost of the asset when it was acquired and this measurement can be easily verified and it is neutral. There is also a significant cost to obtaining reliable fair value information, on a regular basis, to be reported in the financial statements.

When comparing public real estate companies, the reader is well advised to read the accounting policy note to the financial statements disclosing the measurement policy used for the real estate property. One would need to determine the corresponding fair value for real estate for the company that used the historical cost basis of accounting. In fact, this information is required to be disclosed for real estate companies, even if they adopted the historical cost basis of accounting, to improve comparability and disclosure. Otherwise, trying to compare businesses that use different bases of accounting would be very difficult.

LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting

PROBLEM 2.1B Item Accumulated amortization—patents and trademarks Accumulated depreciation—industrial machinery and equipment Bank overdraft Cash Common (ordinary) shares Current borrowings and debts Income tax payable (current) Industrial machinery and equipment Inventories Land Long-term investments Non-current borrowings and debts Patents and trademarks Prepaid expenses Trade accounts payable Trade accounts receivable

Statement of Financial Position Category Intangible assets (contra account) Property, plant, and equipment (contra account) Current liabilities Current assets Share capital Current liabilities Current liabilities Property, plant, and equipment Current assets Property, plant, and equipment Non-current assets Non-current liabilities Intangible assets Current assets Current liabilities Current assets

LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.2B a. Item Accounts receivable Accumulated amortization— patent Accumulated depreciation— buildings Accumulated depreciation— equipment Buildings Cash Equipment Goodwill Inventory Land Patent Prepaid expenses Trading investments

Statement of Financial Position Category Current assets Intangible assets Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment Current assets Property, plant, and equipment Goodwill (after intangibles) Current assets Property, plant, and equipment Intangible assets Current assets Current assets

PROBLEM 2.2B (CONTINUED) b. DEVON LIMITED Statement of Financial Position (partial) December 31, 2024 Assets Current assets Cash Trading investments Accounts receivable Inventory Prepaid expenses Total current assets Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total property, plant, and equipment Intangible assets Patent Less: Accumulated amortization Goodwill Total assets $724,230

$100,460 52,520 13,345 105,320 13,950 $285,595

$207,290 $ 58,275 27,595 $287,400 146,550

30,680 140,850 378,820 29,225 9,000

20,225 39,590

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.3B a. Item Accounts payable Common shares Current portion of mortgage payable Mortgage payable Retained earnings Deferred revenue

Category Current liabilities Shareholders‘ equity Current liabilities Non-current liabilities Shareholders‘ equity Current liabilities

b. DEVON LIMITED Statement of Financial Position (partial) December 31, 2024 Liabilities and Shareholders' Equity Current liabilities Accounts payable Deferred revenue Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$ 13,100 14,180 29,000 $ 56,280 231,255 287,535 $115,400 321,295 436,695 $724,230

Yes, the total assets of $724,230 matches the total liabilities and shareholders‘ equity.

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.4B a. BEAULIEU LIMITED Statement of Income Year Ended December 31, 2024 Revenues Service revenue Interest income Total revenues Expenses Salaries expense Interest expense Depreciation expense Utilities expense Insurance expense Total expenses Income before income tax Income tax expense Net Income

$193,100 500 $193,600 $145,600 8,000 5,400 3,700 2,400 165,100 28,500 5,000 $23,500

[Revenues – Expenses = Net income or (loss)]

BEAULIEU LIMITED Statement of Changes in Equity Year Ended December 31, 2024

Balance, January 1 Issued common shares Net income Dividends declared Balance, December 31

Common Shares

Retained Earnings

$25,000 20,000

$34,000

_ _____ $45,000

23,500 (3,500) $54,000

Total Equity $59,000 20,000 23,500 (3,500) $99,000

(Beginning equity ± Changes in equity = Ending equity) [Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

PROBLEM 2.4B (CONTINUED) a. (continued) BEAULIEU LIMITED Statement of Financial Position December 31, 2024 Assets Current assets Cash Accounts receivable Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings $105,000 Less: Accumulated depreciation—buildings 12,000 Equipment $ 32,000 Less: Accumulated depreciation—equipment 19,200 Total property, plant, and equipment Total assets

$11,170 7,500 250 $ 18,920 20,000 $145,800 93,000 12,800 251,600 $290,520

Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable ($175,800 - $35,100) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$ 9,550 6,170 35,100 $ 50,820 140,700 191,520 $45,000 54,000 99,000 $290,520

PROBLEM 2.4B (CONTINUED) b.

The statement of income reports the net income or loss for the period. This figure is then used in the statement of changes in equity, along with dividends declared and issues (or repurchases) of shares to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position, to determine shareholders‘ equity and complete the accounting equation.

LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.5B a. Working capital

Current ratio

Current assets – Current liabilities $253,850 – $156,550 =

$97,300

Current assets Current liabilities $253,850

1.6 :1

40.1%

$156,550

Debt to total assets

Total liabilities Total assets $288,550 $719,150 Income available to common shareholders

Basic earnings per share

Price-earnings ratio

Weighted average number of common shares $96,600 = $2.42 40,000 Market price per share Basic earnings per share $30.00 = 12.4 $2.42

times

Fast‘s liquidity has improved as the working capital is larger in 2024 and the current ratio is greater than that of 2023. The solvency has improved as the debt to total assets ratio is a smaller percentage in 2024 than in 2023. Fast‘s profitability has improved dramatically as the basic earnings per share ratio has increased by a large amount in 2024, as has the priceearnings ratio, suggesting that investors are excited about the company‘s future prospects.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.6B a. Working capital Belliveau

Current assets – Current liabilities $180,000 – $75,000 = $700,000 – $300,000 =

= = =

Shields Current ratio

Current assets Current liabilities

Belliveau $180,000

$105,000 $400,000

Shields =

$700,000

2.4 :1

$75,000

2.3 :1

$300,000

Belliveau is slightly more liquid than Shields as it has a higher current ratio, even though its absolute working capital amount is lower. b. Debt to total assets

Total liabilities Total assets

Belliveau ($75,000 + $190,000) ($180,000 + $600,000)

Shields = 34.0%

($300,000 + $200,000) ($700,000 + $800,000)

= 33.3%

The debt to asset ratios are similar and both companies are solvent. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.

PROBLEM 2.6B (CONTINUED) c. Service revenue Operating expenses Interest expense Income tax expense Total expenses

Belliveau $450,000 390,000 6,000 10,000 406,000

Shields $890,000 679,000 10,000 65,000 754,000

Net income

$ 44,000

$136,000

Basic earnings per share =

Income available to common shareholders Weighted average number of common shares

Belliveau $44,000 200,000

= $0.22

Price-earnings ratio Belliveau $2.50 $0.22

Shields

= 11.4 times

$136,000 200,000 =

= $0.68

Market price per share Basic earnings per share Shields $6.00 $0.68

= 8.8 times

Investors have higher expectations for Belliveau‘s future profitability, as evidenced by the price-earnings ratio. It is not useful to compare basic earnings per share between companies. LO 2 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.7B a. Clear Ltd.

Dot Ltd.

$2,000 + $18,000 + $48,000 – $30,000 = 38,000

$14,000 + $8,000 + $22,000 – $30,000 = $14,000

Working capital

Current ratio

Debt to total assets

Basic earnings per share

$16,000 1,800

= $8.89

$22,000 11,000

= $2.00

Price-earnings ratio

$78.00 $8.89

= 8.8 times

$28.00 $2.00

= 14.0 times

$68,000 $30,000

= 2.3:1

$30,000 + $178,000 = 72.2% $68,000 + $220,000

$44,000 $30,000

= 1.5:1

$30,000 + $90,000 $44,000 + $236,000

= 42.9%

Liquidity Both companies are liquid, with Clear having a stronger position with a current ratio that is higher than the industry average of 1.7:1. Solvency Dot is more solvent than Clear as evidenced by its lower debt to total assets ratio. Dot also has a debt to total assets ratio that is lower than the industry average of 52%. Profitability Although the basic earnings per share ratio does not provide a basis for comparison, investors appear to have more confidence in the future net income of Dot as evidenced by Dot‘s price-earnings ratio. Both Clear and Dot have lower price-earnings ratios than the industry average of 16.1.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.8B a.

The higher the amount of working capital, the better a business‘ liquidity. From 2022 to 2023, Giasson Corporation‘s working capital improved. It then deteriorated from 2023 to 2024, decreasing by $17,000. A higher current ratio is evidence of better liquidity for a business, assuming all components of current assets are also liquid. The current ratio for Giasson has been deteriorating steadily from 2022 to 2024. The corporation remains liquid, as its current ratio was 1.5:1 in 2024. A smaller debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2022 to 2023, showing deterioration in the solvency for Giasson. On the other hand, this ratio improved from 2023 to 2024. Less than half of the company‘s assets have been financed using debt. The higher the basic earnings per share, the better evidence of improved profitability. Profitability increased from 2022 to 2023 but declined significantly from 2023 to 2024 indicating poorer profitability. The investors appear to have less confidence in the future profitability of Giasson as evidenced by Giasson's price-earnings ratio which declined from 2022 to 2024.

Liquidity Giasson‘s current ratio, although declining over the past two years, demonstrates adequate liquidity. There is $1.50 of current assets available to cover each $1 of current liabilities. Solvency Giasson‘s debt to total assets ratio, although deteriorating from 2022 to 2024, remains modest in size and so the solvency of the company continues to be good. Profitability Giasson‘s profitability is declining as is demonstrated by the basic earnings per share ratio and the price-earnings ratio.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.9B a.

The objective of financial reporting is to provide information that is useful to existing and potential investors and creditors in making decisions about providing resources to the company. Virginia‘s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. Two of her suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray the economic reality and would not faithfully represent the performance of the construction company and the financial position at its year end. Virginia‘s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.

1. Failing to include the estimated expense and the related liability for the damages that have already occurred by the end of the year violates accrual accounting. The expense was incurred and a liability exists that can be estimated. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the construction company at its year end. 2. The suggestion of increasing the revenues from construction would result not only in the recording of revenue but the recording of an accounts receivable. The revenue from construction has not been earned as no work has been performed. Furthermore, no account receivable should be recorded because no asset exists yet. Because revenue would be overstated if recorded, equity would also be overstated if Virginia‘s instructions were followed. Virginia‘s suggestions would not faithfully represent the reality of the performance of Ace Construction Limited for the current fiscal year.

PROBLEM 2.9B (CONTINUED) b. (continued) 3. Although there are no fixed repayment terms for the bank overdraft, the bank can require repayment on demand since no contract or agreement has been entered into to delay the repayment of the overdraft. For this reason, the classification of the bank overdraft as a non-current liability would falsely portray the financial position of Ace Construction Limited at the year end. When assessing the construction company‘s liquidity, the users of the financial statements would be misinterpreting the financial position because of this misclassification. Classifying the debt as non-current would not faithfully represent the economic reality of the construction company‘s liquidity position. LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting

PROBLEM 2.10B a.

The following is the recommended basis of measurement that should be used for the following purchases: 1. Due the nature of the asset, a textbook purchase should be recorded at the historical cost basis of accounting because of its intended use. The objective of owning the asset is to use it and not to immediately resell it at a profit. 2. In the case of an iPad, the use of the asset will be limited due to technological obsolescence. Because of this obsolescence, the iPad purchase should be recorded and reported using the historical cost basis of accounting. 3. Software is very similar to the iPad of item 2 above in that it becomes technologically obsolete very quickly. On the other hand, the manufacturer has recognized this problem and has included in the sale of the software, automatic upgrades to attempt to deal with the future needs and demands of the purchaser. This asset is purchased for use and not for resale at a gain and consequently, the historical cost basis of accounting should be used for its recording and reporting. 4. If the purchase of the used car is for use in the business, the historical cost basis of accounting should be used. On the other hand, if the purchase is for resale, the fair value basis of accounting should be used. 5. Since the intention of the buyer of land is to eventually build a home on the land, the purchase of the land should be recorded using the historical cost basis of accounting. If the intention changes over the years and the buyer decides to resell the property and intends to hold the land for resale at a gain, the reporting of the asset should change to the fair value basis of accounting used for investments, assuming the fair value is readily available.

LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting Solutions Manual 3-144 Chapter 3 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

CT2.1

FINANCIAL ANALYSIS CASE

Transaction Selling common shares for cash Paying off an accounts payable Buying supplies on credit Borrowing money with payment due in 5 years Buying land with cash Using up supplies Paying for prepaid insurance Using utilities that the company will pay for later Collecting an accounts receivable

Current Current Retained Cash Assets Liabilities Earnings Flow Increase Increase Decrease Decrease Decrease Increase Increase Increase Increase Decrease Decrease Increase Decrease

Decrease Decrease Decrease Increase

Decrease

Increase Decrease

Increase

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

CT2.2 FINANCIAL REPORTING CASE

Total current assets were $403,358,000 at January 31, 2022, and $396,860,000 at January 31, 2021. Total assets were $1,219,273,000 $1,191,168,000 at January 31, 2021.

January

31,

2022,

and

Current assets are listed in the order of liquidity from most to least liquid. Cash is the most liquid asset and is reported first. Non-current assets appear to be listed in order of permanency, with property, plant, and equipment listed first.

The current liabilities total $294,490,000 at January 31, 2022, and $315,135,000 at January 31, 2021. The total liabilities at January 31, 2022 and January 31, 2021 were $639,069,000 and $685,937,000, respectively.

The current liabilities appear to be listed in order of size. It is not clear what order was chosen for non-current liabilities.

LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

CT2.3

FINANCIAL ANALYSIS CASE

a. North West (in thousands) 1. Working capital

$403,358 – $294,490

Sobeys (in millions)

= $108,868 $3,185.8 – $4,153.3 = $(967.5)

2. Current ratio

$403,358 $294,490

= 1.4:1

$3,185.8 $4,153.3

= 0.8:1

3. Debt to total assets

$639,069 $1,219,273

= 52.4%

$11,245.6 $15,366.1

= 73.2%

Liquidity: Working capital is not comparable, because of the differing sizes of the two companies involved. However, using the current ratio to assess liquidity, we can determine that North West is significantly more liquid than Sobeys but lower than the industry average. Sobeys is in a difficult position of having a working capital deficiency. Solvency: The higher a company‘s percentage of debt to total assets is, the greater the risk that this company may be unable to meet its maturing obligations. Both North West and Sobeys have worse ratios than the industry average, in particular, Sobeys has a very high debt to total assets ratio when compared to the industry average.

LO 2 BT: C Difficulty: S Time: 25 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

CT2.4 a.

FINANCIAL REPORTING CASE

McCain‘s multinational structure means that accounting personnel from various countries are involved with preparing financial statements. Since IFRS is a global standard, most of the accounting personnel would be familiar with IFRS. Also, by using one standard across all subsidiaries, there is no need to make adjustments for various GAAP differences (this was often the case for Canadian multinationals prior to the adoption of IFRS). For McCain, it means that the company will reduce cost as well as the chance for errors. In addition, the users of McCain‘s financial statements are located throughout the world. Those located in countries using IFRS, or wishing to compare McCain‘s financial statements to other global public companies, would better understand financial statements prepared using this standard.

Relevance – Researchers have found that companies who voluntarily adopt IFRS find that IFRS‘ accounting measures are better tools for evaluating performance. Therefore, IFRS statements are more relevant to McCain‘s management. Also, when global creditors are looking at financial statements prepared according to IFRS, they are no longer concerned about differences in GAAP. This increases the relevance to creditors. Faithful Representation – In comparison to ASPE, IFRS requires more detailed information to be disclosed in the notes to the financial statements. From a user‘s perspective, more information and explanation are provided to help understand the economic event being depicted. Comparability – McCain Foods is a global company that competes against various other global companies (most of whom follow IFRS). By adopting IFRS, it is easier for McCain to compare its results to other similar companies. This information would be useful to both internal users (management) as well as external (creditors).

CT2.4 (CONTINUED) b. (continued) Understandability – When different accounting standards are used by various companies within a corporate group, they are less understandable. Furthermore, when users are not resident in the country where the head office of the company is located, they often have a difficult time understanding financial statements that are presented using standards that they are not familiar with. For instance, a McCain manager in a United States subsidiary that follows U.S. GAAP may have difficulty understanding the statements of a McCain subsidiary located in the U.K. (that follows IFRS). c.

The assumption that small companies would avoid IFRS can relate to many things like: i. Not planning to take their company public in the future; ii. They like the simplicity and familiarity of ASPE; iii. They have many competitors, customers, and suppliers that use ASPE which makes their financial statements comparable and understandable. iv. The additional costs of preparing the additional required disclosure are not outweighed by the relevance or usefulness of the additional information. Examples of why private companies may adopt IFRS: i. Private companies that plan to be public sometime in the near future or who have foreign private investors, may choose to adopt IFRS. ii. Private companies that have global shareholders or creditors (who are more familiar with IFRS). They may also want to provide financial statements to customers.

LO 3 BT: S Difficulty: M Time: 25 min. AACSB: None CPA: cpa.t001 CM: Reporting

CT2.5

FINANCIAL ANALYSIS CASE

Sheila paid $25,000 for 10,000 common shares of Kenmare Architects Ltd. (or $2.50 per share) when the company was formed. This amount is reported as the balance in the Common Shares account on the statement of financial position of December 31, 2023. Sheila‘s mother paid $10,000 for 1,000 common shares (or $10.00 per share) in early 2024. This amount paid can be determined by calculating the increase of $10,000 ($35,000 less $25,000) in the Common Shares account on the statement of financial position of December 31, 2024.

By December 31, 2023, Uncle Harry wanted $8,000 of the loan paid off in 2024. This amount is classified as the current portion of the loan due at December 31, 2023. The actual amount of principal paid in 2024 was $30,000. This amount paid can be determined by calculating the total decrease in the loan payable from December 31, 2023 to December 31, 2024: [($52,000 + $8,000) less ($26,000 + $4,000)]. During 2023, Uncle Harry received only interest, in the amount of $3,600, as indicated in the statement of income for interest expense. In 2024, Uncle Harry received $32,700. This amount is equal to the principal repayment of $30,000 and the interest of $2,700.

CT2.5 (CONTINUED) c. Current ratio

2024 $46,000 $33,580

= 1.4:1

2023 $31,000 $22,490

= 1.4:1

Although the current ratio is unchanged, we need to further examine the account balances that make up the ratio. There has been deterioration in liquidity due to the declining cash balance and a significant rise in accounts receivable which may indicate difficulty in collecting amounts owed from customers. This decreased cash flow from customers has probably caused the increase in accounts payable, as the company seems to have delayed payment to suppliers. d. Debt to total assets

2024 $59,580 $106,000

= 56.2%

2023 $74,490 $103,000

= 72.3%

Kenmare‘s solvency improved significantly. The decrease in the ratio occurred mainly because of changes in the numerator rather than in the denominator. Total liabilities fell because of the large pay down of the loan from the uncle even though accounts payable rose. This had an impact on the statement of income by lowering interest expense because of the lower loan balance. Because Kenmare‘s debt level is lower, the amount of interest expense is also lower, making the business more profitable.

CT2.5 (CONTINUED) e. Basic earnings per share

2024 $7,910 11,000

= $0.72

2023 $3,510 10,000

= $0.35

The basic earnings per share more than doubled because net income more than doubled while there was only a 10% increase in the number of shares. f.

Sheila paid $2.50 per share for her shares ($25,000 ÷ 10,000). The amount Sheila‘s mother paid for her shares was $10.00 per share ($10,000 refer to part (a) above ÷ 1,000). 2024 2023 Price-earnings ratio $10.00 = 13.9 times $2.50 = 7.1 times $0.72 $0.35 The service revenue increased 20% from 2023 to 2024 [($120,000 – $100,000) ÷ $100,000]. The net income increased by 125% from 2023 to 2024 [($7,910 – $3,510) ’ $3,510]. Sheila‘s salary increased by 25% from 2023 to 2024 [($74,000 – $59,000) ÷ $59,000]. The price-earnings ratio changed mostly because of the price difference paid by the two shareholders. Sheila‘s mother paid four times the price Sheila paid for her shares. This increase is very dramatic, taking into account other ratios for measurement of performance. The fourfold increase in the share price is not justified by the financial performance of the business. The future profitability of the business is based on the amount of service revenue that can be generated by the single employee, Sheila, and is therefore limited.

The likely reason for the sale in shares in 2024 was to obtain $10,000, which was used to repay the debt to Uncle Harry earlier than originally scheduled.

LO 1,2 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

CT2.6

DATA ANALYTICS CASE

1. Permanent address location 2. Citizenship 3. Prior education and grades 4. Age 5. Gender 6. Prior courses or programs 7. Grades obtained on prior courses taken at institution 8. Number of courses dropped 9. Number of courses repeated 10. Program change history 11. Past payment history including any delinquencies 12. Payment method

Ordering and supplying of support material and textbooks are based on projected enrolment. The bookstore would want to ensure that there would be no stockouts for any of the material in order to maximize sales. The student ID card would be used to access sport facilities provided by the college or university. Data on usage and time of day when the facilities are used could help in the planning and delivery of the service to maximize fees for this service. Student ID cards are used to access health services, photocopying or reproduction services, meal plans and parking passes, all of which would benefit from knowing the type of service provided, any trends in demand and pricing information to better serve students and generate the most revenue.

Sensor data on vending machines can provide feedback on the type of products that are in demand, and any trends in pricing information. Comparing levels of sales of different machines at different locations on campus will provide information on the optimal selection of future locations and products for vending machines.

Admission requirements often draw on grades history to decide on whether or not a student is eligible for enrollment. During the delivery of a program, academic advisors can draw on grades information to determine if a student requires additional assistance, counselling or if they should be allowed to progress in a particular program or be placed on probation. Academics, with the aid of the grades data can determine if the student has satisfied the requirement of the program of study to determine if a degree or certificate can be awarded. Upon request, official transcripts of grades are issued as proof of attendance, grades and graduation status used by potential employers or by other educational institutions, governing bodies or associations in the field of study.

LO 2 BT: AN Difficulty: M Time: 20 min. AACSB: Analysis CPA: cpa.t001 CM: Reporting

CT2.7 a.

ETHICS CASE

The stakeholders in this case are: Kathy Onishi, controller Redondo‘s vice-president of finance Users of the company's financial statements, including shareholders and creditors

The ethical consideration in this situation is whether or not switching from ASPE to IFRS would affect the decisions of the users of the financial statements. Because Redondo Corporation is a private corporation, the use of IFRS is not required. It is ethically preferable to disclose the most financially relevant information to the users of the financial statements so that they can make informed decisions. One should question the reasoning of Redondo‘s vice-president of finance, who is focusing on the effect of the implementation on the net income for the year.

As the controller, by supporting the conversion from ASPE to IFRS, Kathy could gain the trust and respect of the board of directors and the shareholders in general. The users of the company‘s financial statements will find the information provided under IFRS to be more useful in making comparisons with Redondo‘s competitors. This in turn will lead to better decisions being made by users of the financial statements. Stakeholders most affected by retaining ASPE include management of the business (including the board of directors), creditors, shareholders, and potential new shareholders.

LO 3 BT: E Difficulty: M Time: 15 min. AACSB: Ethics CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

CT2.8 a.

SERIAL CASE

Software Solutions‘ financial statements will include the statement of financial position, statement of income, statement of changes in equity, and statement of cash flows. It may also include a statement of comprehensive income. It will also include the notes to the financial statements. The statement of financial position reports the assets, liabilities, and shareholders‘ equity at a specific date. The statement of income presents the revenues and expenses and resulting net income or loss for a specific period of time. The statement of changes in equity summarizes the changes in equity accounts, including common shares and retained earnings, for a specific period of time. Finally, the statement of cash flows provides information about the cash inflows and cash outflows provided or used for operating, investing, and financing activities for a specific period of time.

Because Software Solutions is a public company, it is required to have its financial statements audited. The auditor‘s report provides users with assurance that the financial statements are fairly presented. As a public company, Software Solutions is also required to file its financial statements on a timely basis with the regulator of the stock exchange on which its shares trade.

By looking at the statement of financial position and determining the composition of Software Solutions‘ current assets and current liabilities, we can assess its ability to pay its short-term obligations. We can also calculate liquidity ratios, such as working capital and the current ratio, for the current and prior periods to help determine its ability to meet its current obligations. This will not guarantee that Software Solutions is able to pay ABC‘s invoices in the future, but it will provide some assurance with respect to how it has performed in the past. The statement of cash flows also provides information to determine if Software Solutions generates positive cash flows from its operating activities.

CT2.8 (CONTINUED) d.

By looking at the types of revenues and expenses reported in the statement of income, we can determine if Software Solutions is profitable. If revenues earned by Software Solutions exceed expenses incurred, then Software Solutions is profitable. As well, profitability ratios that measure a company‘s ability to generate net income over a period of time can be determined. These profitability ratios include basic earnings per share and the price-earnings ratio. The latter measures investors‘ expectations about Software Solutions‘ future profitability.

By looking at the statement of financial position, we can determine Software Solutions‘ total liabilities, and the mix of current and non-current debt. We can also calculate solvency ratios, such as the debt to total assets ratio, to determine whether Software Solutions has the ability to repay its total debt. Solvency ratios help measure a company‘s ability to survive over a long period of time. Reviewing the company‘s statement of income and statement of cash flows helps in determining whether Software Solutions is able to pay its interest expense. The more profitable the company, the better able it is to make the interest payments on its debt and generate sufficient cash to repay its obligations.

Be aware that the financial statements of Software Solutions provide a historical perspective of what has already taken place. The financial statements may not prove to be the best indicator of what will happen in the future. Consumer tastes change and as a result the demand for Software Solutions‘ products may also change. As well, consider this business opportunity from your perspective. Ask yourself if the price obtained for the hours worked is reasonable, considering some of the risks involved. There is a risk that, by taking on this obligation, additional opportunities cannot be pursued. Does Anthony Business Company have the ability to meet the demands of Software Solutions? Is it able to commit to providing 500 hours of service per month? Does it have enough staff to enable the company to do so? Does it have enough cash to pay for the staff that will be required, along with other operating expenses, and wait 30 days from the date of the invoice to collect from Software Solutions?

LO 2,3 BT: E Difficulty: M time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

Legal Notice Copyright

CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Analyze the effect of transactions on the accounting equation. Explain how accounts, debits, and credits are used to record transactions. Journalize transactions in the general journal. Post transactions to the general ledger. Prepare a trial balance.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO

Questions 1. 2. 3. 4.

1 1 1 2

C C C C

5. 6. 7. 8.

2 2 3 3

C C C C

9. 10. 11. 12.

3,4 3,4 4 4

C C K C

13. 14. 15. 16.

4 4 4 5

K K K C

17. 5 C 18. 1,3,4,5 C

Brief Exercises 1.

10.

13.

1,2

11.

14.

12.

15.

1,2

10.

4,5

13.

11.

14.

12.

15.

Exercises 1,2,3,4 AN

Problems: Set A and B 1.

3,4

10.

1,2,3

3,4,5

11.

3,4,5

12.

3,4,5

Accounting Cycle Review 1.

3,4,5

Cases 1.

1,2

Legend: The following abbreviations will appear throughout the solutions manual file.

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

(a)

(b)

Only events that cause changes in asset, liability, or shareholders‘ equity accounts are recorded as accounting transactions. Other events, such as the agreement to provide a service, do not immediately impact an asset, liability, or shareholder‘s equity account and, therefore, are not considered an accounting transaction. Examples of events that would not be recorded include hiring employees, signing a lease, and placing an order to purchase services.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Accounting transactions that affect the accounting equation (assets = liabilities + shareholders‘ equity) should be recorded. (a)

(b)

(e)

Winning an award is not an accounting transaction, as it does not affect the accounting equation. The award did not involve the receipt of an asset, such as cash. Supplies purchased on account is an accounting transaction because it affects the accounting equation (assets are increased because supplies were received and liabilities are increased because accounts payable were incurred). A shareholder dying is not an accounting transaction, as it does not affect the accounting equation. Declaring and paying a cash dividend to shareholders is an accounting transaction as it does affect the accounting equation (shareholders‘ equity is decreased and assets (cash) are decreased). The agreement to provide legal services to the company is not an accounting transaction as it does not affect the accounting equation. No expense has been incurred yet and no liabilities have been affected as yet. Once the lawyer begins providing services and an amount is paid or owed, then a transaction would be recorded.

LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Yes, a company can enter into a transaction in which only the left (assets) side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. A decrease in the Accounts Receivable account which is offset by an increase in the Cash account is a specific example (that is, a customer paying for goods previously purchased on account).

LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The structure of the accounting equation matches the debit-credit rules in accounting. Assets are shown on the left-hand side of the accounting equation and debits are shown on the left-hand side of the accounting equation and T accounts. Because of this, asset accounts have normal debit balances. Liabilities and shareholders‘ equity are shown on the right-hand side of the accounting equation and credits are shown on the right-hand side of the accounting equation and T accounts. Liabilities and shareholders‘ equity accounts (such as share capital and retained earnings) have normal credit balances. Following the debit-credit rules will ensure that the accounting equation will be consistently balanced.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Shareholders' equity consists of different components, and they do not all move in the same direction. Shareholders‘ equity is usually comprised of share capital (which is increased by credits) and retained earnings. Retained earnings can be further subdivided into revenues and expenses and dividends declared which are then added to opening retained earnings in the case of revenues, and deducted from opening retained earnings in the case of expenses and dividends. Revenues are increased by credits while expenses and dividends declared are increased by debits.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Emily is likely relating the term debit and credit to the normal balances of accounts. Since assets have normal debit balances and, from a personal standpoint, acquiring and possessing assets is viewed in a positive light, it might follow in Emily‘s mind that debits are favourable. On the other hand, liabilities have a normal credit balance and might be viewed by Emily in a negative light because debt is unfavourable from a personal standpoint. However, Emily is incorrect. Debits mean nothing more than the left side of accounts and credits the right side of the accounts. Neither is favourable or unfavourable.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a) (b)

A general journal is a book of original entry, in which transactions are recorded in chronological order. The general journal facilitates the recording process by documenting the debit and credit effects on specific accounts. The general journal discloses the complete effect of a transaction in one place, including an explanation and, where applicable, identification of the source document. The general journal provides a chronological record of transactions and it helps to prevent and locate errors, because the debit and credit amounts for each entry can be quickly compared.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

While the account title choices suggested by Meghan provide details of the type of truck the company purchased, the title of the account used to record the purchase should be more generic to include all types of trucks and other vehicles that can be owned and used by the business. Ambiguous or multiple account titles with similar names can lead to incorrect financial reporting. The name of the account often used by companies for purchases of this nature is Vehicles.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

This would not be efficient because the journal provides a record that shows both ―sides‖ of the transaction along with a description of the transaction. This information is vital to the understanding of the event. A general ledger is not intended to be used to capture the recording of transactions, but to tabulate the effects of transactions in separate accounts. The balances arrived at in the ledger are then used to communicate information to the users of the financial statements. If one attempted to omit the use of journal entries, one could not retrace the transactions as they originated in the journal. One would only see one side of a transaction at a time by looking at an account in the ledger. It would become very confusing and unruly to try to keep track of transactions.

LO 3,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

Posting should be done on a timely basis, at least monthly, so that account balances can be monitored and reconciled. This ensures that any errors are identified as soon as possible.

LO 3,4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

(a)

(b)

The general ledger is the entire group of accounts maintained by a company, including all the asset, liability, and shareholders' equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts. The general ledger is often arranged in the order in which accounts are presented in the financial statements, beginning with the statement of financial position accounts. The asset accounts come first, followed by liability accounts, and then shareholders‘ equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

A T account represents a ledger and not a journal. A T account is for a single account and shows the debits and the credits that affect the account as well as the balance in the account. A journal, on the other hand, documents the effect of a transaction as a debit and a credit to a minimum of two specific accounts.

LO 4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

When recording transactions using a worksheet, a company uses columns to represent the general ledger accounts, and the rows to represent a journal.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

(a)

(b)

The chart of accounts is a list of a company‘s accounts. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the general ledger. Numbering the accounts helps identify and sort the accounts.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

Cash, Accounts Receivable, Supplies, Prepaid Insurance, Accounts Payable, Deferred Revenue, Common Shares, Retained Earnings, Dividends Declared, Service Revenue, Salaries Expense, and Income Tax Expense.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

16.

(a)

(b)

A trial balance is a list of accounts and their balances at a point in time. The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after all journalized transactions have been posted. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements. While it does not matter in what order the accounts are listed in the trial balance, it is usual for the accounts in the trial balance to be listed in the same order as they are listed in the general ledger (asset accounts, liability accounts, and shareholders‘ equity accounts, including the share capital, retained earnings, dividends declared, revenue, and expense accounts). This makes it easier to compare the trial balance accounts to the general ledger accounts, as well as to prepare the financial statements from the trial balance.

LO 5 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

The retained earnings account in the unadjusted trial balance shows the beginning balance of the period (which is the same as the ending balance of the prior period) as it has not yet been updated for the effect that the revenues, expenses, and dividends declared have on retained earnings for the current accounting period. (Note to instructors: This chapter only includes references to an unadjusted and pre-closing trial balance; the post-closing trial balance is not introduced until Chapter 4.)

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

The first four steps in the accounting cycle are: (a) (1) Analyze the business transactions and determine their effects on the accounting equation and also determine when and how to record the transactions. (2) Journalize the transactions in the general journal to record the effects of the transactions on the accounts involved in the transactions. (3) Post to the general ledger accounts to provide an accumulation of the effects of several journalized transactions in the individual accounts. (4) Prepare a trial balance to prove that the sum of the debit account balances equals the sum of the credit account balances after posting. (b) It does matter in which order the steps of the accounting cycle are completed. Each step performed has been designed in the sequence with the understanding that the previous step has been performed. Failing to do so would result in incomplete and inaccurate financial information.

LO 1,3,4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3.1 a. 1. 2. 3. 4. 5. b.

Assets (+) (-) NE NE (+) NE

Liabilities NE NE NE NE NE

Shareholders‘ Equity NE NE NE (+) NE

Items 1 and 4 are accounting transactions that should be recorded in the accounting records. Each of these transactions have an impact on the accounting equation as shown in part (a). Items 2, 3, and 5 should not be recorded in the accounting equation. They do not yet impact the accounting equation.

LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.2 Assets

Liabilities

Shareholders‘ Equity Retained Earnings

= Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Total

Cash

Accounts Receivable

Supplies +$250

Prepaid Insurance

Accounts Payable +$250

Deferred Revenue

Common + Shares

+$500 –$300 +5,000 –100 +500 −250 –100 +300 $5,050

+ Revenues

– Expenses

– Dividends Declared

+$500 −$300 +$5,000 −$100

−500 −250 +$100

+ $0

TOTAL ASSETS = $5,400

+$250

+ $100 =

+$300 −300 + $0

+ $5,000

+300 + $800

– $300

TOTAL LIABILITIES + SHAREHOLDERS‘ EQUITY = $5,400

LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

– $100

BRIEF EXERCISE 3.3

1. Accounts Payable

a. Basic Type Liability

b. Normal Balance Credit

c. Debit Effect decrease

d. Credit Effect increase

2. Accounts Receivable

Asset

Debit

increase

decrease

3. Cash

Asset

Debit

increase

decrease

4. Common Shares

Shareholder's equity

Credit

decrease

increase

5. Deferred Revenue

Liability

Credit

decrease

increase

6. Dividends Declared

Shareholder's equity

Debit

increase

decrease

Debit

increase

decrease

Debit

increase

decrease

Credit

decrease

increase

Credit

decrease

increase

7. Equipment 8. Income Tax Expense 9. Retained Earnings 10. Service Revenue

Asset Shareholder's equity Shareholder's equity Shareholder's equity

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.4 a. Transaction

Basic Type

Account Debited b. Specific Account

c. Effect

Account Credited b. Specific Basic Type Account a.

c. Effect

Asset

Cash

Increase

Shareholders‘ equity

Common Shares

Increase

Asset

Prepaid Rent

Increase

Asset

Cash

Decrease

Shareholders‘ equity

Salaries Expense

Increase

Asset

Cash

Decrease

Asset

Accounts Receivable

Increase

Shareholders‘ equity

Service Revenue

Increase

Asset

Cash

Increase

Asset

Accounts Receivable

Decrease

Asset

Supplies

Increase

Liability

Accounts Payable

Increase

Liability

Accounts Payable

Decrease

Asset

Cash

Decrease

Asset

Cash

Increase

Liability

Bank Loan Payable

Increase

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.5 Transaction 1

June 1: Issued common shares to shareholders in exchange for $2,500 cash.

a. Basic Analysis

The asset account Cash is increased by $2,500; the shareholders‘ equity account Common Shares is increased by $2,500.

b. Equation Analysis

Assets

Liabilities

Cash +$2,500

Shareholders‘ Equity Common Shares +$2,500

c. Debit−Credit Analysis

Debits increase assets: debit Cash $2,500. Credits increase share capital (shareholders‘ equity): credit Common Shares $2,500.

Transaction 2

June 4: Purchased supplies on account for $250.

a. Basic Analysis

The asset account Supplies is increased by $250; the liability account Accounts Payable is increased by $250.

b. Equation Analysis

Assets

Supplies +$250

c. Debit−Credit Analysis

Liabilities

Shareholders‘ Equity

Accounts Payable +$250

Debits increase assets: debit Supplies $250. Credits increase liabilities: credit Accounts Payable $250.

BRIEF EXERCISE 3.5 (CONTINUED) a., b., and c. (continued) Transaction 3

June 7: Billed J. Kronsnoble $300 for welding work done.

a. Basic Analysis

The asset account Accounts Receivable is increased by $300; the revenue account Service Revenue is increased by $300.

b. Equation Analysis

Assets

Liabilities

Accounts Receivable +$300

Shareholders‘ Equity Service Revenue +$300

c. Debit−Credit Analysis

Debits increase assets; debit Accounts Receivable $300. Credits increase revenues; credit Service Revenue $300.

Transaction 4

June 18: Received partial payment from J. Kronsnoble for work billed on June 7.

a. Basic Analysis

The asset account Cash is increased by $200; the asset account Accounts Receivable is decreased by $200.

b. Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Cash +$200 Accounts Receivable -$200

c. Debit−Credit Analysis

Debits increase assets: debit Cash $200. Credits decrease assets: credit Accounts Receivable $200.

BRIEF EXERCISE 3.5 (CONTINUED) a., b., and c. (continued) Transaction 5

June 25: Hired new employee to start work on July 3.

a. Basic Analysis

An accounting transaction has not occurred. There is only an agreement of employment to start on July 3.

Transaction 6

June 27: Received cash of $200 from Liu Controls Ltd. as a deposit for welding work to be done in July.

a. Basic Analysis

The asset account Cash is increased by $200; the liability account Deferred Revenue is increased by $200.

b. Equation Analysis

Assets

Cash +$200

c. Debit−Credit Analysis

Liabilities

Shareholders‘ Equity

Deferred Revenue +$200

Debits increase assets: debit Cash $200. Credits increase liabilities: credit Deferred Revenue $200.

BRIEF EXERCISE 3.5 (CONTINUED) a., b., and c. (continued) Transaction 7

June 28: Paid for supplies purchased on June 4.

a. Basic Analysis

The asset account Cash is decreased by $250; the liability account Accounts Payable is decreased by $250.

b. Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Accounts Payable -$250

Cash -$250

c. Debit−Credit Analysis

Debits decrease liabilities: debit Accounts Payable $250. Credits decrease assets: credit Cash $250.

Transaction 8

June 29: Paid $100 for monthly income tax instalment.

a. Basic Analysis

The expense account Income Tax Expense is increased by $100; the asset account Cash is decreased by $100.

b. Equation Analysis

Assets

Cash -$100

c. Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Income Tax Expense -$100

Debits increase expenses: debit Income Tax Expense $100. Credits decrease assets: credit Cash $100.

LO 1,2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.6 1.

10.

Supplies ....................................................... Accounts Payable .................................

250

Accounts Receivable ................................... Service Revenue ...................................

500

Salaries Expense ......................................... Cash ......................................................

300

Cash ............................................................ Common Shares ...................................

5,000

Dividends Declared ...................................... Cash ......................................................

100

Cash ............................................................ Accounts Receivable .............................

500

Accounts Payable ..................................... Cash ...................................................

250

Prepaid Insurance ........................................ Cash ...................................................

100

Cash .......................................................... Deferred Revenue ..............................

300

Deferred Revenue...................................... Service Revenue ................................

300

250

500

300

5,000

100

500

250

100

300

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.7 1.

Cash ............................................................ Common Shares ...................................

5,000

Prepaid Rent ................................................ Cash ......................................................

2,100

Salaries Expense ......................................... Cash ......................................................

500

Accounts Receivable ................................... Service Revenue ...................................

1,200

Cash ............................................................ Accounts Receivable .............................

900

Supplies ....................................................... Accounts Payable..................................

500

Accounts Payable ........................................ Cash ......................................................

500

Cash ............................................................ Bank Loan Payable ...............................

1,000

5,000

2,100

500

1,200

900

500

1,000

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.8 June

Cash ....................................................... Common Shares..........................

2,500

Supplies ................................................. Accounts Payable ........................

250

Accounts Receivable .............................. Service Revenue .........................

300

Cash ....................................................... Accounts Receivable ...................

200

2,500

250

300

200

No transaction – no asset, liability, or equity account affected

Cash ..................................................... Deferred Revenue........................

200

Accounts Payable .................................. Cash ............................................

250

Income Tax Expense ............................. Cash ............................................

100

200

250

100

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.9 Accounts Receivable Aug. 10 17,500 15 6,500 Aug. 23 (a) 15,000 Aug. 31 9,000 Sept.5 (b) 4,000 Sept. 15 8,000 Sept.30 5,000

Accounts Payable Aug. 5 (c) 6,000 18 3,400 Aug. 29 5,800 Aug.31 Sept. 12

Service Revenue Aug. 10 50,000 Aug. 12 500 15 45,000 Aug.31(e)94,500

3,600 7,700

Sept. 23 5,900

Sept. 5 (f) 4,950 Sept. 25 450 Sept. 30 99,000

Sept.30(d) 5,400

$17,500 + $6,500 – $9,000 = $15,000

$5,000 – $9,000 + $8,000 = $4,000

$3,600 + $5,800 – $3,400 = $6,000

$3,600 + $7,700 – $5,900 = $5,400

$50,000 – $500 + $45,000 = $94,500

$99,000 + $450 – $94,500 = $4,950

LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.10 Cash May 16 (a) 2,700 26 2,300 28 6,100 May 31 11,100 Jun. 11 (e) 3,300 28 4,400 Jun. 30 18,800

Accounts Receivable May 12 3,400 26 (c) 2,300 May 31 1,100 Jun. 17 (f) 4,100 28 (g) 4,400 June 30

800

Service Revenue May 12 (b) 3,400 16 2,700 28 (d) 6,100 May 31 12,200 Jun. 11 3,300 17 4,100 Jun. 30 19,600

$11,100 – $2,300 – $6,100 = $2,700 or $2,700 from credit to Service revenue

$3,400 from debit to Accounts Receivable

$2,300 from debit to Cash or $3,400 - $1,100 = $2,300

$6,100 from debit to Cash or $12,200 – $3,400 – $2,700 = $6,100

$3,300 from credit to Service Revenue or $18,800 – $11,100 – $4,400 = $3,300

$4,100 from credit to Service Revenue

$4,400 from debit to Cash or $1,100 + $4,100 - $800 = $4,400

LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.11 Cash Oct. 2 6,400 23 7,100 Oct. 31 13,500 Nov. 11 (e) 2,400 Nov. 30

a. b. c. d. e. f. g.

15,900

Deferred Revenue Oct. 2 (a) 6,400 Oct. 19 5,300 Oct. 31 (d) 1,100 Nov. 11 2,400 Nov. 25 (f) 2,000 Nov. 30 1,500

Service Revenue Oct. 19 (b) 5,300 Oct. 23 (c) 7,100 Oct. 31 12,400 Nov. 25 (g) 2,000 Nov. 30 14,400

$1,100 (d) + $5,300 = $6,400 or Oct. 2 debit to Cash $5,300 from debit to Deferred Revenue or $12,400 – $7,100 (c) = $5,300 $7,100 from debit to Cash or $12,400 – $5,300 (b) = $7,100 $1,500 + $2,000 (f) – $2,400 = $1,100 or $6,400 (a) – $5,300 = $1,100 $2,400 from Nov. 11 credit to Deferred Revenue $2,000 (g) from the credit to Service Revenue or $1,500 – $2,400 – $1,100 = $2,000 $2,000 from the debit to Deferred Revenue or $14,400 – $12,400 = $2,000

LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.12 June 1 June 18 June 27 Bal.

Cash 2,500 June 28 200 June 29 200 2,550

June 7 Bal.

Accounts Receivable 300 June 18 100

June 4

June 28

June 29

250 100

200

Supplies 250 Accounts Payable 250 June 4 Bal.

250 0

Deferred Revenue June 27

200

Common Shares June 1

2,500

Service Revenue June 7

300

Income Tax Expense 100

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.13 a. May 4 May 7 May 11 May 21 May 25 May 28 May 30

Billed clients $3,200 for services provided on account Declared and paid dividends of $500 Collected $1,900 from a customer on account Received $2,000 from client for services provided Paid salaries of $2,500 Paid supplier $200 on account Paid income tax of $750

b. Apr. 30 May 11 May 21

1,500 1,900 2,000

Bal.

1,450

Apr. 30 May 4 Bal.

May 28

Cash May 7 May 25 May 28 May 30

Accounts Receivable 1,800 May 11 3,200 3,100

Accounts Payable 200 Apr. 30 Bal.

500 2,500 200 750

May 7

Service Revenue May 4 May 21 Bal.

1,900

900 700

Dividends Declared 500

May 30

Income Tax Expense 750

May 25

Salaries Expense 2,500

3,200 2,000 5,200

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.14 a.

Account Normal Balance Accounts payable ............................................................ Credit Accounts receivable ........................................................ Debit Accumulated depreciation—equipment ........................... Credit Cash ................................................................................ Debit Common shares .............................................................. Credit Deferred revenue ............................................................ Credit Dividends declared .......................................................... Debit Equipment ....................................................................... Debit Income tax expense ........................................................ Debit Rent expense .................................................................. Debit Retained earnings ........................................................... Credit Salaries expense ............................................................. Debit Service revenue .............................................................. Credit Trading investments ........................................................ Debit

BRIEF EXERCISE 3.14 (CONTINUED) b. CARLAND INC. Trial Balance June 30, 2024 Debit Cash Accounts receivable Trading investments Equipment Accumulated depreciation—equipment Accounts payable Deferred revenue Common shares Retained earnings Dividends declared Service revenue Salaries expense Rent expense Income tax expense Totals

Credit

$ 4,400 4,000 6,000 17,000 $ 3,600 3,000 150 10,000 12,650 200 7,600 4,000 1,000 400 $37,000

_ $37,000

(Total of debit account balances = Total of credit account balances) LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 3.15 Error 1. 2. 3. 4. 5. 6.

a. In Balance No No Yes Yes Yes No

b. Difference $ 900 1,000 N/A N/A N/A 1,000

c. Larger Column Debit Credit N/A N/A N/A Debit

LO 5 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 3.1 a. 1.

Received cash of $1,000 from a customer as a deposit for work to be done in the future. 2. Purchased equipment for $5,000 paying cash $1,000 with the remaining balance of $4,000 on account. 3. Paid $750 for supplies. 4. Performed services for $9,500 collecting cash of $4,100 and the remaining balance of $5,400 on account. 5. Paid $2,000 to suppliers on account. 6. Declared and paid dividends of $1,000. 7. Paid for operating expenses of $4,800 8. Collected $5,000 on account from customers. 9. Paid interest expense of $300 10. Paid income tax expense of $880.

b. Service revenue Less: Expenses Operating expenses Interest expense Income tax expense Total expenses Net income

$9,500 $4,800 300 880

Retained earnings: Beginning balance Add: Net income Less: Dividends declared Ending balance

5,980 $3,520

$4,500 3,520 (1,000) $7,020

[Revenues – Expenses = Net income or (loss)]

EXERCISE 3.1 (CONTINUED) c. =

Assets

Liabilities

Shareholders‘ Equity

Retained Earnings

Cash July 31 Bal.

Accounts Receivable Supplies Equipment = $5,000

Accounts Payable

Deferred Revenue

$2,000

Common Shares

Bal.

$5,000

$4,500

+ – Revenues Expenses

(1)

$6,500 +1,000

(2)

−1,000

(3)

−750

(4)

+4,100

(5)

-2,000

(6)

-1,000

(7)

-4,800

(8)

+5,000

(9)

-300

(10)

-880

Aug. 31 Bal.

$5,870

– Dividends Declared

+$1,000 +$5,000

+4,000

+$750 +5,400

+$9,500 -2,000 -$1,000 -$4,800

-5,000

+ $5,400

+ $750

TOTAL ASSETS = $17,020

+ $5,000 =

$4,000

+ $1,000

+ $5,000

+$4,500

+ $9,500

- $5,980

TOTAL LIABILITIES + SHAREHOLDERS‘ EQUITY = $17,020

LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

- $1,000

EXERCISE 3.2 Assets

Trans. Apr. 30 Bal. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. May 31 Bal.

Liabilities Bank Loan Payable

Accounts Prepaid Accounts Cash Receivable Insurance Equipment = Payable + $5,000 $6,000 $2,000 +$8,000 +8,000 −1,600 +3,800 −300 +20,000 +$20,000 −8,000 −8,000 −500 +$500 +3,000 −3,000 −500 −250 $16,850 + $6,800 + $500 + $8,000 = $2,000 + $20,000

TOTAL ASSETS = $32,150

Shareholders‘ Equity Retained Earnings

Common Shares Balance $5,000 $4,000

– + – Dividends Revenues Expenses Declared

-$1,600 +$3,800 −300

−$500 +$5,000 +$4,000

+ $3,800

−250 – $2,150

TOTAL LIABILITIES + SHAREHOLDERS‘ EQUITY = $32,150

LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

– $500

EXERCISE 3.3 a. Type of Account

b. Normal Balance

Bank loans payable

Liabilities

Credit

Buildings

Assets

Debit

Cash

Assets

Debit

Depreciation expense

Expenses

Debit

Statement of Income

Dividends declared

Dividends

Debit

Statement of Changes in Equity

Finance income

Revenues

Credit

Statement of Income

Furniture, machinery, and equipment

Assets

Debit

Statement of Financial Position

Income tax expense

Expenses

Debit

Statement of Income

Income taxes payable

Liabilities

Credit

Statement of Financial Position

Interest expense

Expenses

Debit

Statement of Income

Inventories

Assets

Debit

Prepaid expenses

Assets

Debit

Receivables

Assets

Debit

Revenues

Credit

Account

c. Financial Statement Statement of Financial Position Statement of Financial Position Statement of Financial Position

Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Income

LO 2 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 3-4 Transaction 1

March 2: Issued common shares for $11,000 cash.

a. Basic Analysis

The asset account Cash is increased by $11,000; the shareholders‘ equity account Common Shares is increased by $11,000.

b. Equation Analysis

Assets

Liabilities

Cash +$11,000

Shareholders‘ Equity Common Shares +$11,000

c. Debit−Credit Analysis

Debits increase assets: debit Cash $11,000. Credits increase share capital (shareholders‘ equity): credit Common Shares $11,000.

Transaction 2

March 4: Purchased used car for $1,000 cash and $9,000 on account, for use in the business.

a. Basic Analysis

The asset account Vehicles is increased by $10,000; the liability account Accounts Payable is increased by $9,000; the asset account Cash is decreased by $1,000.

b. Equation Analysis

Assets

Cash -$1,000

Liabilities

Shareholders’ Equity

Account Payable +$9,000

Vehicles +$10,000 c. Debit−Credit Analysis

Debits increase assets: debit Vehicles $10,000. Credits increase liabilities: credit Accounts Payable $9,000. Credit decrease assets: credit Cash $1,000.

EXERCISE 3.4 (CONTINUED) a., b., and c. (continued) Transaction 3

March 10: Billed customers $2,300 for services performed.

a. Basic Analysis

The asset account Accounts Receivable is increased by $2,300; the revenue account Service Revenue is increased by $2,300.

b. Equation Analysis

Assets

Liabilities

Accounts Receivable +$2,300

Shareholders‘ Equity Service Revenue +$2,300

c. Debit−Credit Analysis

Debits increase assets: debit Accounts Receivable $2,300. Credits increase revenues: credit Service Revenue $2,300.

Transaction 4

March 13: Paid $225 cash to advertise business opening.

a. Basic Analysis

The expense account Advertising Expense is increased by $225; the asset account Cash is decreased by $225.

b. Equation Analysis

Assets

Cash -$225

c. Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Advertising Expense -$225

Debits increase expenses: debit Advertising Expense $225. Credits decrease assets: credit Cash $225.

EXERCISE 3.4 (CONTINUED) a., b., and c. (continued) Transaction 5

March 25: Received $1,000 cash from customers billed on March 10.

a. Basic Analysis

The asset account Cash is increased by $1,000; the asset account Accounts Receivable is decreased by $1,000.

b. Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Cash +$1,000 Accounts Receivable -$1,000

c. Debit−Credit Analysis

Debits increase assets: debit Cash $1,000. Credits decrease assets: credit Accounts Receivable $1,000.

Transaction 6

March 27: Paid amount owing for used car purchased on March 4.

a. Basic Analysis

The liability account Accounts Payable is decreased by $9,000; the asset account Cash is decreased by $9,000.

b. Equation Analysis

Assets

Cash -$9,000

c. Debit−Credit Analysis

Liabilities

Shareholders‘ Equity

Accounts Payable -$9,000

Debits decrease liabilities: debit Accounts Payable $9,000. Credits decrease assets: credit Cash $9,000.

EXERCISE 3.4 (CONTINUED) a., b., and c. (continued)

Transaction 7

March 30: Received $700 cash from a customer for services to be performed in April.

a. Basic Analysis

The asset account Cash is increased by $700; the liability account Deferred Revenue is increased by $700.

b. Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Deferred Revenue +$700

Cash +$700

c. Debit−Credit Analysis

Debits increase assets: debit Cash $700. Credits increase liabilities: credit Deferred Revenue $700.

Transaction 8

March 31: Declared and paid $300 of dividends to shareholders.

a. Basic Analysis

The asset account Cash is decreased by $300; the Dividends Declared account is increased by $300.

b. Equation Analysis

Assets

Cash -$300

c. Debit−Credit Analysis

Liabilities

Shareholders’ Equity Dividends Declared -$300

Debits increase dividends: debit Dividends Declared $300. Credits decrease assets: credit Cash $300.

LO 1,2 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.5 1.

10.

Equipment ............................... Accounts Payable...............

8,000

Rent Expense .......................... Cash .................................

1,600

Accounts Receivable ............... Service Revenue ..............

3,800

Utilities Expense ...................... Cash .................................

300

Cash ........................................ Bank Loan Payable ..........

20,000

Accounts Payable.................... Cash .................................

8,000

Prepaid Insurance ................... Cash .................................

500

Cash ........................................ Accounts Receivable........

3,000

Dividends Declared ................. Cash .................................

500

Income Tax Expense............... Cash .................................

250

8,000

1,600

3,800

300

20,000

8,000

500

3,000

500

250

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.6 Mar. 2

Cash ........................................ Common Shares.................

11,000

Vehicles ................................... Cash .................................. Accounts Payable .............

10,000

Accounts Receivable ............... Service Revenue ..............

2,300

Advertising Expense ................ Cash .................................

225

Cash ........................................ Accounts Receivable ........

1,000

Accounts Payable .................... Cash .................................

9,000

Cash ........................................ Deferred Revenue ............

700

Dividends Declared ................. Cash .................................

300

11,000

1,000 9,000

2,300

225

1,000

9,000

700

300

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.7 Transaction 1

Sept. 1: Issued common shares for $20,000 cash.

a. Basic Analysis

The asset account Cash is increased by $20,000; the shareholders‘ equity account Common Shares is increased by $20,000.

b. Equation Analysis

Assets

Liabilities

Cash +$20,000

Shareholders‘ Equity Common Shares +$20,000

c. Debit−Credit Analysis

Debits increase assets: debit Cash $20,000. Credits increase share capital (shareholders‘ equity): credit Common Shares $20,000.

Transaction 2

Sept. 2: Performed $9,000 of services on account for a customer.

a. Basic Analysis

The asset account Accounts Receivable is increased by $9,000; the revenue account Service Revenue is increased by $9,000.

b. Equation Analysis

Assets Accounts Receivable +$9,000

c. Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Service Revenue +$9,000

Debits increase assets; debit Accounts Receivable $9,000. Credits increase revenues; credit Service Revenue $9,000.

EXERCISE 3.7 (CONTINUED) a., b., and c. (continued) Transaction 3

Sept. 4: Purchased equipment for $12,000 paying $5,000 in cash and borrowing the balance from the bank.

a. Basic Analysis

The asset account Equipment is increased by $12,000; the asset account Cash is decreased by $5,000 and the liability account Bank Loan Payable increased by $7,000.

b. Equation Analysis

Assets

Cash -$5,000

Liabilities

Shareholders‘ Equity

Bank Loan Payable +$7,000

Equipment +$12,000

c. Debit−Credit Analysis

Debits increase assets: debit Equipment $12,000. Credits decrease assets: credit Cash $5,000 Credits increase liabilities: credit Bank Loan Payable $7,000.

EXERCISE 3.7 (CONTINUED) a., b., and c. (continued) Transaction 4

Sept. 10: Purchased $500 of supplies on account.

a. Basic Analysis

The asset account Supplies is increased by $500; the liability account Accounts Payable is increased by $500.

b. Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Accounts Payable +$500

Supplies +$500

c. Debit−Credit Analysis

Debits increase assets: debit Supplies $500. Credits increase liabilities: credit Accounts Payable $500.

Transaction 5

Sept. 25: Received $4,500 cash in advance for architectural services to be provided next month.

a. Basic Analysis

The asset account Cash is increased by $4,500; the liability account Deferred Revenue is increased by $4,500.

b. Equation Analysis

Assets

Cash +$4,500 c. Debit−Credit Analysis

Liabilities

Shareholders‘ Equity

Deferred Revenue +$4,500

Debits increase assets: debit Cash $4,500. Credits increase liabilities: credit Deferred Revenue $4,500.

EXERCISE 3.7 (CONTINUED) a., b., and c. (continued) Transaction 6

Sept. 30: Paid $300 on account in partial payment of amount owing for supplies purchased Sept. 10.

a. Basic Analysis

The liability account Accounts Payable is decreased by $300; the asset account Cash is decreased by $300.

b. Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Accounts Payable -$300

Cash -$300

c. Debit−Credit Analysis

Debits decrease liabilities: debit Accounts Payable $300. Credits decrease assets: credit Cash $300.

Transaction 7

Sept. 30: Collected $5,000 on account owing from customer from Sept. 2.

a. Basic Analysis

The asset account Cash is increased by $5,000; the asset account Accounts Receivable is decreased by $5,000.

b. Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Cash +$5,000 Accounts Receivable -$5,000

c. Debit−Credit Analysis

Debits increase assets: debit Cash $5,000. Credits decrease assets: credit Accounts Receivable $5,000.

EXERCISE 3.7 (CONTINUED) d.

Sept. 1

Cash................................................... Common Shares .........................

20,000

Accounts Receivable.......................... Service Revenue.........................

9,000

Equipment .......................................... Cash ........................................... Bank Loan Payable .....................

12,000

Supplies ............................................. Accounts Payable .......................

500

Cash................................................... Deferred Revenue.......................

4,500

Accounts Payable .............................. Cash ...........................................

300

Cash................................................... Accounts Receivable ..................

5,000

20,000

9,000

5,000 7,000

500

4,500

300

5,000

EXERCISE 3.7 (CONTINUED) e. Sept. 1 Sept. 25 Sept. 30 Bal.

Cash 20,000 Sept. 4 4,500 Sept. 30 5,000 24,200

Sept. 2 Bal.

Accounts Receivable 9,000 Sept. 30 4,000

Sept. 10

Supplies 500

Sept. 4

Equipment 12,000

Sept. 30

5,000 300

5,000

Accounts Payable 300 Sept. 10 Bal.

500 200

Deferred Revenue Sept. 25

4,500

Bank Loan Payable Sept. 4

7,000

Common Shares Sept. 1

20,000

Service Revenue Sept. 2

9,000

LO 1,2,3,4 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.8 Cash Mar.

Mar.

11,000 Mar.

1,000

225

700

9,000

300

1,000

31 Bal.

2,175 Accounts Receivable

Mar.

2,300 Mar.

Mar.

31 Bal.

1,300 Vehicles

Mar.

10,000 Accounts Payable

Mar.

9,000 Mar. Mar.

4 31 Bal.

9,000 0

Deferred Revenue Mar. 30

700

Common Shares Mar. 2

11,000

Dividends Declared Mar. 31

300 Service Revenue Mar. 10

2,300

Advertising Expense Mar. 13

225

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.9 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Operating activity Investing activity Operating activity Operating activity Operating activity Financing activity Operating activity Operating activity Operating activity Operating activity

LO 4 BT: AN Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 3.10 a.

Aug. 7 Aug. 10 Aug. 14 Aug. 16 Aug. 28 Aug. 30 Aug. 31

Provided services and was paid cash Purchased equipment with a down payment of $1,500 and the balance from a bank loan payable Performed services on account Collected cash in advance of providing services Received a collection from a customer on account Paid salaries Declared and paid dividends

EXERCISE 3.10 (CONTINUED) b. Cash July 31 bal. 4,000 Aug. 7 1,800 Aug. 10 16 900 30 28 700 31 Bal. 3,400 Accounts Receivable July 31 bal. 2,000 Aug. 14 1,450 Aug. 28 Bal. 2,750

Bank Loan Payable Aug. 10 1,500 2,000 500

Deferred Revenue Aug. 16

Common Shares July 31 bal. 2,000 Retained Earnings July 31 bal. 5,000

700

Equipment July 31 bal. 2,500 Aug. 10 4,000 Bal. 6,500 Accounts Payable July 31 bal.

2,500

Aug. 31

Dividends Declared 500 Service Revenue Aug. 7 14 Bal.

1,500 Aug. 30

1,800 1,450 3,250

Salaries Expense 2,000

900

EXERCISE 3.10 (CONTINUED) c. KANG LTD. Trial Balance August 31

Debit Cash Accounts receivable Equipment Accounts payable Deferred revenue Bank loan payable Common shares Retained earnings Dividends declared Service revenue Salaries expense Totals

Credit

$ 3,400 2,750 6,500 $ 1,500 900 2,500 2,000 5,000 500 2,000 $15,150

3,250 _ $15,150

(Assets, dividends, and expense accounts have debit balances) LO 4,5 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.11 a.

Oct. 1 Oct. 2 Oct. 3 Oct. 4 Oct. 5 Oct. 9 Oct. 12 Oct. 16 Oct. 17 Oct. 22 Oct. 30 Oct. 31 Oct. 31

Issued common shares in exchange for cash Purchased equipment using a bank loan payable Performed services on account Purchased advertising on account Purchased supplies for cash Received cash for services to be performed in the future Made a partial payment on account Declared and paid dividends Received a collection on account Performed services on account Paid rent for the month of October Paid salaries Recorded income taxes owing

EXERCISE 3.11 (CONTINUED) b.

After summing the debit and credits in each account, the following net balances would result. Note that because the Supplies, Equipment, Income Tax Payable, Bank Loan Payable, Deferred Revenue, Common Shares, Dividends Declared, Salaries Expense, Advertising Expense, Rent Expense, and Income Tax Expense accounts have only one entry, there is no need to sum these accounts.

Cash Accounts receivable Supplies Equipment Accounts payable Income tax payable Deferred revenue Bank loan payable Common shares Dividends declared Service revenue Salaries expense Advertising expense Rent expense Income tax expense

Balance 550 2,240 400 3,500 100 180 650 3,500 2,000 300 2,740 500 250 1,250 180

Debit or Credit Debit Debit Debit Debit Credit Credit Credit Credit Credit Debit Credit Debit Debit Debit Debit

EXERCISE 3.11 (CONTINUED) c. HOLLY CORP. Trial Balance October 31

Debit Cash Accounts receivable Supplies Equipment Accounts payable Income tax payable Deferred revenue Bank loan payable Common shares Dividends declared Service revenue Salaries expense Advertising expense Rent expense Income tax expense Totals

Credit

$ 550 2,240 400 3,500 $

100 180 650 3,500 2,000

300 2,740 500 250 1,250 180 $9,170

0 $9,170

(Total of debit account balances = Total of credit account balances) LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.12 BOURQUE LTD. Trial Balance December 31, 2024 Debit Cash Accounts receivable Supplies Equipment Accumulated depreciation—equipment Accounts payable Salaries payable Deferred revenue Common shares Retained earnings Dividends declared Service revenue Salaries expense Office expense Depreciation expense Rent expense Supplies expense Income tax expense

Credit

$10,000 6,500 3,500 10,000 $ 4,000 1,500 3,000 2,200 5,000 16,000 4,500 22,000 9,100 4,400 2,000 2,000 1,200 500 $53,700

$53,700

(Liabilities, common shares, retained earnings, and revenue accounts have credit balances) LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.13 BOURQUE LTD. Statement of Income Year Ended December 31, 2024 Revenues Service revenue Expenses Salaries expense Office expense Depreciation expense Rent expense Supplies expense Total expenses Income before income tax Income tax expense Net income

$22,000 $9,100 4,400 2,000 2,000 1,200 18,700 3,300 500 $ 2,800

BOURQUE LTD. Statement of Changes in Equity Year Ended December 31, 2024

Balance, January 1, 2024 Net income Dividends declared Balance, December 31, 2024

Common Shares

Retained Earnings

Total Equity

$5,000

$16,000 2,800 (4,500) $14,300

$21,000 2,800 (4,500) $19,300

$5,000

EXERCISE 3.13 (CONTINUED) BOURQUE LTD. Statement of Financial Position December 31, 2024 Assets Current assets Cash Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$10,000 6,500 3,500 $20,000 $10,000 4,000 6,000 $26,000

Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Deferred revenue Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$ 1,500 3,000 2,200 6,700 $ 5,000 14,300 19,300 $26,000

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared] LO 5 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.14 a. SPEEDY SERVICE INC. Trial Balance July 31, 2024

Debit Cash Trading investments Accounts receivable Prepaid insurance Equipment Accumulated depreciation—equipment Accounts payable Salaries payable Bank loan payable, due 2026 Common shares Retained earnings Dividends declared Service revenue Salaries expense Depreciation expense Rent expense Repairs and maintenance expense Interest expense Insurance expense Income tax expense Totals

Credit

$ 8,000 20,000 14,000 200 99,000 $ 21,400 9,500 800 39,000 38,000 20,850 800 75,000 25,000 9,700 9,000 10,450 3,600 1,800 3,000 $204,550

0 $204,550

(Asset, dividends, and expense accounts have debit balances)

EXERCISE 3.14 (CONTINUED) b. SPEEDY SERVICE INC. Statement of Income Year Ended July 31, 2024 Revenues Service revenue Expenses Salaries expense Repairs and maintenance expense Depreciation expense Rent expense Interest expense Insurance expense Total expenses Income before income tax Income tax expense Net income

$75,000 $25,000 10,450 9,700 9,000 3,600 1,800 59,550 15,450 3,000 $12,450

SPEEDY SERVICE INC. Statement of Changes in Equity Year Ended July 31, 2024

Balance, August 1, 2023 Issued common shares Net income Dividends declared Balance, July 31, 2024

Common Shares

Retained Earnings

Total Equity

$27,000 11,000

$20,850

$47,850 11,000 12,450 (800) $70,500

$38,000

12,450 (800) $32,500

EXERCISE 3.14 (CONTINUED) b.

(continued) SPEEDY SERVICE INC. Statement of Financial Position July 31, 2024 Assets Current assets Cash Trading investments Accounts receivable Prepaid insurance Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$ 8,000 20,000 14,000 200 $ 42,200 $99,000 21,400 77,600 $119,800

Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Total current liabilities Non-current liabilities Bank loan payable, due 2026 Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$9,500 800 $ 10,300 39,000 49,300 $38,000 32,500 70,500 $119,800

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

EXERCISE 3.14 (CONTINUED) c.

If the amount of the retained earnings was not known, it would be more difficult to prepare the three financial statements in part (b) above. However, the beginning balance of retained earnings could either be derived from the trial balance or worked backwards by determining the ending retained earnings amount from a complete (except for retained earnings) statement of financial position and adjusting the ending amount by calculating and deducting net income and adding dividends declared. Remember that ending retained earnings = beginning retained earnings + net income – dividends declared; so it follows mathematically that beginning retained earnings = ending retained earnings – net income + dividends declared

LO 5 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 3.15 Error

a. In Balance

b. Difference

c. Larger Column

1. 2. 3. 4. 5. 6.

No Yes Yes No No No

$400 0 0 500 225 9

Debit n/a n/a Credit Debit Credit

LO 5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 3.1A a. Assets

Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Apr. 30 Bal.

Cash +$5,000 +20,000 –11,000 –1,200 –1,450

Accounts Receivable

Supplies

Equipment

Liabilities

Accounts Payable

Bank Loan Payable

Shareholders‘ Equity Retained Earnings

Common Shares +$5,000

+ Revenues

+$20,000 +$11,000 –$1,200 +$1,450 –600

+$600 +2,000 –400 –2,000 –600 –100 –6,400 +12,000 –1,500 $14,350

– Expenses

– Dividends Declared

+$16,000

+$18,000 –$400 –2,000 –600 –100 –6,400

–12,000 + $4,000

+$1,450

+ $11,000 =

+ $20,000

+ $5,000

+ $18,000

–1,500 –$11,800

–$400

TOTAL ASSETS = $30,800 TOTAL LIABILITIES + SHAREHOLDERS‘ EQUITY = $20,000 + ($5,000 + $18,000 – $11,800 – $400) = $30,800 NET INCOME = $18,000 – $11,800 = $6,200

LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.2A a. Assets

Shareholders‘ Equity Retained Earnings

Liabilities

Bank Accounts Loan Accounts Common Cash + Receivable +Supplies+Equipment= Payable + Payable + Shares + Jul 31 Bal.. Aug. 2 3 6 7 13 17

$4,000 +1,200 +1,300 −2,700 +3,000 –400 –4,675

17 20 22 24 28 31 Aug. 31 Bal.

+3,500 –500

$1,500 –1,200

$500

$5,000

$4,100

$3,500

Balance

Dividends +Revenues – Expenses– Declared

$3,400

+1,300 −2,700 +3,500

+$6,500 +1,200

+800 –$3,500 –900 –275

–3,500 –$500 +1,000

+1,000

+2,000 –500 $6,225

+$2,000 $1,300 $1,300 +

0 0 $500 +

00 00 $6,200

700 000 $2,000 +

+275 00 000 $2,475+

00 000 $4,800

00 000 $3,400 +

–275 −500 $5,450

00 000 $7,500 +

–

TOTAL ASSETS $14,225 = TOTAL LIABILITIES & SHAREHOLDERS‘ EQUITY $14,225 Note: The August 27th transaction does not affect the accounting equation and is therefore not recorded in the accounting records.

00 0 $500 –

PROBLEM 3.2A (CONTINUED) b. HILLS LEGAL SERVICES INC. Statement of Income Month Ended August 31, 2024 Revenues Service revenue Expenses Salaries expense Rent expense Advertising expense Utilities expense Total expenses Income before income tax Income tax expense Net income

$7,500 $3,500 900 275 275 4,950 2,550 500 $2,050

[Revenues – Expenses = Net income or (loss)]

HILLS LEGAL SERVICES INC. Statement of Changes in Equity Month Ended August 31, 2024

Balance, August 1 Issued common shares Net income Dividends declared Balance, August 31

Common Shares

Retained Earnings

$3,500 1,300

$3,400

00 $4,800

2,050 (500) $4,950

Total Equity $6,900 1,300 2,050 (500) $9,750

PROBLEM 3.2A (CONTINUED) b.

(continued) HILLS LEGAL SERVICES INC. Statement of Financial Position August 31, 2024 Assets Current assets Cash Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Total assets

$6,225 1,300 500 $ 8,025 6,200 $14,225

Liabilities and Shareholders' Equity Current liabilities Accounts payable Bank loan payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$2,475 2,000 $ 4,475 $4,800 4,950 9,750 $14,225

(Assets = Liabilities + Shareholders‘ equity) LO 1 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.3A a. (1) Transaction

Basic Type

Account Debited (2) Specific Account

(3) Effect

Account Credited (1) (2) Specific Basic Type Account

(3) Effect

Oct. 1

Asset

Cash

Increase

Shareholders‘ equity

Common Shares

Increase

Oct. 2

Asset

Prepaid Insurance

Increase

Asset

Cash

Decrease

Oct. 7

Asset

Equipment

Increase

Liability

Accounts Payable

Increase

Asset

Cash

Decrease

Oct. 11

Asset

Accounts Receivable

Increase

Shareholders‘ equity

Revenue

Increase

Oct. 13

Asset

Cash

Increase

Liability

Deferred Revenue

Increase

Oct. 17

Shareholders‘ equity

Repairs and Maintenance Expense

Increase

Asset

Cash

Decrease

Oct. 19

Asset

Supplies

Increase

Liability

Accounts Payable

Increase

PROBLEM 3.3A (CONTINUED) a. (continued) Account Debited (2) Specific Basic Type Account (1)

Transaction

(3) Effect

Account Credited (2) Specific Basic Type Account (1)

(3) Effect

Oct. 22

Liability

Accounts Payable

Decrease

Asset

Cash

Decrease

Oct. 23

Shareholders‘ equity

Salaries Expense

Increase

Asset

Cash

Decrease

Oct. 26

Asset

Cash

Increase

Liability

Bank Loan Payable

Increase

Oct. 28

Shareholders‘ equity

Dividends Declared

Increase

Asset

Cash

Decrease

Oct. 31

Shareholders‘ equity

Income tax Expense

Increase

Asset

Cash

Decrease

PROBLEM 3.3A (CONTINUED) b. Date Account Oct. Cash 1,2,7,13,17,22,23,26, 28,31

Normal Balance debit

Oct. 1

Common Shares

credit

Oct. 2

Prepaid Insurance

debit

Oct.7

Equipment

debit

Oct. 7,19,22

Accounts Payable

credit

Oct. 11

Accounts Receivable

debit

Oct. 11

Revenue

credit

Oct. 13

Deferred Revenue

credit

Oct. 17

Repairs and Maintenance Expense

debit

Oct. 19

Supplies

debit

Oct. 23

Salaries Expense

debit

Oct. 26

Bank Loan Payable

credit

Oct. 28

Dividends Declared

debit

Oct. 31

Income Tax Expense

debit

LO 2 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 3.4A a. Account Accumulated depreciation Administrative expenses Buildings Common shares, beginning of year Cost of goods sold Dividends declared Finance income Goodwill Income tax expense Income taxes recoverable Inventories Prepaid expenses Retained earnings, beginning of year Sales Trade and other payables Trade and other receivables

(1) Increases By Credit Debit Debit Credit Debit Debit Credit Debit Debit Debit Debit Debit Credit Credit Credit Debit

(2) Normal Balance Credit Debit Debit Credit Debit Debit Credit Debit Debit Debit Debit Debit Credit Credit Credit Debit

PROBLEM 3.4A (CONTINUED) b. Account Accumulated depreciation Administrative expenses Buildings Common shares, beginning of year Cost of goods sold Dividends declared Finance income Goodwill Income tax expense Income taxes recoverable Inventories Prepaid expenses Retained earnings, beginning of year Sales Trade and other payables Trade and other receivables

Financial Statement Statement of Financial Position Statement of Income Statement of Financial Position Statement of Changes in Equity Statement of Income Statement of Changes in Equity Statement of Income Statement of Financial Position Statement of Income Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Changes in Equity Statement of Income Statement of Financial Position Statement of Financial Position

Note: Beginning-of-the-year equity amounts such as opening common shares or opening retained earnings balances are shown on the statement of changes in equity and do not appear on the statement of financial position. Only end-of-year amounts for equity accounts would appear on the statement of financial position. c. Account Accumulated depreciation Buildings Goodwill Income taxes recoverable Inventories Prepaid expenses Trade and other payables Trade and other receivables

Classification Non-current assets Non-current assets Non-current assets Current assets Current assets Current assets Current liabilities Current assets

LO 2 BT: K Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 3.5A (a) Transaction 1

Feb.2: Purchased supplies on account for $600.

(1) Basic Analysis

The asset account Supplies is increased by $600; the liability account Accounts Payable is increased by $600.

(2) Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Accounts Payable +$600

Supplies +$600

(3) Debit−Credit Analysis

Debits increase assets: debit Supplies $600. Credits increase liabilities: credit Accounts Payable $600.

Transaction 2

Feb.3: Purchased equipment for $10,000 by signing a bank loan due in three months.

(1) Basic Analysis

The asset account Equipment is increased by $10,000; the liability account Bank Loan Payable is increased by $10,000.

(2) Equation Analysis

Assets

Equipment +$10,000

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity

Bank Loan Payable +$10,000

Debits increase assets: debit Equipment $10,000. Credits increase liabilities: credit Bank Loan Payable $10,000.

PROBLEM 3.5A (CONTINUED) a. (continued) Transaction 3

Feb.6: Earned service revenue of $50,000. Of this amount, $30,000 was received in cash. The balance was on account.

(1) Basic Analysis

The asset account Cash is increased by $30,000; the asset account Accounts Receivable is increased by $20,000; the shareholders‘ equity account Service Revenue is increased by $50,000.

(2) Equation Analysis

Assets

Cash +$30,000

Liabilities

Shareholders‘ Equity Service Revenue +$50,000

Accounts Receivable +$20,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $30,000. Debits increase assets: debit Accounts Receivable $20,000. Credits increase revenues: credit Service Revenue $50,000.

PROBLEM 3.5A (CONTINUED) a. (continued) Transaction 4

Feb.13: Declared and paid dividends of $500 to shareholders.

(1) Basic Analysis

The asset account Cash is decreased by $500; the Dividends Declared account is increased by $500.

(2) Equation Analysis

Assets

Liabilities

Cash -$500

Shareholders‘ Equity Dividends Declared -$500

(3) Debit−Credit Analysis

Debits increase dividends: debit Dividends Declared $500. Credits decrease assets: credit Cash $500.

Transaction 5

Feb. 18: Received cash of $2,000 from a customer as a deposit for services to be provided next month.

(1) Basic Analysis

The asset account Cash is increased by $2,000; the liability account Deferred Revenue is increased by $2,000.

(2) Equation Analysis

Assets

Cash +$2,000

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity

Deferred Revenue +$2,000

Debits increase assets: debit Cash $2,000. Credits increase liabilities: credit Deferred Revenue $2,000.

PROBLEM 3.5A (CONTINUED) a. (continued) Transaction 6

Feb. 20: Paid amount owing from the supplies purchased on Feb. 2.

(1) Basic Analysis

The asset account Cash is decreased by $600; the liability account Accounts Payable is decreased by $600.

(2) Equation Analysis

Assets

Cash -$600

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity

Accounts Payable -$600

Debits decrease liabilities: debit Accounts Payable $600. Credits decrease assets: credit Cash $600.

PROBLEM 3.5A (CONTINUED) a. (continued) Transaction 7

Feb. 23: Collected $20,000 of the amount owing from the Feb. 6 transaction.

(1) Basic Analysis

The asset account Cash is increased by $20,000; the asset account Accounts Receivable is decreased by $20,000.

(2) Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Cash +$20,000 Accounts Receivable -$20,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $20,000. Credits decrease assets: credit Accounts Receivable $20,000.

PROBLEM 3.5A (CONTINUED) a. (continued)

Transaction 8

Feb. 24: Paid office expenses for the month, $22,000.

(1) Basic Analysis

The expense account Office Expense is increased by $22,000; the asset account Cash is decreased by $22,000.

(2) Equation Analysis

Assets Cash -$22,000

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Office Expense -$22,000

Debits increase expenses: debit Office Expense $22,000. Credits decrease assets: credit Cash $22,000.

PROBLEM 3.5A (CONTINUED) a. (continued) Transaction 9

Feb.27: Recorded salaries due to employees for work performed during the month, $14,000.

(1) Basic Analysis

The expense account Salaries Expense is increased by $14,000; the liability account Salaries Payable is increased by $14,000.

(2) Equation Analysis

Assets

Liabilities

Salaries Payable +$14,000

Shareholders‘ Equity Salaries Expense -$14,000

(3) Debit−Credit Analysis

Debits increase expenses: debit Salaries Expense $14,000. Credits increase liabilities: credit Salaries Payable $14,000.

Transaction 10

Feb. 28: Paid interest of $50 on the bank loan signed on Feb. 3.

(1) Basic Analysis

The expense account Interest Expense is increased by $50; the asset account Cash is decreased by $50.

(2) Equation Analysis

Assets

Cash -$50

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Interest Expense -$50

Debits increase expenses: debit Interest Expense $50. Credits decrease assets: credit Cash $50.

PROBLEM 3.5A (CONTINUED) b. Feb. 2 Supplies........................................................... Accounts Payable.....................................

600 600

3 Equipment ....................................................... Bank Loan Payable .................................

10,000

6 Cash ................................................................ Accounts Receivable ...................................... Service Revenue ......................................

30,000 20,000

13 Dividends Declared ......................................... Cash .........................................................

500

18 Cash ................................................................ Deferred Revenue ....................................

2,000

20 Accounts Payable ............................................ Cash .........................................................

600

23 Cash ................................................................ Accounts Receivable ................................

20,000

24 Office Expense ................................................ Cash .........................................................

22,000

27 Salaries Expense............................................. Salaries Payable ......................................

14,000

28 Interest Expense.............................................. Cash .........................................................

10,000

0 50,000

500

2,000

600

20,000

22,000

14,000

LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.6A April 1 Cash ................................................................ Bank Loan Payable ...................................

2,000,000

2 Land ................................................................. Buildings .......................................................... Equipment ........................................................ Cash ......................................................... Mortgage Payable .....................................

1,000,000 650,000 100,000

5 Advertising Expense ........................................ Cash .........................................................

700

10 Cash ............................................................... Deferred Revenue ....................................

50,000

15 Salaries Expense ............................................. Cash .........................................................

1,700

17 Equipment ........................................................ Cash…………………………………………. Accounts Payable .....................................

15,000

20 Utilities Expense .............................................. Cash .........................................................

1,000

21 Cash ................................................................ Deferred Revenue ...................................

1,200

25 Prepaid Insurance ............................................ Cash .........................................................

1,200

29 Property Tax Expense ..................................... Cash .........................................................

200

30 Accounts Payable ........................................... Cash .........................................................

8,000

31 Interest Expense .............................................. Cash .........................................................

2,500

2,000,000

750,000 1,000,000

700

50,000

1,700

7,000 8,000

1,000

1,200

200

8,000

2,500

(Each journal entry must balance and reflect the actual amount of the transaction) LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 3-233 Chapter 3 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

PROBLEM 3.7A a. Jan. 1

Cash ................................................................ Buildings .......................................................... Common Shares.......................................

7,000 100,000 107,000

2 No entry. Not a transaction. Contingent on a successful hire. 3

Supplies ........................................................... Accounts Payable .....................................

1,500

Accounts Receivable ....................................... Service Revenue ......................................

2,000

Cash ................................................................ Service Revenue ......................................

4,000

Accounts Payable ............................................ Cash .........................................................

600

Professional Fees Expense ............................. Accounts Payable .....................................

500

Accounts Payable ............................................ Cash .........................................................

500

Cash ................................................................ Deferred Revenue ....................................

500

Cash ................................................................ Accounts Receivable ................................

1,000

Income Tax Expense ....................................... Cash .........................................................

500

1,500

2,000

4,000

600

500

1,000

500

PROBLEM 3.7A (CONTINUED) a. (continued) Jan., 28

Salaries Expense ............................................. Cash .........................................................

1,250

Dividends Declared ......................................... Cash .........................................................

150

Utilities Expense .............................................. Accounts Payable .....................................

500

1,250

150

500

PROBLEM 3.7A (CONTINUED) b.

Jan.. 1 Jan. 10 Jan. 19 Jan. 21

Bal.

Jan. 7 Bal. Jan. 3

Jan. 1

Jan. 11 Jan. 15

Cash 7,000 Jan.11 4,000 Jan. 15 500 Jan. 26 1,000 Jan. 28 Jan. 30

Service Revenue Jan. 7 Jan. 10 Bal.

600 500 500 1,250 150 Jan. 28

Salaries Expense 1,250

Jan. 12

Professional Fees Expense 500

Jan. 31

Utilities Expense 500

Jan. 26

Income Tax Expense 500

2,000 4,000 6,000

9,500 Accounts Receivable 2,000 Jan. 21 1,000

1,000

Supplies 1,500 Buildings 100,000 Accounts Payable 600 Jan. 3 500 Jan. 12 Jan. 31 Bal.

1,500 500 500 1,400

Deferred Revenue Jan. 19

500

Common Shares Jan. 1 107,000

Jan 30.

Dividends Declared 150

PROBLEM 3.7A (CONTINUED) c.

This suggestion is not a good idea. Journals are used to record transactions. A general ledger is not intended to be used to capture the recording of transactions, but to tabulate the effects of transactions in separate accounts. The balances arrived at in the ledger are then used to communicate information to the users of the financial statements. If one attempted to omit the use of journal entries, one could not retrace the transactions as they originated in the journal. One would only see one side of a transaction at a time by looking at an account in the ledger. It would become very confusing and unruly to try to keep track of transactions.

LO 3,4 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.8A a. Apr

Development Costs ......................................... Accounts Payable ..................................... Cash .........................................................

30,000

Accounts Payable ........................................... Cash .........................................................

68,000

10,000 20,000

68,000

No entry

Advertising Expense ........................................ Cash .........................................................

18,000

Advertising Expense ........................................ Cash .........................................................

50,000

Equipment ....................................................... Accounts Payable .....................................

192,000

Cash ................................................................ Advertising Revenue ................................

42,000

Loan Payable................................................... Interest Expense.............................................. Cash .........................................................

1,500 500

Utilities Expense .............................................. Cash .........................................................

2,300

Professional Fees Expense ............................. Cash .........................................................

13,000

Advertising Expense ........................................ Cash .........................................................

6,600

Cash ................................................................ Deferred Revenue ....................................

140,000

17 18

18,000

50,000

192,000 42,000

2,000

2,300

13,000

6,600

140,000

PROBLEM 3.8A (CONTINUED) a. (Continued) 30

Salaries Expense ............................................ Cash.........................................................

112,000

Cash ................................................................ Loan Payable ...........................................

100,000

112,000

100,000

PROBLEM 3.8A (CONTINUED) b. Cash Mar. 31 Bal.220,000 Apr. 1 Apr. 18 42,000 Apr. 3 Apr. 30 140,000 Apr. 10 Apr. 30 100,000 Apr. 11 Apr. 19 Apr. 22 Apr. 23 Apr. 24 Apr. 30 Bal.

20,000 68,000 18,000 50,000 2,000 2,300 13,000 6,600 112,000

210,100

Development Costs Mar. 31 Bal. 290,000 Apr. 1 30,000 Bal. 320,000 Land Mar.31 Bal. 860,000 Buildings Mar. 31 Bal. 440,000 Equipment Mar. 31 Bal. 230,000 Apr. 17 192,000 Bal. 422,000

Apr. 3

Accounts Payable 68,000 Mar. 31 Bal. 115,000 Apr. 1 10,000 Apr. 17 192,000 Bal. 249,000

PROBLEM 3.8A (CONTINUED) Loan Payable 1,500 Mar. 31 Bal. 915,000 Apr. 30 100,000 Bal. 1,013,500

Apr. 19

Deferred Revenue Apr 30 Bal.

140,000 140,000

Common Shares Mar. 31 Bal. 497,000 Retained Earnings Mar. 31 Bal. 513,000

Advertising Revenue Apr. 18

Apr. 10 Apr. 11 Apr. 24 Bal.

Advertising Expense 18,000 50,000 6,600 74,600

Apr. 30

Salaries Expense 112,000

Apr. 30

Professional Fees Expense 13,000

Apr. 22

Utilities Expense 2,300

Apr. 19

Interest Expense 500

42,000

PROBLEM 3.8A (CONTINUED) c. METAPLAY INC. Trial Balance April 30, 2024

Cash Development costs Land Buildings Equipment Accounts payable Loan payable Deferred revenue Common shares Retained earnings Advertising revenue Advertising expense Salaries expense Professional fees expense Utilities expense Interest expense Totals

Debit $ 210,100 320,000 860,000 440,000 422,000

Credit

$249,000 1,013,500 140,000 497,000 513,000 42,000 74,600 112,000 13,000 2,300 500 $ 2,454,500

0 $ 2,454,500

[Liabilities (loan payable) and shareholders‘ equity items such as common shares, retained earnings, and revenue accounts (fees earned and concession revenue) have credit balances]

LO 3,4,5 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.9A a. May 1

Rent Expense .................................................. Cash .........................................................

1,000

Accounts Payable ............................................ Cash .........................................................

1,100

Cash ................................................................ Deferred Revenue ....................................

1,500

Cash ................................................................ Service Revenue ......................................

2,000

Salaries Expense ............................................. Cash .........................................................

1,200

Deferred Revenue ........................................... Service Revenue ......................................

700

Accounts Payable ............................................ Cash .........................................................

1,000

Supplies ........................................................... Accounts Payable .....................................

700

Advertising Expense ........................................ Accounts Payable .....................................

500

Utilities Expense .............................................. Cash .........................................................

400

Cash ................................................................ Service Revenue ......................................

2,100

1,000

1,100

1,500

2,000

1,200

700 0 1,000

700

500

400

2,100

PROBLEM 3.9A (CONTINUED) a. (continued) May

Deferred Revenue ........................................... Service Revenue......................................

600

Interest Expense ............................................. Cash ........................................................

Salaries Expense ............................................ Cash ........................................................

1,200

Income Tax Expense ...................................... Cash ........................................................

150

600

1,200

150

PROBLEM 3.9A (CONTINUED) b.

Bal.

Cash 5,000 May 1 1,500 4 2,000 15 2,100 18 25 30 31 31 4,500

Apr. 30 May 22 Bal.

Supplies 500 700 1,200

Apr. 30 May 7 15 28

Apr. 30

May 4 18

May 17 29

1,000 1,100 1,200 1,000 400 50 1,200 150

Equipment 24,000

Accounts Payable Apr. 30 1,100 May 22 1,000 24 Bal. Deferred Revenue 700 Apr. 30 600 May 7 Bal. Bank Loan Payable Apr 30

2,100 700 500 1,200

1,000 1,500 1,200

Common Shares Apr. 30

5,000

Retained Earnings Apr. 30

11,400

Service Revenue May 15 17 28 29 Bal.

2,000 700 2,100 600 5,400

May 15 31 Bal.

Salaries Expense 1,200 1,200 2,400

May 1

Rent Expense 1,000

May 24

Advertising Expense 500

May 25

Utilities Expense 400

May 30

Interest Expense 50

Income Tax Expense May 31 150

10,000

PROBLEM 3.9A (CONTINUED) c. PAMPER ME SALON INC. Trial Balance May 31, 2024

Cash Supplies Equipment Accounts payable Deferred revenue Bank loan payable Common shares Retained earnings Service revenue Salaries expense Rent expense Advertising expense Utilities expense Interest expense Income tax expense Totals

Debit $ 4,500 1,200 24,000

Credit

$1,200 1,200 10,000 5,000 11,400 5,400 2,400 1,000 500 400 50 150 $34,200

$34,200

(Asset and expense accounts have debit balances) LO 3,4,5 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.10A a. TAGGAR ENTERPRISES INC. Trial Balance June 30, 2024

Cash Accounts receivable Prepaid insurance Long-term investments Land Buildings Accumulated depreciation—buildings Equipment Accumulated depreciation—equipment Accounts payable Income tax payable Mortgage payable, due 2028 Common shares Retained earnings Dividends declared Service revenue Salaries expense Office expense Interest expense Income tax expense Totals

Debit $ 1,800 3,000 900 3,550 12,500 15,000

Credit

$ 4,000 3,000 1,000 3,500 100 15,000 5,000 6,250 2,000 25,000 13,700 3,300 100 1,000 $59,850

$59,850

(Asset, dividends declared, and expense accounts have debit balances. Liability, common shares, retained earnings, and revenue accounts have credit balances)

PROBLEM 3.10A (CONTINUED) b.

When debits equal credits in a trial balance, there is some assurance that certain types of errors were not made. However, there is no guarantee that other types of errors do not exist because entries may have been omitted completely, duplicated, or recorded to incorrect accounts.

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.11A TAGGAR ENTERPRISES INC. Statement of Income Year Ended June 30, 2024 Service revenue Expenses Salaries expense Office expense Interest expense Total expenses Income before income tax Income tax expense Net income

$25,000 $13,700 3,300 100 17,100 7,900 1,000 $ 6,900

TAGGAR ENTERPRISES INC. Statement of Changes in Equity Year Ended June 30, 2024

Balance, July 1, 2023 Issued common shares Net income Dividends declared Balance, June 30, 2024

Common Shares

Retained Earnings

$3,000 2,000

$ 6,250

__ ___ $5,000

6,900 (2,000) $11,150

Total Equity $ 9,250 2,000 6,900 (2,000) $16,150

PROBLEM 3.11A (CONTINUED) TAGGAR ENTERPRISES INC. Statement of Financial Position June 30, 2024 Assets Current assets Cash Accounts receivable Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$1,800 3,000 900 $5,700 3,550 $ 12,500 $15,000 4,000 $3,000 1,000

11,000 2,000 25,500 $34,750

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable Income tax payable Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$3,500 100 1,250 $ 4,850 13,750 18,600 $ 5,000 11,150 16,150 $34,750

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared] LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.12A a.

(1) General: Three accounts are listed in the wrong columns: Cash (debit), Accumulated Depreciation (credit), and Deferred Revenue (credit). (2) 1. The trial balance totals are not affected, only the amounts appearing on the trial balance are affected. Cash would be understated by $180 ($750 – $570) and Accounts Receivable overstated by the same amount. Note that Cash was one of the accounts listed in the wrong column (credit instead of debit). 2. The trial balance totals are not affected, only the accounts and amounts appearing on the trial balance are affected. Equipment would be understated by $360 and Supplies overstated by the same amount. 3. Trial balance is out of balance because of the slide error (wrong number of zeros/position of decimal spot). Service Revenue would be understated by $801 ($890 – $89) and the total for the credit column is lower by the same amount. 4. Trial balance is out of balance because of transposition error. Salaries Expense is understated by $900 ($4,300 – $3,400) and the total for the debit column is lower by the same amount. 5. The trial balance totals are not affected by this omission; only the accounts and amounts appearing on the trial balance are affected. Rent Expense would be understated by $1,000 (should be shown on the trial balance) and Cash overstated by the same amount. Note that Cash is one of the accounts listed in the wrong column (credit instead of debit).

PROBLEM 3.12A (CONTINUED) b. CANTPOST LTD. Trial Balance June 30, 2024

Debit Cash ($1,241 + $750 – $570 − $1,000) Accounts receivable ($2,630 – $750 + $570) Supplies ($860 – $360) Equipment ($3,000 + $360) Accumulated depreciation—equipment Accounts payable Deferred revenue Common shares Dividends declared Service revenue ($8,440 – $89 + $890) Salaries expense (given) Rent expense Office expense Depreciation expense Income tax expense Totals

Credit

421 2,450 500 3,360 $

600 2,665 1,200 1,000

800 9,241 4,300 1,000 910 600 365 $14,706

0 $14,706

Note that the opening retained earnings balance is zero, as this is the company‘s first year of operations. (Asset, dividends declared, and expense accounts have debit balances) LO 5 BT: AN Difficulty: C Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.1B a. Assets

Trans. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. May 31 Bal.

Cash +$8,000 –1,280 –4,000

A/R

Supplies

Equipment

Liabilities

A/P

Bank Loan Payable

Shareholders‘ Equity Retained Earnings

Deferred Revenue

Commo + + n Shares Revenues +$8,000

–$1,280 +$16,000

+$12,000

+$700

+4,200 –700 –200

+$4,200 –700 –200 +$3,600

–2,000 +700 +1,600 –500 –80 –600 $5,140

– Expenses

– Dividends Declared

+3,600 –2,000 +$700

–1,600 –$500

+$2,000

+ $700

+ $16,000

+ $12,000

+ $700

$8,000

+ $7,800

–80 –600 –$4,160

–$500

PROBLEM 3.1B (CONTINUED) b.

TOTAL ASSETS = $23,840 TOTAL LIABILITIES & SHAREHOLDERS‘ EQUITY = ($12,000 + $700) + ($8,000 + $7,800 – $4,160 – $500) = $23,840 NET INCOME = $7,800 – $4,160 = $3,640

LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.2B a. Assets

Cash Aug. 31 Bal. Sept. 4 4 5 7 10 12 14 17 20 20 26 27 28 Sep. 30 Bal.

$4,500 –3,200 –1,200 +1,450 +2,300 –700

A/R

Shareholders‘ Equity Retained Earnings

Liabilities

$1,800

Supplies

+ Equip. =

$350

$6,500

A/P

Bank Loan Common + Payable + Shares +

$3,200 –3,200

$2,500

Rev. –

–

Div.

$7,450 –$1,200

+2,300 +2,050

+1,350 +$500 –300 +2,500

+1,500

+4,500 –750 –175

+175 –500 –350 $6,750+

Exp.

–1,450

+500 –300 +2,500 +3,000 –750

Bal.

0 $2,350 +

TOTAL ASSETS = $18,000

0 $350 +

0 $8,550 =

0 $1,525+

0 $2,500 +

0 $4,800 +

0 0 $7,450 + $5,000 –

–350 $2,775 –

TOTAL LIABILITIES & SHAREHOLDERS‘ EQUITY = $18,000

Note: The transactions on September 6 (hired a part-time office assistant) and 18 (sent a statement) do not affect the accounting equation and are therefore not recorded in the accounting records .

–$500 0 $500

PROBLEM 3.2B (CONTINUED) b. CORSO CARE CORP. Statement of Income Month Ended September 30, 2024 Revenues Service revenue Expenses Rent expense Salaries expense Advertising expense Utilities expense Total expenses Income before income tax Income tax expense Net income

$5,000 $1,200 750 300 175 0

2,425 2,575 350 $2,225

[Revenues – Expenses = Net income or (loss)]

CORSO CARE CORP. Statement of Changes in Equity Month Ended September 30, 2024

Balance, September 1 Issued common shares Net income Dividends declared Balance, September 30

Common Shares

Retained Earnings

$2,500 2,300

$7,450

0 $4,800

2,225 (500) $9,175

Total Equity $ 9,950 2,300 2,225 (500) $13,975

PROBLEM 3.2B (CONTINUED) b.

(continued) CORSO CARE CORP. Statement of Financial Position September 30, 2024 Assets Current assets Cash Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Total assets

$6,750 2,350 350 $ 9,450 8,550 $18,000

$1,525 2,500 $ 4,025 $4,800 9,175 13,975 $18,000

(Assets = Liabilities + Shareholders‘ equity) LO 1 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.3B a. Account Debited (2) Specific Basic Type Account (1)

Transaction

(3)

(1)

Effect

Basic Type

Account Credited (2) Specific Account

(3) Effect

Mar. 1

Shareholders‘ equity

Rent Expense

Increase

Assets

Cash

Decrease

Mar. 3

Assets

Accounts Receivable

Increase

Shareholders‘ equity

Service Revenue

Increase

Mar. 5

Assets

Cash

Increase

Shareholders‘ equity

Service Revenue

Increase

Mar. 8

Assets

Equipment

Increase

Liabilities

Bank Loan Payable Cash

Increase

Assets

Decrease

Mar. 12

Assets

Cash

Increase

Assets

Accounts Receivable

Decrease

Mar. 15

Shareholders‘ equity

Salaries Expense

Increase

Assets

Cash

Decrease

Mar. 16

Assets

Supplies

Increase

Liabilities

Accounts Payable

Increase

PROBLEM 3.3B (CONTINUED) a. (continued) Account Debited (2) Specific Basic Type Account (1)

Transaction

(3) Effect

Account Credited (2) Specific Basic Type Account (1)

(3) Effect

Mar. 20

Shareholders‘ equity

Repairs and Maintenance Expense

Increase

Assets

Cash

Decrease

Mar. 22

Assets

Accounts Receivable

Increase

Shareholders‘ equity

Service Revenue

Increase

Mar. 26

Liabilities

Bank Loan Payable

Decrease

Assets

Cash

Decrease

Mar. 28

Assets

Cash

Increase

Liabilities

Deferred Revenue

Increase

Mar. 31

Shareholders‘ equity

Dividends Declared

Increase

Assets

Cash

Decrease

PROBLEM 3.3B (CONTINUED) b. Normal Balance debit

Date Mar. 1

Account Rent Expense

Mar. 3, 12, 22

Accounts Receivable

debit

Mar. 3, 5, 22

Service Revenue

credit

Mar. 1, 5, 8, 12, 15, 20, 26, 28, 31

Cash

debit

Mar. 8

Equipment

debit

Mar. 8, 26

Bank Loan Payable

credit

Mar. 15

Salaries Expense

debit

Mar. 16

Accounts Payable

credit

Mar. 16

Supplies

debit

Mar. 20

Repairs and Maintenance Expense

debit

Mar. 28

Deferred Revenue

credit

Mar. 31

Dividends Declared

debit

LO 2 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 3.4B a.

Account Accounts payable Accounts receivable Bank loans payable (short-term) Cash Common shares, beginning of year Dividends declared Furniture, fixtures, and production equipment Income taxes expense Income taxes receivable Interest expense Inventories Prepaid expenses Retained earnings, beginning of year Sales Selling, general, and administrative expenses

(1) Increases with Credit Debit Credit Debit Credit Debit Debit Debit Debit Debit Debit Debit Credit Credit Debit

(2) Normal Balance Credit Debit Credit Debit Credit Debit Debit Debit Debit Debit Debit Debit Credit Credit Debit

PROBLEM 3.4B (CONTINUED) b. Account Accounts payable Accounts receivable Bank loans payable (short-term) Cash Common shares, beginning of year Dividends declared Furniture, fixtures, and production equipment Income tax expense Income taxes receivable Interest expense Inventories Prepaid expenses Retained earnings, beginning of year Sales Selling, general, and administrative expenses

Financial Statement Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Changes in Equity Statement of Changes in Equity Statement of Financial Position Statement of Income Statement of Financial Position Statement of Income Statement of Financial Position Statement of Financial Position Statement of Changes in Equity Statement of Income Statement of Income

Note: Beginning-of-the-year equity amounts such as opening common shares or opening retained earnings balances are shown on the statement of changes in equity and do not appear on the statement of financial position as only endof-year amounts for equity accounts would appear on that statement. c. Account Accounts payable Accounts receivable Bank loans payable (short-term) Cash Furniture, fixtures, and production equipment Income taxes receivable Inventories Prepaid expenses

Classification Current liabilities Current assets Current liabilities Current assets Non-current assets Current assets Current assets Current assets

LO 2 BT: K Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 3.5B a. Transaction 1

Jan. 2: Issued $5,000 of common shares for cash.

(1) Basic Analysis

The asset account Cash is increased by $5,000; the shareholders‘ equity account Common Shares account is increased by $5,000.

(2) Equation Analysis

Assets

Liabilities

Cash +$5,000

Shareholders‘ Equity Common Shares +$5,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $5,000. Credits increase share capital: credit Common Shares $5,000.

Transaction 2

Jan. 5: Provided services on account $2,500.

(1) Basic Analysis

The asset account Accounts Receivable is increased by $2,500; the revenue account Service Revenue is increased by $2,500.

(2) Equation Analysis

Assets Accounts Receivable +$2,500

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Service Revenue +$2,500

Debits increase assets: debit Accounts Receivable $2,500. Credits increase revenues: credit Service Revenue $2,500.

PROBLEM 3.5B (CONTINUED) a. (continued) Transaction 3

Jan. 6: Obtained a bank loan for $30,000.

(1) Basic Analysis

The asset account Cash is increased by $30,000; the liability account Bank Loan Payable is increased by $30,000.

(2) Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Bank Loan Payable +$30,000

Cash +$30,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $30,000. Credits increase liabilities: credit Bank Loan Payable $30,000.

Transaction 4

Jan. 7: Paid $40,000 to purchase a hybrid car.

(1) Basic Analysis

The asset account Vehicles is increased by $40,000; the asset account Cash is decreased by $40,000.

(2) Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Cash -$40,000 Vehicles +$40,000

(3) Debit−Credit Analysis

Debits increase assets: debit Vehicles $40,000. Credits decrease assets: credit Cash $40,000.

PROBLEM 3.5B (CONTINUED) a. (continued) Transaction 5

Jan. 9: Received a $5,000 deposit from a customer for services to be performed in the future.

(1) Basic Analysis

The asset account Cash is increased by $5,000; the liability account Deferred Revenue is increased by $5,000.

(2) Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Deferred Revenue +$5,000

Cash +$5,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $5,000. Credits increase liabilities: credit Deferred Revenue $5,000.

Transaction 6

Jan. 12: Billed customers $20,000 for services performed during the month.

(1) Basic Analysis

The asset account Accounts Receivable is increased by $20,000; the revenue account Service Revenue is increased by $20,000.

(2) Equation Analysis

Assets Accounts Receivable +$20,000

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Service Revenue +$20,000

Debits increase assets: debit Accounts Receivable $20,000. Credits increase revenues: credit Service Revenue $20,000.

PROBLEM 3.5B (CONTINUED) a. (continued) Transaction 7

Jan. 19: Paid $500 to purchase supplies.

(1) Basic Analysis

The asset account Supplies is increased by $500; the asset account Cash is decreased by $500.

(2) Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Cash -$500 Supplies +$500 (3) Debit−Credit Analysis

Debits increase assets: debit Supplies $500. Credits decrease assets: credit Cash $500.

Transaction 8

Jan 20: Provided $1,500 of services for the customer who paid in advance on January 9.

(1) Basic Analysis

The liability account Deferred Revenue decreased by $1,500; the revenue account Service Revenue is increased by $1,500.

(2) Equation Analysis

Assets

Liabilities Deferred Revenue -$1,500

(3) Debit−Credit Analysis

Shareholders‘ Equity Service Revenue +$1,500

Debits decrease liabilities: debit Deferred Revenue $1,500. Credits increase revenues: credit Service Revenue $1,500.

PROBLEM 3.5B (CONTINUED) a. (continued) Transaction 9

Jan. 23: Collected $5,000 owing from customers from the January 12 transaction.

(1) Basic Analysis

The asset account Cash is increased by $5,000; the asset account Accounts Receivable is decreased by $5,000.

(2) Equation Analysis

Assets

Liabilities

Shareholders‘ Equity

Cash +$5,000 Accounts Receivable -$5,000

(3) Debit−Credit Analysis

Debits increase assets: debit Cash $5,000. Credits decrease assets: credit Accounts Receivable $5,000.

Transaction 10

Jan 26: Received a bill for utilities of $125, due February 26.

(1) Basic Analysis

The expense account Utilities Expense is increased by $125; the liability account Accounts Payable is increased by $125.

(2) Equation Analysis

Assets

Liabilities Accounts Payable +$125

(3) Debit−Credit Analysis

Shareholders‘ Equity Utilities Expense -$125

Debits increase expenses: debit Utilities Expense $125. Credits increase liabilities: credit Accounts Payable $125.

PROBLEM 3.5B (CONTINUED) a. (continued) Transaction 11

Jan. 29: Paid rent for the month, $1,500.

(1) Basic Analysis

The expense account Rent Expense is increased by $1,500; the asset account Cash is decreased by $1,500.

(2) Equation Analysis

Assets

Liabilities

Cash -$1,500

Shareholders‘ Equity Rent Expense -$1,500

(3) Debit−Credit Analysis

Debits increase expenses: debit Rent Expense $1,500. Credits decrease assets: credit Cash $1,500.

Transaction 12

Jan. 31: Paid $4,000 of salaries to employees.

(1) Basic Analysis

The expense account Salaries Expense is increased by $4,000; the asset account Cash is decreased by $4,000.

(2) Equation Analysis

Assets

Cash -$4,000

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Salaries Expense -$4,000

Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000.

PROBLEM 3.5B (CONTINUED) a. (continued) Transaction 13

Jan 31: Paid interest of $300 on the bank loan from the January 6 transaction.

(1) Basic Analysis

The expense account Interest Expense is increased by $300; the asset account Cash is decreased by $300.

(2) Equation Analysis

Assets

Liabilities

Cash -$300

Shareholders‘ Equity Interest Expense -$300

(3) Debit−Credit Analysis

Debits increase expenses: debit Interest Expense $300. Credits decrease assets: credit Cash $300.

Transaction14

Jan. 31: Paid income tax for the month, $3,600.

(1) Basic Analysis

The expense account Income Tax Expense is increased by $3,600; the asset account Cash is decreased by $3,600.

(2) Equation Analysis

Assets

Cash -$3,600

(3) Debit−Credit Analysis

Liabilities

Shareholders‘ Equity Income Tax Expense -$3,600

Debits increase expenses: debit Income Tax Expense $3,600. Credits decrease assets: credit Cash $3,600.

PROBLEM 3.5B (CONTINUED) b. Jan. 2 Cash ................................................................ Common Shares ......................................

5,000

5 Accounts Receivable ....................................... Service Revenue ......................................

2,500

6 Cash ................................................................ Bank Loan Payable ..................................

30,000

7 Vehicles ........................................................... Cash .........................................................

40,000

9 Cash ................................................................ Deferred Revenue ....................................

5,000

12 Accounts Receivable ....................................... Service Revenue ......................................

20,000

19 Supplies .......................................................... Cash .........................................................

500

20 Deferred Revenue ........................................... Service Revenue ......................................

1,500

23 Cash ................................................................ Accounts Receivable ................................

5,000

26 Utilities Expense .............................................. Accounts Payable ....................................

125

29 Rent Expense .................................................. Cash .........................................................

1,500

5,000

2,500

30,000

40,000

5,000

20,000

500

1,500

5,000

125

1,500

PROBLEM 3.5B (CONTINUED) b. (continued) Jan. 31 Salaries Expense ............................................ Cash .........................................................

4,000

31 Interest Expense ............................................. Cash .........................................................

300

31 Income Tax Expense ....................................... Cash .........................................................

03,600

4,000

300

3,600

LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.6B Apr. 1 Cash...................................................................... 100,000 Common Shares ............................................

100,000

3 Land ...................................................................... 204,000 Buildings ............................................................... 121,000 Equipment ............................................................. 45,000 Cash .............................................................. Bank Loan Payable ........................................

60,000 310,000

8 Advertising Expense ............................................. 1,800 Accounts Payable ..........................................

1,800

10 Salaries Expense .................................................. 2,800 Cash ..............................................................

2,800

13 No entry as the accounting equation is not affected. 14 Prepaid Insurance ................................................. 5,500 Cash ..............................................................

5,500

17 Dividends Declared ............................................... 600 Cash ..............................................................

600

20 Cash...................................................................... 10,600 Sales ..............................................................

10,600

30 Accounts Payable ................................................. 1,800 Cash ..............................................................

1,800

30 Interest Expense ................................................... 2,000 Cash ..............................................................

2,000

30 Income Tax Expense .................................................................................................... 800 Cash .................................................................................................................... 800 (Each journal entry must balance and reflect the actual amount of the transaction) LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.7B a.

May 1 Cash ........................................................................... 20,000 Common Shares ..................................................

20,000

1 Rent Expense ............................................................. Cash ....................................................................

950

4 No entry. Not an accounting transaction. 4 Supplies .............................................................. Accounts Payable ........................................

750

11 Accounts Receivable .......................................... Service Revenue .........................................

2,725

12 Cash ................................................................... Deferred Revenue .......................................

3,500

15 Cash ................................................................... Service Revenue .........................................

2,350

20 Cash ................................................................... Accounts Receivable ...................................

1,725

22 Accounts Payable ($750 × 1/3) ........................... Cash ............................................................

250

25 Utilities Expense ................................................. Accounts Payable ........................................

275

29 Salaries Expense ................................................ Cash ............................................................

2,000

29 Income Tax Expense .......................................... Cash ............................................................

300

29 Dividends Declared ............................................. Cash ............................................................

250

750

2,725

3,500

2,350

1,725 , 250

275

2,000

300

250

PROBLEM 3.7B (CONTINUED) b. May 1 12 15 20 Bal.

Cash 20,000May 1 3,500 22 2,350 29 1,725 29 29 23,825

Accounts Receivable May 11 2,725May 20 Bal. 1,000

May 4

May 22

950 250 2,000 300 250

Deferred Revenue May 12

May 29

750 275 775

May 29

Salaries Expense 2,000

May 1

Rent Expense 950

May 25

Utilities Expense 275

May 29

Income Tax Expense 300

3,500

20,000

Dividends Declared 250 Service Revenue May 11 15 Bal.

1,725

Supplies 750 Accounts Payable 250May 4 25 Bal.

Common Shares May 1

2,725 2,350 5,075

PROBLEM 3.7B (CONTINUED) c.

This suggestion is a good idea. Most companies use computerized accounting systems, which speed up the process of recording in the journals and subsequently use summarized transactions that are posted to the general ledger. Systems such as these can reduce errors (from posting or calculations) and provide timely information for decision-making. However, computerized accounting systems cannot eliminate human errors nor can they perform the analysis of transactions needed as a first step before entries can be recorded in the accounting system. This aspect of the cycle needs to be performed by a person who can interpret the information and decide which accounts are affected.

LO 3,4 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.8B a. Apr. 2 Rent Expense ............................................................. Cash ....................................................................

800

3 Advertising Expense ................................................... Cash ....................................................................

620

800

620

5 No entry, not a transaction. 6 No entry, not a transaction. 15 Cash ........................................................................... Fees Earned ........................................................

1,950

16 Mortgage Payable....................................................... Interest Expense ......................................................... Cash ....................................................................

2,000 850

17 Accounts Payable ....................................................... Cash ....................................................................

2,800

19 Rent Expense ............................................................. Accounts Payable ................................................

750

20 Prepaid Rent ............................................................... Cash ....................................................................

700

26 Salaries Expense ........................................................ Cash ....................................................................

2,900

27 Income Tax Expense .................................................. Cash ....................................................................

1,000

30 Cash ........................................................................... Accounts Receivable .................................................. Sales (20% × $5,600) ..........................................

560 560

30 Cash ........................................................................... Fees Earned ........................................................

7,300

1,950

2,850

2,800

750

700

2,900

1,000

1,120

7,300

PROBLEM 3.8B (CONTINUED) b. Cash Mar. 31 Bal. 6,000 Apr. 2 Apr. 15 1,950 Apr. 3 Apr. 30 560 Apr. 16 Apr. 30 7,300 Apr. 17 Apr. 20 Apr. 26 Apr. 27 Bal. 4,140

Apr. 30

Accounts Receivable 560

Apr. 20

Prepaid Rent 700

Land Mar. 31 Bal. 100,000 Buildings Mar. 31 Bal. 80,000

Equipment Mar. 31 Bal. 25,000

Apr. 17

Apr. 16

Accounts Payable Mar. 31 Bal. 2,800 Apr. 19 Bal.

Common Shares Mar. 31 Bal. 50,000

800 620 2,850 2,800 700 2,900 1,000

5,000 750 2,950

Retained Earnings Mar. 31 Bal.31,000 Fees Earned Apr. 15 Apr. 30 Bal.

1,950 7,300 9,250

Sales Apr. 30

1,120

Apr. 26

Salaries Expense 2,900

Apr. 2 Apr. 19 Bal.

Rent Expense 800 750 1,550

Apr. 3

Advertising Expense 620

Apr. 16

Interest Expense 850

Apr. 27

Income Tax Expense 1,000

Mortgage Payable 2,000 Mar. 31 Bal. 125,000 Bal. 123,000

PROBLEM 3.8B (CONTINUED) c.

LAKE THEATRE INC. Trial Balance April 30, 2024 Debit Cash Accounts receivable Prepaid rent Land Buildings Equipment Accounts payable Mortgage payable Common shares Retained earnings Fees earned Sales Salaries expense Rent expense Advertising expense Interest expense Income tax expense Totals

Credit

4,140 560 700 100,000 80,000 25,500 $2,950 123,000 50,000 31,000 9,250 1,120

2,900 1,550 620 850 1,000 $217,320

0000 000 $217,320

(Liability, common shares, retained earnings, and revenue (fees earned and concession revenue) accounts have credit balances) LO 3,4,5 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.9B a. Apr.

2 Rent Expense .............................................................. 5,000 Cash .....................................................................

5,000

4 No entry. Not a transaction. 6 Advertising Expense .................................................... Cash .....................................................................

500

9 Accounts Payable ........................................................ Cash .....................................................................

300

500

300

15 Salaries Expense ........................................................ 1,000 Cash .....................................................................

1,000

16 Rent Expense .............................................................. 5,000 Cash .....................................................................

5,000

18 Utilities Expense .......................................................... Accounts Payable.................................................

100

19 Supplies Expense ........................................................ Cash .....................................................................

200

100

200

24 Cash ............................................................................ 2,200 Deferred Revenue ................................................ 25 Income Tax Expense ................................................... Cash .....................................................................

880

27 Advertising Expense .................................................... Cash .....................................................................

300

2,200

880

300

30 Salaries Expense ........................................................ 1,000 Cash .....................................................................

1,000

30 Deferred Revenue ....................................................... 17,500 Fees Earned .........................................................

17,500

PROBLEM 3.9B (CONTINUED) b. Cash Mar. 31 Bal. 23,000 Apr. 2 Apr. 24 2,200 Apr. 6 Apr. 9 Apr. 13 Apr. 16 Apr. 19 Apr. 25 Apr. 27 Apr. 30 Bal. 11,020

5,000 500 300 1,000 5,000 200 880 300 1,000

Equipment Mar. 31 Bal. 2,000

Apr. 9

Apr. 30

Accounts Payable Mar. 31 Bal. 300 Apr. 18 Bal.

500 100 300

Deferred Revenue Mar. 31 Bal. 17,500 17,500 Apr. 24 2,200 Bal. 2,200 Common Shares Mar. 31 Bal. 1,000

Retained Earnings Mar. 31 Bal. 6,000 Fees Earned Apr. 30

Apr. 2 Apr. 16 Bal.

Rent Expense 5,000 5,000 10,000

Apr. 15 Apr. 30 Bal.

Salaries Expense 1,000 1,000 2,000

Apr. 6 27 Bal.

Advertising Expense 500 300 800

Apr. 19

Supplies Expense 200

Apr. 18

Utilities Expense 100

Apr. 25

Income Tax Expense 880

17,500

PROBLEM 3.9B (CONTINUED) c.

KG SKATING SCHOOL INC. Trial Balance April 30, 2024 Debit Cash Equipment Accounts payable Deferred revenue Common shares Retained earnings Fees earned Rent expense Salaries expense Advertising expense Supplies expense Utilities expense Income tax expense Totals

Credit

$11,020 2,500 $

300 2,200 1,000 6,000 17,500

10,000 2,000 800 200 100 880 $27,000

_ $27,000

(Asset and expense accounts have debit balances) LO 3,4,5 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.10B a. ASIAN IMPORTERS LIMITED Trial Balance January 31, 2024 (thousands) Debit Cash Accounts receivable Prepaid insurance Land Buildings Accumulated depreciation—buildings Equipment Accumulated depreciation—equipment Goodwill Accounts payable Other current liabilities Bank loan payable (due 2026) Mortgage payable Common shares Retained earnings Dividends declared Service revenue Salaries expense Office expense Interest expense Income tax expense Totals

Credit

$ 10,000 30,200 3,950 116,750 39,500 $ 13,000 10,900 3,600 7,600 46,300 12,200 10,050 19,750 32,900 37,050 1,850 370,000 244,200 67,750 2,150 10,000 $544,850

00000 0 $544,850

(Asset, dividends declared, and expense accounts have debit balances. Liability, common shares, retained earnings, and revenue accounts have credit balances)

PROBLEM 3.10B (CONTINUED) b.

The following are some steps to help find the error(s) in a trial balance: 1.

If the error (difference between the debit and credit totals) is an amount such as $1, $100, or $1,000, re-add the trial balance columns and recalculate the account balances. If the error can be evenly divided by two, scan the trial balance to see if a balance equal to half the error has been entered in the wrong column. If the error can be evenly divided by nine, retrace the account balances on the trial balance to see whether they have been incorrectly copied from the ledger. For example, if a balance was $12 but was listed as $21, a $9 error has been made. Reversing the order of numbers is called a transposition error. A slide, which is adding or deducting one or several zeros in a figure, has the same effect. If the error cannot be evenly divided by two or nine, scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance. Scan the journal to see whether a posting in the amount of the error has been omitted.

When all else fails, all of the transactions should be carefully traced through the process again. LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.11B ASIAN IMPORTERS LIMITED Statement of Income Year Ended January 31, 2024 (thousands) Revenues Service revenue Expenses Salaries expense Office expense Interest expense Total expenses Income before income tax Income tax expense Net income

$370,000 $244,200 67,750 2,150 314,100 55,900 10,000 $ 45,900

ASIAN IMPORTERS LIMITED Statement of Changes in Equity Year Ended January 31, 2024

Balance, February 1, 2023 Issued common shares Net income Dividends declared Balance, January 31, 2024

Common Shares

Retained Earnings

$20,000 12,900

$37,050

000 000 $32,900

45,900 (1,850) $81,100

Total Equity $ 57,050 12,900 45,900 (1,850) $114,000

PROBLEM 3.11B (CONTINUED) ASIAN IMPORTERS LIMITED Statement of Financial Position January 31, 2024 (thousands) Assets Current assets Cash Accounts receivable Prepaid expenses Total current assets Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Goodwill Total assets

$10,000 30,200 3,950 $44,150 $116,750 $39,500 13,000 $10,900 3,600

26,500 7,300

150,550 7,600 $202,300

PROBLEM 3.11B (CONTINUED) a. (continued)

Liabilities and Shareholders' Equity Liabilities Current liabilities Accounts payable Current portion of mortgage payable Other current liabilities Total current liabilities Non-current liabilities Mortgage payable ($19,750 − $6,300) $13,450 Bank loan payable 10,050 Total non-current liabilities Total liabilities Shareholders' equity Common shares $32,900 Retained earnings 81,100 Total shareholders‘ equity Total liabilities and shareholders‘ equity

$ 46,300 6,300 12,200 64,800

23,500 88,300

114,000 $202,300

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared] LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 3.12B a.

(1)

General: Eight accounts are listed in the wrong columns: Accumulated depreciation (credit), Accounts payable (credit), Common Shares (credit), and all five expense accounts (debit).

(2) 1.

Each of the Prepaid Insurance, Accounts Payable, and Income Tax Expense accounts are understated by $100. Note also that the last two accounts—Accounts Payable and Income Tax Expense—are also listed in the wrong debit/credit column as described above in (1). Before these errors were identified, the Prepaid Insurance account was missing and each of the Accounts Payable and Income Tax Expense accounts were in debit and credit columns, respectively, and each understated $100 so one of the reasons the trial balance did not balance was because the Prepaid Insurance account had been omitted.

The trial balance is out of balance by $270 ($14,529 – $14,259) because of the transposition error. Service Revenue is overstated by $270, as is the total for the credit column.

The trial balance is not out of balance because of this recording error. The Salaries Expense account is overstated by $750 and the Dividends Declared account understated by the same amount. The Dividends Declared account is not included in the incorrect trial balance, so it needs to be included.

The trial balance is not out of balance because of this recording error. The total for the debit column is lower by $120 (because the Cash account is understated) and the credit column is lower by $120 (because the Accounts Payable account is understated). Recall that the Accounts Payable account is one of the accounts listed in the wrong column (debit instead of credit).

The trial balance is not out of balance because of this omission; only the accounts and amounts appearing on the trial balance are affected. The Equipment and Bank Loan Payable accounts are each understated by $2,000.

PROBLEM 3.12B (CONTINUED) b. MESSED UP LTD. Trial Balance May 31, 2024 Debit Cash ($2,997 + $120) Accounts receivable Prepaid insurance (+$100) Equipment ($9,200 + $2,000) Accumulated depreciation—equipment Accounts payable ($4,600 + $100 + $120) Bank loan payable (+$2,000) Common shares Dividends declared (+$750) Service revenue ($14,529 –$14,529 + $14,259) Salaries expense ($8,150 – $750) Advertising expense Depreciation expense Insurance expense Income tax expense ($400 + $100) Totals

Credit

$ 3,117 2,630 100 11,200 $ 4,200 4,820 2,000 4,250 750 14,259 7,400 1,132 2,100 600 500 $29,529

0 $29,529

(Asset, dividends declared, and expense accounts have debit balances) LO 5 BT: AN Difficulty: C Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

ACR3.1 ACCOUNTING CYCLE REVIEW a. Date

Account Titles

Ref.

Debit

Credit

Jan. 2 Cash ....................................................................................................................... 1000 65,000 Common Shares (1,000 × $65) ...................................................................... 4000 65,000 4 Rent Expense ......................................................................................................... 7400 3,000 Cash............................................................................................................... 1000 3,000 5 Equipment .............................................................................................................. 2000 40,000 Cash............................................................................................................... 1000 10,000 Bank Loan Payable ........................................................................................ 3100 30,000 8 Advertising Expense ............................................................................................... 7000 500 Cash............................................................................................................... 1000 500 10 Supplies .................................................................................................................. 1200 1,000 Accounts Payable .......................................................................................... 3000 1,000 11 Advertising Expense ............................................................................................... 7000 3,000 Cash............................................................................................................... 1000 3,000 12 Salaries Expense .................................................................................................... 7100 7,500 Cash............................................................................................................... 1000 7,500 15 Accounts Receivable ............................................................................................. 1100 15,000 Service Revenue ............................................................................................ 5000 15,000 17 Office Expense ...................................................................................................... 7300 1,000 Cash ............................................................................................................... 1000 1,000 19 Prepaid Insurance .................................................................................................. 1300 6,000 Cash ............................................................................................................... 1000 6,000

ACR3.1 (CONTINUED) a. (continued) Date

Account Titles

Ref.

Debit

Credit

Jan. 24 Cash ....................................................................................................................... 1000 10,000 Accounts Receivable ...................................................................................... 1100 10,000 25 Dividends Declared ................................................................................................ 4900 500 Cash ............................................................................................................... 1000 500 26 Salaries Expense .................................................................................................... 7100 7,500 Cash ............................................................................................................... 1000 7,500 29 Accounts Receivable ............................................................................................... 1100 18,000 Service Revenue ............................................................................................ 5000 18,000 30 Interest Expense ..................................................................................................... 7200 200 Bank Loan Payable ................................................................................................. 3100 700 Cash ............................................................................................................... 1000 900 31 Income Tax Expense............................................................................................... 9000 1,500 Cash ............................................................................................................... 1000 1,500

ACR3.1 (CONTINUED) b.

Jan.

Cash 65,000 Jan. 10,000

2 24

4 5 8 11 12 17 19 25 26 30 31

Jan. 31 Bal.

33,600

Accounts Receivable Jan. 15 15,000 Jan. 24 29 18,000 Jan. 31 Bal. 23,000

Jan. 10

#1000 3,000 10,000 500 3,000 7,500 1,000 6,000 500 7,500 900 1,500

Supplies 1,000

#1100 10,000

#1200

Jan. 19

Prepaid Insurance 6,000

#2000

Jan. 5

Equipment 40,000 Accounts Payable Jan. 10

#3000 1,000

Bank Loan Payable 700 Jan. 5 Jan 31 Bal.

#3100 30,000 29,300

Jan. 30

Jan. 25

Common Shares Jan. 2

#4000 65,000

Dividends Declared 500

#4900

Service Revenue Jan. 15 29 Jan. 31

#5000 15,000 18,000 Bal. 33,000

Advertising Exepense Jan. 8 500

#7000

3,000

11 Jan. 31

Bal. 3,500

Jan. 12

Salaries Expense 7,500

#7100

7,500 26 Jan. 31 Bal. 15,000

#1300

Interest Expense 200

#7200

Jan. 30

Office Expense 1,000

#7300

Jan. 17

#7400

Jan. 4

Rent Expense 3,000 Income Tax Expense 1,500

#9000

Jan. 31

ACR3.1 (CONTINUED)

1000 1100 1200 1300 2000 3000 3100 4000 4900 5000 7000 7100 7200 7300 7400 9000

SOFTWARE ADVISORS LIMITED Trial Balance January 31, 2024

Cash Accounts receivable Supplies Prepaid insurance Equipment Accounts payable Bank loan payable Common shares Dividends declared Service revenue Advertising expense Salaries expense Interest expense Office expense Rent expense Income tax expense

Debit $ 33,600 23,000 1,000 6,000 40,000

Credit

$ 1,000 29,300 65,000 500 33,000 3,500 15,000 200 1,000 3,000 1,500 $128,300

0 $128,300

(Asset, dividends declared, and expense accounts have debit balances)

ACR3.1 (CONTINUED) d. (1) SOFTWARE ADVISORS LIMITED Statement of Income Month Ended January 31, 2024 Revenues Service revenue Expenses Salaries expense Advertising expense Rent expense Office expense Interest expense Total expenses Income before income tax Income tax expense Net income

$33,000 $15,000 3,500 3,000 1,000 200 22,700 10,300 1,500 $ 8,800

d. (2) SOFTWARE ADVISORS LIMITED Statement of Changes in Equity Month Ended January 31, 2024

Balance, January 1 Issued common shares Net Income Dividends declared Balance, January 31

Common Shares $ 0 65,000 0 $65,000

Retained Earnings $ 0 8,800 (500) $8,300

Total Equity $ 0 65,000 8,800 (500) $73,300

ACR3.1 (CONTINUED) d. (3) SOFTWARE ADVISORS LIMITED Statement of Financial Position January 31, 2024 Assets

Current assets Cash Accounts receivable Supplies Prepaid insurance Property, plant, and equipment Equipment

$33,600 23,000 1,000 6,000

$63,600 40,000 $103,600

Total assets Liabilities and Shareholders‘ Equity Current liabilities Accounts payable Non-current liabilities Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total liabilities and shareholders‘ equity

$ 1,000 29,300 30,300 $65,000 8,300

73,300 $103,600

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared] LO 3,4,5 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

ACR3.2 ACCOUNTING CYCLE REVIEW a. Aug. 1 Advertising Expense ........................................ Cash .........................................................

250

2 Deferred Revenue ........................................... Service Revenue ......................................

1,260

3 Rent Expense .................................................. Cash .........................................................

980

6 Cash ................................................................ Accounts Receivable ................................

1,200

250

1,260

980

1,200

7 No entry, not a transaction 9 Salaries Payable ............................................. Salaries Expense ............................................ Cash .........................................................

1,420 1,700

13 Cash ................................................................ Service Revenue ......................................

2,800

15 Equipment ....................................................... Bank Loan Payable ..................................

2,000

20 Accounts Payable ............................................ Cash .........................................................

2,000

22 Supplies .......................................................... Accounts Payable ....................................

800

3,120

2,800

2,000

800

ACR3.2 (CONTINUED) a. (continued) Aug. 23 Salaries Expense ............................................ Cash .........................................................

2,900

27 Accounts Receivable ....................................... Service Revenue .....................................

3,760

29 Cash ................................................................ Deferred Revenue ...................................

780

30 Bank Loan Payable ......................................... Interest Expense ............................................. Cash .........................................................

500 50

31 Income Tax Expense ....................................... Cash .........................................................

380

31 Dividends Declared ......................................... Cash .........................................................

0400

2,900

3,760

780

550

380

400

ACR3.2 (CONTINUED) b.

Aug. 31

Cash 8,040 Aug. 1 1,200 3 2,800 9 20 780 23 30 31 31 2,240

July 31 27 Aug. 31

Accounts Receivable 3,200 Aug. 6 3,760 Bal. 5,760

July 31 Aug. 22 Aug. 31

Supplies 1,030 800 Bal. 1,830

July 31 Aug. 15 Aug. 31

Equipment 10,000 2,000 Bal. 12,000

July 31 Aug. 6 13 29

250 980 3,120 2,000 2,900 550 380 400

Aug. 31

Aug. 9

Bank Loan Payable July 31 500 Aug. 15 Aug. 31

4,000 2,000 Bal. 5,500

Common Shares July 31

14,000

Dividends Declared 400 Service Revenue Aug. 2 1,260 Aug. 13 2,800 Aug. 27 3,760 Aug. 31 Bal. 7,820

Vehicles 25,000

Accounts Payable July 31 2,300 2,000 Aug. 22 800 Aug. 31 Bal. 1,100 Salaries Payable 1,420 July 31 Aug. 31

1,260 780 Bal. 780

Retained Earnings July 31 Bal. 17,290

Accumulated Depreciation—Vehicles July 31 5,000

Aug. 20

Aug. 30

1,200

Accumulated Depreciation—Equipment July 31 2,000

July 31

Aug. 2

Deferred Revenue July 31 1,260 Aug. 29 Aug. 29

1,420 Bal. 0

Aug. 1

Advertising Expense 250

Aug. 3

Rent Expense 980

9 23 Aug. 31

Salaries Expense 1,700 2,900 4,600

Aug. 30

Interest Expense 50

Aug. 31

Income Tax Expense 380

Aug.

ACR3.2 (CONTINUED) c. B&B REPAIR SERVICES LTD. Trial Balance August 31, 2024

Cash Accounts receivable Supplies Equipment Accumulated depreciation—equipment Vehicles Accumulated depreciation—vehicles Accounts payable Deferred revenue Bank loan payable Common shares Retained earnings Dividends declared Service revenue Advertising expense Rent expense Salaries expense Interest expense Income tax expense

Debit $ 2,240 5,760 1,830 12,000

Credit

$ 2,000 25,000 5,000 1,100 780 5,500 14,000 17,290 400 7,820 250 980 4,600 50 380 $53,490

$53,490

(Asset, dividends declared, and expense accounts have debit balances)

ACR3.2 (CONTINUED) d. B&B REPAIR SERVICES LTD. Statement of Income Month Ended August 31, 2024 Revenues Service revenue Expenses Salaries expense Rent expense Advertising expense Interest expense Total expenses Income before income tax Income tax expense Net income

$7,820 $4,600 980 250 50 5,880 1,940 380 $1,560

B&B REPAIR SERVICES LTD. Statement of Changes in Equity Month Ended August 31, 2024 Common Shares Balance, July 31 Net income Dividends declared Balance, August 31

$14,000 0 $14,000

Retained Earnings $17,290 1,560 (400) $18,450

Total Equity $31,290 1,560 (400) $32,450

ACR3.2 (CONTINUED) d. (continued) B&B REPAIR SERVICES LTD. Statement of Financial Position August 31, 2024 Assets

Current assets Cash Accounts receivable Supplies Property, plant, and equipment Equipment Accumulated depreciation—equipment Vehicles Accumulated depreciation—vehicles

$2,240 5,760 1,830 $12,000 2,000 $25,000 5,000

$ 9,830

$10,000 20,000

Total assets

30,000 $39,830

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable Deferred revenue Non-current liabilities Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total liabilities and shareholders‘ equity

$1,100 780

$ 1,880 5,500 7,380

$14,000 18,450

32,450 $39,830

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

ACR3.2 (CONTINUED) e. Payments: Cash flow Aug.

1 3

980 Rent

Operating Operating

3,120 Salaries

Operating

2,000 On account to suppliers

Operating

2,900 Salaries

Operating

$ 250 Advertising

550 Loan principal $500

Financing

Loan interest $50

Operating

380 Income tax

Operating

400 Dividends declared and paid

Financing

1,200 On account from customers

Operating

2,800 Revenue

Operating

Receipts: Aug.

780 Deferred revenue

Operating

LO 3,4,5 BT: AP Difficulty: M Time: 70 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

ct3.1

FINANCIAL STATEMENT IMPACT

Transaction 1. Issued common shares for $50,000. 2. Purchased supplies with a cost of $6,300 on account. 3. Performed services for customers on account, earning revenue of $5,900. 4. Paid salaries of $2,100 to employees. 5. Collected $4,200 from customers making payments on their accounts. 6. Paid $1,600 for 12 months of insurance coverage. Coverage period begins in the following month. 7. Paid suppliers $3,600 related to the supplies purchased in transaction #2. 8. Declared and paid dividends of $1,200 to shareholders

Total Assets increase increase

Total Liabilities no change Increase

Net Income no change no change

Cash Flow

increase

no change

Increase

no change

decrease

no change

decrease

increase decrease increase decrease

no change

increase

no change

decrease

no change

decrease

no change

decrease

increase no change

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

CT3.2 a.

North West ($ in thousands)

Total Assets =

Total Liabilities +

$1,219,273 =

$639,069 +

FINANCIAL REPORTING CASE

Shareholder's Equity $173,081 Share capital 355,674 Retained earnings Other equity items (contributed surplus $12,530 and accumulated other comprehensive income $22,350, and non- controlling 51,449 interest $16,569) $580,204

Sobeys ($ in millions)

Total Assets =

Total Liabilities +

$15,366.1 =

$11,245.6 +

Shareholder's Equity $ 2,877.9 Capital stock 978.2 Retained earnings Other equity items (contributed surplus $126.9, accumulated other comprehensive loss $4.9, and non264.4 controlling interest $142.4) $4,120.5

Sobeys has about 13 times the assets compared to North West ($15,366.1 million compared to $1,219.3 million). However, it also has 18 times the liabilities ($11,245.6 million compared to $639.1 million) which is why its shareholders‘ equity is proportionately lower. Sobeys‘s shareholders‘ equity is more than 7 times the equity reported by North West ($4,120.5 million compared to $580.2 million). North West‘s share capital comprises about 30% of its total shareholders‘ equity whereas Sobeys‘s is more than 70% of its total equity.

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT3.3

FINANCIAL REPORTING CASE

Uber‘s network of riders and drivers are resources available to the business but are not assets owned or controlled by the business. Nor can the company predict the future economic benefits to be contributed by a person or measure the ―value‖ of a person. Consequently, people are not recorded in the accounting records.

Uber would likely report current assets such as cash, accounts receivable, and supplies. Its non-current assets likely consist of property, plant, and equipment such as office furniture and equipment and computer systems including hardware and software. It also would report intangible assets such as the software developed to run its ride-sharing app. In addition, this category would include technology the company purchased from Microsoft related to street imaging and 3-D views.

The valuation given by the market to Uber Technologies Inc. is not based on the assets on its statement of financial position but on investors‘ perception of its ability to produce growth and income in the future.

LO 1,2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic and Tech. CPA: cpa-t001 CM: Reporting

ct3.4

FINANCIAL analysis CASE

a. Assets

Cash

Accounts + Receivable

= Prepaid + Rent

1. 2. 3. 4. 5. 6. 7. 8. 9.

+$10,000

-1,000

00 0 000

00 000

Aug. 31 Bal.

+$3,100

+$39,400

+$3,500

+190,000 -45,500 -120,000 -32,400 +2,000

Income Accounts Tax Payable = + Payable

Shareholders' Equity Retained Earnings

Deferred Revenue.

Common Shares

+ Revenue

- Expenses

Div. - Declared

+$10,000 +$229,400 -190,000

+$229,400 +$3,500

-$42,000 -120,000 -36,400

+$4,000 +$2,000

Total assets = $46,000 b.

Liabilities

0 00 00

+$6,200 0 00000

0 0 0 00

0 0 0000

+$4,000

+$6,200

+$2,000

+$10,000

0 0 0000

-6,200 00 0000

-$1,000

+$229,400

-$204,600

-$1,000

Total liabilities ($12,200) + shareholders‘ equity ($33,800) = $46,000

A spreadsheet can help, in a small business like Bob‘s Repairs, to organize information. However, it lacks the date, specific account title for multiple expenses, and explanation for each entry that one would find in a traditional general journal. It could assist in posting, although again it lacks any cross-referencing to allow transactions to be traced back to the source, if required. Finally, use of a spreadsheet, while convenient for very small businesses, would limit growth in the number of accounts and transactions.

CT3.4 (CONTINUED) c. BOB'S REPAIRS LTD. Statement of Income Year Ended August 31, 2024 Service revenue Expenses Salaries expense Rent expense Office expense Income before income tax Income tax expense Net income

$229,400 $120,000 42,000 36,400

198,400 31,000 6,200 $ 24,800

[Revenues – Expenses = Net income or (loss)]

BOB'S REPAIRS LTD. Statement of Changes in Equity Year Ended August 31, 2024

Balance, September 1 Issued common shares Net income Dividends declared Balance, August 31

Common Shares $ 0 10,000 00 0000 $10,000

Retained Earnings $ 0 24,800 (1,000) $23,800

Total Equity $ 0 10,000 24,800 (1,000) $33,800

CT3.4 (CONTINUED) c. (continued) BOB'S REPAIRS LTD. Statement of Financial Position August 31, 2024 Current assets Cash Accounts receivable Prepaid rent Total assets Current liabilities Accounts payable Income tax payable Deferred revenue Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$ 3,100 39,400 3,500 $46,000

$4,000 6,200 2,000 $12,200 $10,000 23,800 33,800 $46,000

Five of the cash transactions relate to operating activities: Cash collected from customers Payments to the landlord Salaries paid Payments for office expenses Customer advances Total effect on cash flow

$190,000 (45,500) (120,000) (32,400) 2,000 $ (5,900)

CT3.4 (CONTINUED) Uncle Bob would not be pleased to find out that operating cash flows were not positive. This can often happen during the first year that a company operates. The other two cash transactions not shown above are financing activities: the issue of common shares for $10,000 and the declaration and payment of dividends for $1,000. The net increase to cash of $9,000 allowed the company to have a positive cash balance $3,100 (−$5,900 + $9,000) at the end of the year. e.

The bank would want collateral for any loan given to the company. Usually such collateral consists of property, plant, or equipment and this company has none of these. It may be possible to secure a loan with accounts receivable but the company did not have this type of asset when it was first formed.

No, the company does not have enough cash to pay the income tax. The company would have to collect some accounts receivable if it hoped to pay the income tax.

The government levies income tax on corporations, which are considered legal entities, separate from their shareholders. Uncle Bob would pay income tax only on the dividends he received from the company.

LO 1 BT: E Difficulty: M Time: 55 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT3.5 a.

Student view case

On September 1, 2024, my personal equity would be as follows: Cash ................................................ Cellphone ........................................ Total assets ..................................... Less: student loan ........................... Personal equity, Sept. 1, 2024 ........

$21,000 200 21,200 (9,000) $12,200

Errors in the trial balance:  The cash amount should be the amount in the bank account at December 15.  The computer was recorded at $100 rather than the actual cost of $1,000.  The damage deposit of $400 for the residence has been omitted.  The travel costs are $450, not $540.

CT3.5 (CONTINUED) b. (continued) Personal Trial Balance December 15, 2024 Debit Cash ....................................................................... $ 7,400 Clothes ................................................................... 1,500 Cellphone ............................................................... 200 Computer ............................................................... 1,000 Damage deposit on residence ................................ 400 Student loan ........................................................... Personal equity ...................................................... Residence and meal plan fees ($1,100 per month) 4,400 Tuition for September to December ....................... 3,500 Books and course resources .................................. 600 Personal costs (personal items, entertainment, eating out) 1,500 Cellphone costs ...................................................... 250 Travel to go home at Christmas ............................. 450 $21,200

Credit

$ 9,000 12,200

____ __ $21,200

(Total of debit account balances = Total of credit account balances)

Expenses Clothes..................................................................... Residence and meal plan fees ($1,100 per month) . Tuition for September to December ......................... Books and course resources ................................... Personal costs (personal items, entertainment, eating out) Cellphone costs ....................................................... Travel to go home at Christmas ............................... Total expenses September to December ................. Personal equity, September 1 .................................. Total expenses......................................................... Personal equity, December 15 ................................. By December 31, 2024, the personal equity is nil.

$ 1,500 4,400 3,500 600 1,500 250 450 $12,200 $12,200 (12,200) $ 0

CT3.5 (CONTINUED) d.

Balance of cash December 15, 2024 ....................... Assumed expenses for second term same as first... Shortfall in cash .......................................................

Personal expenses in the first term are far too high. Some expenses that can be reduced in the second term include personal costs for entertainment and eating out. If half as much is spent in the second term, $750 can be saved. In addition, clothes expenses could be reduced to $300, saving another $1,200. Travel to go home can be eliminated. Finally, if the residence room is kept in good condition and with no damages, $400 for the damage deposit will be returned in cash.

$ 7,400 (12,200) $ 4,800

Personal expenses savings ..................................... Reduced clothing costs ............................................ Travel costs ............................................................. Return of residence damage deposit ....................... Additional cash made available ...............................

$ 750 1,200 450 400 $2,800

Cash shortfall ........................................................... Additional cash from spending changes .................. Ask parents for extra cash .......................................

$4,800 2,800 $2,000

LO 5 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT3.6

ethics case

Ron, here are some tips to help you find the $810 error in the trial balance assuming it is a single error: 1.

If the error is an amount such as $1, $100, or $1,000, re-add the trial balance columns and recalculate the account balances. This tip does not apply in this case because the difference between the debit and credit columns is $810. If the error can be evenly divided by two (which it can be in this case $810 ÷ 2 = $405), scan the trial balance to see if a balance equal to half the error has been entered in the wrong column. If the error can be evenly divided by nine (which it can be in this case $810 ÷ 9 = $90), retrace the account balances on the trial balance to see whether they have been incorrectly copied from the ledger. For example, if a balance was $12 but was listed as $21, a $9 error has been made. Reversing the order of numbers is called a transposition error. A slide, which is adding or deducting one or several zeros in a figure, has the same effect. If the error cannot be evenly divided by two or nine, scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance. Scan the journal to see whether a posting in the amount of the error has been omitted.

Note that these suggestions will not always work, especially if there is more than one error and sometimes, the only way to find an error is to retrace all of the work carefully.

CT3.6 (CONTINUED) b.

The stakeholders in this situation are: Ron Hollister The other students in the group who will be graded for Ron‘s work The other students in the class The professor The College or University attended by Ron Future employers of the graduates of the school

By adding $810 to the Salaries Expense account, the account total has been deliberately misstated. By not locating the error causing the imbalance, some other account or accounts may also be misstated by a net amount of $810. Ron did not advise his fellow team members of the action he has taken to avoid detection. While his motivation was most likely to meet the deadline for handing in the assignment, he also ―hoped no one would notice the difference‖ so he made this change with deliberate intent. It was inappropriate not to offer the other group members an opportunity to find the error in one or more of their parts of the assignment, or to take action without advising them. The entire group will be affected by Ron‘s actions and had no means of agreeing to the strategy taken to address the problem. As an aside, it is important for students to agree as a group on ―behavioural norms‖ ahead of time to help reduce the likelihood of unintended consequences affecting one or more of the group. The adding of the $810 to the Salaries Expense account is not by itself unethical in a classroom situation but it does not adhere to the qualitative characteristic of faithful representation of the numbers. The professor would obviously catch this error and grade the assignment accordingly. However, Ron‘s failure to inform other group members that he was changing amounts that they had prepared would be considered by many to be both inappropriate and unethical.

CT3.6 (CONTINUED) c. (continued) Although the assignment will not affect external users of a real financial report, it is important to understand that if this had been a real life situation, Ron‘s actions—both the changing of an account balance and the failure to inform—would be considered to be unethical because financial information was intentionally altered and done deliberately to mislead users. [See also the answer to part (e).] While Ron is not likely in breach of any rule or directive issued by the school concerning academic integrity, the professor and the other group members will not agree with the strategy used by Ron. They will wonder if this is the type of action Ron would take while at a future job. Such actions would then affect others who are not part of the school community and the reputation of the school would be diminished. This in turn could affect society‘s opinion of the past and future graduates of the school. d.

Ron's alternatives are: 1. Discuss the situation with the teammates and reach a consensus that it is better to miss the deadline but find the error causing the imbalance and suffer the corresponding penalty for submitting the assignment late. 2. Discuss the situation with teammates and reach a consensus to tell the professor of the imbalance and ask for an extension of time or suffer the consequences. 3. Discuss the situation with teammates and potentially get their assistance to locate the error causing the imbalance as a team effort so that the assignment can still submitted by the deadline.

CT3.6 (CONTINUED) e.

External users of the financial information prepared by Ron could potentially be affected by the errors that remain undetected. It is highly likely that another account may also be wrong on the financial statements. The consequences are more far reaching and so the behaviour is more serious. Deliberate deception for this purpose would be viewed as unethical.

LO 5 BT: S Difficulty: M Time: 20 min. AACSB: Analytic and Ethics CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

ct3.7

SERIAL CASE

a. June 5 Supplies ........................................................................ 2,500 Accounts Payable ....................................................

2,500

14 Equipment..................................................................... 2,520 Cash ........................................................................

2,520

16 Cash ............................................................................. 1,000 Deferred Revenue....................................................

1,000

19 Cash .............................................................................300 Deferred Revenue ........................................................100 Service Revenue ......................................................

400

21 Accounts Receivable .................................................... 2,040 Service Revenue ......................................................

2,040

27 Utilities Expense ...........................................................200 Accounts Payable ....................................................

200

29 No entry, not a transaction 30 Salaries Expense .......................................................... 3,250 Cash ........................................................................

3,250

30 Accounts Receivable .................................................... 2,550 Service Revenue ......................................................

2,550

CT3.7 (CONTINUED) b. Cash June Bal. 39,004 June 14 16 1,000 30 19 300 June 30 Bal. 34,534

2,520 3,250

Accounts Receivable June Bal. 5,900 21 2,040 30 2,550 June 30 Bal. 10,490

Equipment June Bal. 42,000 14 2,520 June 30 Bal. 44,520 Accumulated Depreciation—Equipment June 30 Bal. 14,000 Vehicles June 30 Bal. 52,500 Accounts Payable June Bal. 3,540 5 2,500 27 200 June 30 Bal. 6,240

Supplies June Bal. 18,125 5 2,500 June 30 Bal. 20,625 Prepaid Insurance 12,000

Land June 30 Bal.100,000

Deferred Revenue 100 June Bal. 100 16 1,000 June 30 Bal. 1,000

Buildings June 30 Bal. 165,000

Bank Loan Payable June 30 Bal. 22,500

Accumulated Depreciation—Buildings June 30 Bal. 137,500

Mortgage Payable June 30 Bal.

53,200

Common Shares June 30 Bal.

300

June Bal.

June 19

CT3.7 (CONTINUED) b. (continued)

Retained Earnings June 30 Bal. 146,788 Dividends Declared June 30 Bal. 30,000 Rent Income June 30 Bal.

Utilities Expense June Bal. 12,000 27 200 June 30 Bal. 12,200 6,000

Service Revenue June Bal. 633,768 19 400 21 2,040 30 2,550 June 30 Bal. 638,758 Salaries Expense June Bal. 438,668 30 3,250 June 30 Bal.441,918

Office Expense June 30 Bal. 18,000

Advertising Expense June 30 Bal. 9,000 Property Tax Expense June 30 Bal. 5,950 Interest Expense June 30 Bal. 5,299 Income Tax Expense June 30 Bal. 13,000

Supplies Expense June 30 Bal. 51,250

CT3.7 (CONTINUED) c. ANTHONY BUSINESS COMPANY LTD. Trial Balance June 30, 2023 Cash.................................................................. Accounts receivable .......................................... Supplies ............................................................ Prepaid insurance ............................................. Land .................................................................. Buildings ........................................................... Accumulated depreciation—buildings ............... Equipment ......................................................... Accumulated depreciation—equipment............. Vehicles ............................................................ Accounts payable .............................................. Deferred revenue .............................................. Bank loan payable ............................................ Mortgage payable ............................................. Common shares................................................ Retained earnings ............................................. Dividends declared ........................................... Rent income ...................................................... Service revenue ................................................ Salaries expense .............................................. Supplies expense .............................................. Office expense .................................................. Utilities expense ................................................ Advertising expense .......................................... Property tax expense ........................................ Interest expense ............................................... Income tax expense .......................................... Totals ................................................................

Debit $ 34,534 10,490 20,625 12,000 100,000 165,000

Credit

$ 137,500 44,520 14,000 52,500 6,240 1,000 22,500 53,200 300 146,788 30,000 6,000 638,758 441,918 51,250 18,000 12,200 9,000 5,950 5,299 13,000 $1,026,286

00 $1,026,286

(Liabilities, common shares, retained earnings, and revenue accounts have credit balances) LO 3,4,5 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Legal Notice

CHAPTER 4 Accrual Accounting Concepts LEARNING OBJECTIVES 1. Explain the accrual basis of accounting and the reasons for adjusting entries. 2. Prepare adjusting entries for prepayments. 3. Prepare adjusting entries for accruals. 4. Prepare an adjusted trial balance and financial statements. 5. Prepare closing entries and a post-closing trial balance.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item

BT Item LO Questions

BT Item

BT Item LO BT

13.

2,3

19.

2,3,5

25.

14.

2,3

20.

4,5

26.

15.

2,3

21.

4,5

16.

22.

17.

23.

13.

10.

11.

Brief Exercises 1.

2,3

10.

14.

11.

1,2,3

15.

12.

16.

17.

Exercises 1.

2,3

13.

2,3,4

17.

10.

2,3

14.

18.

11.

2,3

15.

19.

12.

2,3

16.

2,3,4

13. 14.

Problems: Set A and B 1.

2,3

1,2,3,4

10.

2,3

11.

2,3,4

12.

4,5

2,3,4

2,3,4 AN 5

Accounting Cycle Review 1.

2,3,4,5

2,3,4

1,2,3

1,2

2,3

Cases 7.

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self.Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

Difficulty:

Time: AACSB

CPA CM cpa.e001 cpa.e002 cpa.e003 cpa.e004 cpa.e005 cpa.t001 cpa.t002 cpa.t003 cpa.t004 cpa.t005 cpa.t006

ANSWERS TO QUESTIONS 1.

Adjusting entries are made to update the accounts at the end of the period to ensure revenues and expenses are recorded when they are earned or incurred. When revenues and expenses should be recognized in the accounting records is dictated by recognition criteria. Revenue is recognized or recorded when an increase in future economic benefits arising from an increase in an asset or a decrease in a liability has occurred in the course of ordinary activities. In general, revenue recognition occurs when or as the performance obligation has been satisfied. In a service company, revenue is considered to be earned when the service is provided. In a merchandising company, revenue is considered to be earned when the merchandise is sold (normally at the point of sale). Expenses are recognized in the accounting records when there is a decrease in future economic benefits related to a decrease in an asset or an increase in a liability in the course of ordinary activities. Expense recognition is linked to revenue recognition in that expenses are recognized, wherever possible, in the period in which a company makes efforts to generate revenues. This gives rise to adjusting entries so that revenues and expenses can be recorded in the proper period.

LO 1 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

The five-step process to use to measure and report revenue is: 1. 2. 3. 4.

(b)

Identify the contract with the client or customer. Identify the performance obligations in the contract. Determine the transaction price. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the company satisfies the performance obligations. For the engineering firm: 1. The contract was created in March between the engineering firm and the client when the engagement was accepted by the engineering firm. 2. The performance obligation in the contract is to provide consulting services. 3. The transaction price is $8,000. 4. Since there is only a single performance obligation, the transaction price will be allocated to that obligation. 5. The revenue is recognized by the engineering firm once it satisfies the obligation under the engagement and performs the work for the client in April.

LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

Expenses of $4,500 should be deducted from the revenues in April because that is when the expenses were incurred and the revenues earned.

LO 1 BT: C Difficulty: S Time: 2 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

It is necessary for companies to allocate the transaction price to each performance obligation identified in the contract to follow the revenue recognition principle. Revenue should be recognized when a performance obligation is satisfied. When completing multiple performance obligations in a single contract, it is possible that the satisfaction of different performance obligations will occur in different accounting periods. The measurement of the revenue to be recognized for each performance obligation must be calculated at the beginning of the work in order to determine the amount of revenue to be recognized and recorded as each permance obligation is satisfied.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

(b)

(c)

Accrual-basis financial statements provide reporting of assets, liabilities, and shareholders‘ equity as well as revenues and expenses. They include receivables and payables to ensure that revenues are recorded when earned and expenses recorded when incurred in the period revenue is generated. Receivables and payables do not exist under the cash basis of accounting. The cash-basis financial statements provide reliable reporting of cash receipts and cash disbursements. No estimates are required, as is the case with accrual-basis financial statements. Companies using IFRS or ASPE cannot choose between the cash and accrual basis of accounting for financial reporting purposes because generally accepted accounting principles require the accrual basis. In addition, the cash basis could allow for the manipulation of income by delaying or speeding up the timing of cash flows.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

The two main types of adjusting entries are prepayments and accruals. Prepayment examples include prepaid insurance and deferred revenue. Accual examples include interest expense and salaries expense. A company will record adjusting journal entries each time it prepares financial statements.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

Prior to recording an adjusting journal entry for accrued revenues of $780, the net income is understated by $780 due to an omitted revenue. Prior to recording an adjusting journal entry for accrued expenses of $510, the net income is overstated by $510 due to an omitted expense. The net effect is $270 ($780 - $510) understatement of net income prior to the recording of the two adjusting journal entries.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a) (b)

Prepaid expenses are assets because they have a future benefit since they are paid for before they are used or consumed. As the benefit of the prepayment expires, (often with the passage of time) the asset must be reduced and an expense recognized. This requires an adjustment at the end of each accounting period, to expense the portion of the prepaid that has expired (been used up) during the period.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

(b)

Deferred revenue arises when cash is received for goods or services to be provided in the future. It represents a liability because the cash has not yet been earned—the company has a future obligation to provide the goods or services. Deferred revenues must be adjusted at the end of an accounting period to reflect any revenues that have been earned.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

10.

No. Depreciation is the process of allocating the cost of a long-lived asset to expense over its useful life. Depreciation results in the presentation of the carrying amount (cost less accumulated depreciation) of the asset, not its fair value.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

11.

(a)

Depreciation expense is an expense account with a normal debit balance and is reported on the statement of income as part of the operating expenses. This account shows the portion of the cost of a long-lived asset that has expired during the current accounting period. Accumulated depreciation is a contra asset account with a normal credit balance that is reported on the statement of financial position as a reduction of a depreciable asset (such as building and equipment). The balance in the accumulated depreciation account is the total depreciation that has been recognized from the date of acquisition of the depreciable asset to the statement of financial position date.

(b)

Cost is the original cost of the asset when purchased. The carrying amount is the original cost of the asset less its related accumulated depreciation, and represents the portion of the asset that has not yet been depreciated.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

12.

A contra asset account is an account with a credit balance that is deducted from the related asset account on the statement of financial position. Using a contra asset account, such as Accumulated Depreciation, enables disclosure of both the original cost of the asset and the total estimated cost that has expired or been used up to date. This information is useful to the financial statement user who can determine how long until the asset is fully depreciated.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

13.

Yes, I agree. A ―simple‖ adjusting entry affects one statement of financial position account and one statement of income account. An adjusting entry reallocates amounts between a statement of financial position account and an statement of income account. For example: to record the expiration of insurance the following entry would be recorded; a debit to Insurance Expense (an statement of income account) and a credit to Prepaid Insurance (a statement of financial position account). Compound adjusting journal entries are also possible which would affect more accounts, but at least one statement of financial position account and one statement of income account are always affected whether a simple adjusting entry or a compound adjusting entry is made.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

14.

Disagree. Adjusting entries never involve the Cash account. In making adjusting entries for prepayments, the cash has already been paid or received and recorded. The adjusting journal entry is prepared to reflect the fact that a portion of the deferred revenue or prepaid expense arising in the past when the cash flow occurred is now earned or incurred. In making adjusting entries for accruals, we record the fact that, although the cash has not been paid or received, revenue has been earned or an expense has been incurred. Again, there is no impact on the Cash account because cash has not yet been received or paid but is expected to be, subsequently.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

15.

To ensure that the adjusting entry is properly calculated and prepared, the preparer of the adjusting entry must first properly understand the original cash payment transaction that lead to the recording of the prepayment. For example, if you are preparing an adjusting entry to record the supplies on hand, you must know first how much is already recorded. On the other hand, in the case of an accrual, there is no cash payment to look up in the accounts. Consequently, there is no original entry to examine in the process of preparing an adjusting entry related to an accrual.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

16.

(a)

Yes, it does matter whether the adjusting entry is made on December 31. If the interest is not accrued on December 31, then expenses (interest expense) and liabilities (interest payable) will both be understated in that year‘s financial statements. In addition, expenses (interest expense) will be overstated in the subsequent year, when the expense is recorded (incorrectly) when paid on January 1. By not making this journal entry, expenses will not be matched with the period in which the loan was available for use.

(b)

The correct journal entries are as follows: Dec. 31 Interest Expense .............................. Interest Payable.........................

100

Jan. 1

100

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

100

If no entry is made on Dec. 31, and interest expense is recorded on January 1 when paid, interest expense will be understated by $100 and interest payable will be understated by the same amount for the year ended December 31, 2024. LO 3 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

17.

a. Salaries Expense is debited b. Depreciation Expense is debited c. Interest Payable is credited d. Supplies is credited e. Accounts Receivable is debited f. Deferred Revenue is debited

Salaries Payable is credited Accumulated Depreciation is credited Interest Expense is debited Supplies Expense is debited. Service Revenue is credited Service Revenue is credited

LO 3 BT: C Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

18.

Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period. An unadjusted trial balance is not up to date for prepayments and accruals.

LO 4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

19.

(a)

(b)

Initial transaction entries are made throughout the accounting period when transactions arise. Adjusting entries are only recorded at the end of the accounting period, prior to the preparation of the financial statements. As well, adjusting entries never affect the Cash account and always result in an adjustment to a statement of financial position account and an statement of income account. Transaction entries often result in a debit or credit to Cash and can affect any account on the statement of financial position or the statement of income (or both). Closing entries are required to reset the revenue and expense (statement of income) and dividend declared accounts to zero and to update the balance in Retained Earnings to the ending balance as shown in the statement of changes in equity. Unlike adjusting entries, which are prepared before the financial statements are prepared and could be prepared more than once per year (for example, monthly, quarterly), closing entries are only prepared and posted after the year-end financial statements have been completed.

LO 2,3,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

20.

The unadjusted, adjusted, and post-closing trial balances are similar in that they prove the equality of the total debit and total credit balances. Another similarity between the unadjusted and adjusted trial balances is that they are prepared at the end of an accounting period. Where trial balances differ is that the unadjusted trial balance is prepared before any adjusting entries have been recorded or posted. An adjusted trial balance is prepared after the adjusting entries have been posted to the accounts. The financial statements are prepared from the adjusted trial balance. After the financial statements have been prepared, closing entries are prepared and posted. The post-closing trial balance is then prepared and used to form the basis of the opening balances for the next accounting period. Unlike the adjusted trial balance which will list temporary (revenue, expense, dividend declared) account balances prior to recording the closing entries, a post-closing trial balance will not list temporary account balances as these have now been closed out to the Retained Earnings account. Unadjusted and adjusted trial balances are prepared whenever financial statements are prepared but a post-closing trial balance is prepared only at the end of the year.

LO 4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

21.

The retained earnings balance on the unadjusted and adjusted trial balances are the same since adjusting entrues never affect retained earnings and the account does not yet reflect the changes that arise from the recording of closing entries. After the adjusted trial balance and financial statements are prepared, closing entries are recorded. These will change the retained earnings balance by updating it for the effect of any net income or loss and dividends declared. Consequently, the retained earnings balance on the post-closing trial balance will be different from the balance shown on the adjusted trial balance.

LO 4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

22.

Closing entries are prepared to transfer temporary account balances to retained earnings, a permanent account, so retained earnings will show an up-to-date amount that includes the effect of revenues, expenses, and dividends declared for the year. Secondly, closing entries produce a zero balance in each temporary account so that the temporary accounts are ready for the next accounting period, where only transactions relating to that period are recorded in them.

LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

23.

The Dividends Declared account is not closed into the Income Summary account along with the expense accounts because it is not an expense; it was not incurred for the purpose of generating revenue and does not appear on the statement of income. Dividends Declared represent a distribution of retained earnings and is reported on the statement of changes in equity. The Dividends Declared account is also a temporary account and therefore requires a closing entry.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

24.

The Income Summary account is used in the closing process to avoid having too much detail in the Retained Earnings account. Only the net result of the revenues less expenses will be recorded as a closing entry from the Income Summary account to the Retained Earnings account. Before closing the Income Summary account, the net balance is compared to the statement of income to ensure that the amounts used in closing the revenue and expense temporary accounts are complete and accurate. The Income Summary account does not appear on the financial statements because it contains the balance remaining when all the revenue and expenses have been closed to it. The revenue and expense accounts already appear in the income statement.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

25.

(a) (1) (2) (3) (4)

Net income: (Dr) Individual revenue accounts and (Cr) Income Summary (Dr) Income Summary and (Cr) Individual expense accounts (Dr) Income Summary and (Cr) Retained Earnings (Dr) Retained Earnings and (Cr) Dividends Declared

(b) (1) (2) (3) (4)

Net loss: (Dr) Individual revenue accounts and (Cr) Income Summary (Dr) Income Summary and (Cr) Individual expense accounts (Dr) Retained Earnings and (Cr) Income Summary (Dr) Retained Earnings and (Cr) Dividends Declared

Note that it is only step 3 that differs between the two situations shown in (a) and (b) and Income Summary is not involved in the fourth closing entry. LO 5 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

26.

Steps in the accounting cycle that may be done on a daily basis include: 1. Analyzing business transactions 2. Journalizing the transactions Steps in the accounting cycle that are done on a periodic basis include: 3. Posting to the general ledger accounts 4. Preparing a trial balance 5. Journalizing and posting adjusting entries (prepayments and accruals) 6. Preparing an adjusted trial balance 7. Preparing the financial statements: statement of income, statement of changes in equity, statement of financial position, and statement of cash flows Steps in the accounting cycle that are usually only done at the end of the company‘s accounting period include: 8. Journalizing and posting closing entries 9. Preparing a post-closing trial balance

LO 5 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4.1 a. b. c. d. e. f. g. h. i. j. k.

Cash –$ 100 0 0 +800 –5,000 0 +1,000 0 +500 0 0

Net Income $ 0 –75 +1,000 0 0 –1,000 0 –50 0 +200 –250

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.2 a. b. Accrual Cash Basis Basis 1. Collected $200 cash from customers for services provided in August.

$200

2. Collected $500 cash from customers for services provided in September.

500

3. Billed customers $600 for services provided in September.

600

4. Provided $100 of services to customers who paid in advance in August.

100

5. Received $100 from customers in advance for services to be provided in October. Total revenue

$1,200

$800

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.3 Step Step 1: Is there a contract?

Step 2: What performance obligations are included in the contract? Step 3: What is the transaction price? Step 4: How should the transaction price be allocated to the performance obligations? Step 5: Has a performance obligation been satisfied?

Analysis Yes, both parties have agreed to enter into a contract. The services to be provided, price, and payment terms have been agreed to and each party‘s rights under the contract are clear. The contract is consistent with both parties‘ lines of business, meaning it has commercial substance. There are no indications of any concerns regarding collectibility of the rail passes. The contract includes a single performance obligation: providing transportation service.

The transaction price is $416,000. (2,600 x $160) Because there is only a single performance obligation, the transaction price does not have to be allocated.

Revenue for the month of January should be recognized by Commuter Rail Ltd. after it has performed the delivery of the serviced for the month. Once the transportation service has been provided, that portion (1/4) of the performance obligation has been satisfied and revenue in the amount of $104,000 ($416,000 ÷ 4) can be recognized.

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.4 a.

Jan. 11

Supplies ............................................. Accounts Payable........................

Supplies Used = $1,500 + $1,800 – $1,100 = $2,200

Jan. 31

Supplies Expense .............................. Supplies ......................................

1,800 1,800

2,200 2,200

Open. Bal. Jan. 11 Jan. 31 Bal.

Supplies 1,500 1,800 Jan. 31 Adj. 1,100

Supplies Expense Jan. 31 Adj. 2,200 2,200

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.5 a.

Jan. 2

Vehicles............................................. Cash ............................................

50,000 50,000

The journal entry for the years 2024 and 2025 will be the same: Dec. 31

Depreciation Expense ........................ 10,000 Accumulated Depreciation—Vehicles ($50,000 ÷ 5 = $10,000 per year)

10,000

c. CLAYMORE CORPORATION Statement of Financial Position (partial) December 31

Property, plant, and equipment Vehicles Less: Accumulated depreciation Carrying amount d.

2025

2024

$50,000 20,000 $30,000

$50,000 10,000 $40,000

The amount of depreciation expense for November 30, 2024 would change to $9,167 ($50,000 ÷ 5 = $10,000 × 11/12). The depreciation expense for November 30, 2025 would be in the amount of $10,000 calculated as in part b.

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.6 a. (1) Bere Ltd. June

Prepaid Insurance ....................................... Cash...................................................

6,000 6,000

(2) Safety Insurance Corp. June

Cash............................................................ Deferred Revenue ..............................

6,000 6,000

Expired in 2024 = $6,000 × 7/12 = $3,500 Unexpired at December 31, 2024 = $6,000 × 5/12 = $2,500

c. (1) Bere Ltd. Dec. 31

Insurance Expense ....................................... Prepaid Insurance ................................

3,500 3,500

(2) Safety Insurance Corp. Dec. 31

Deferred Revenue ....................................... Insurance Revenue ............................

3,500 3,500

BRIEF EXERCISE 4.6 (CONTINUED) d. Bere Ltd. Prepaid Insurance 6,000 Dec. 31 Adj. 3,500 Dec. 31 Bal. 2,500 June 1

Insurance Expense Dec. 31 Adj. 3,500

Safety Insurance Corp. Deferred Revenue June 1 Dec. 31 Adj. 3,500 Dec. 31 Bal.

6,000

Insurance Revenue Dec. 31 Adj.

3,500

2,500

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.7 a.

Sep. 25

Sep. 30

Oct. 2

Salaries Expense .............................................. Cash .........................................................

5,000

Salaries Expense (Sep. 27-30: $1,000 × 4 days) Salaries Payable ......................................

4,000

Salaries Expense (Oct. 1: $1,000 × 1 day) ....... Salaries Payable ............................................... Cash .........................................................

1,000 4,000

5,000

4,000

5,000

LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.8 a.

Nov. 30

Accounts Receivable......................................... Service Revenue ......................................

375 375

No, Zieborg will not have to make a journal entry on December 1 when it prepares the invoice because the November 30 adjusting entry already recorded the amount.

Jan. 10

Cash ................................................................. Accounts Receivable ................................

375 375

LO 3 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.9 a.

2024 July

2024 Dec. 31 2025 Dec. 31

2025 Jan. 2026 Jan.

Land ........................................................ Bank Loan Payable ......................... Cash ...............................................

500,000

Interest Expense ($400,000 × 6% × 6/12) Interest Payable ..............................

12,000

Interest Expense ($400,000 × 6%)........... Interest Payable ..............................

24,000

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

12,000

Bank Loan Payable .................................. Interest Payable ....................................... Cash ................................................

400,000 24,000

400,000 100,000

12,000

24,000

12,000

424,000

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.10 a.

2024 July

2024 Dec. 31

2025 Dec. 31 c.

2026 Jan.

Bank Loan Receivable ................................. Cash ...................................................

40,000

Interest Receivable ($40,000 × 6% × 6/12) Interest Income ...................................

1,200

Interest Receivable ($40,000 × 6%) ............. Interest Income ...................................

2,400

Cash ............................................................ Interest Receivable ($1,200 + $2,400) Bank Loan Receivable ........................

43,600

40,000

1,200

2,400

3,600 40,000

LO 3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.11 a. b. c. d. e.

($3,300 + $7,600) - $2,900 = $8,000 $21,500 - $16,300 + 19,200 = $24,400 ($4,700 + $16,200) - $5,100 = $15,800 ($44,100 + $122,600) - $55,400 = $111,300 ($19,800 + $31,600) - $16,100 = $35,300

LO 1,2,3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.12 a.

$400 = $2,600 – $2,200

$3,500 = $400 (2022 payable balance) + $3,600 – $500. Notice how the change in the payable each year indicates the difference between the expense and the cash paid. In other words, in this year, the company had to pay off last year‘s tax of $400 but did not pay off $500 of this year‘s tax. Since this year‘s tax was $3,600, only $3,100 of this was paid off. This $3,100 along with the $400 relating to last year totals $3,500.

$4,400 = $4,200 – $500 (2023 payable balance) + $700 (2024 payable balance). The $4,200 that was paid would have included $500 relating to the prior year so the remainder of $3,700 would have related to the current year. Since $700 of the current year‘s tax is unpaid, the total tax expense for this year must have been $3,700 + $700.

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.13 OROMOCTO CORPORATION Adjusted Trial Balance March 31, 2024

Cash .................................................................................. Accounts receivable ........................................................... Supplies ............................................................................. Prepaid insurance .............................................................. Equipment .......................................................................... Accumulated depreciation—equipment .............................. Accounts payable ............................................................... Salaries payable................................................................. Income tax payable ............................................................ Common shares ................................................................. Retained earnings .............................................................. Dividends declared............................................................. Fees earned ....................................................................... Salaries expense ................................................................ Rent expense ..................................................................... Depreciation expense ........................................................ Supplies expense ............................................................... Insurance expense ............................................................. Utilities expense ................................................................. Income tax expense........................................................... Totals ............................................................................

Debit $ 18,000 28,000 1,000 2,500 23,450

Credit

$ 5,400 13,000 3,000 4,550 10,000 21,000 2,000 89,500 46,400 6,000 4,400 4,000 3,500 2,400 4,800 $146,450

0000 000 $146,450

(Total debits = Total credits) LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.14 a. OROMOCTO CORPORATION Statement of Income Year Ended March 31, 2024 Revenues Fees earned .................................................... Expenses Salaries expense ................................................. Rent expense ...................................................... Depreciation expense ......................................... Supplies expense ................................................ Insurance expense .............................................. Utilities expense .................................................. Total expenses ....................................... Income before income tax ........................................ Income tax expense ................................................. Net income ...............................................................

$89,500 $46,400 6,000 4,400 4,000 3,500 2,400 66,700 22,800 4,800 $18,000

[Revenues – Expenses = Net income or (Loss)]

BRIEF EXERCISE 4.14 b. OROMOCTO CORPORATION Statement of Changes in Equity Year Ended March 31, 2024

Common Shares

Retained Earnings

Total Equity

Balance, April 1, 2023 .................................................................... $ 5,000 $21,000 Issued common shares .................................................................. 5,000 Net income ..................................................................................... 18,000 Dividends declared......................................................................... 000 000 (2,000) Balance, March 31, 2024 ............................................................... $10,000 $37,000

$26,000 5,000 18,000 (2,000) $47,000

(Beginning equity ± Changes to equity = Ending equity)

BRIEF EXERCISE 4.14 (CONTINUED) c. OROMOCTO CORPORATION Statement of Financial Position March 31, 2024

Assets Current Assets Cash ....................................................................... Accounts receivable ............................................... Supplies .................................................................. Prepaid insurance .................................................. 2,500 Total current assets ....................................... Property, plant, and equipment Equipment .............................................................. Less: Accumulated depreciation—equipment........ Total assets ....................................................................

$ 18,000 28,000 1,000

49,500 $23,450 5,400

18,050 $67,550

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ................................................... Salaries payable ..................................................... Income tax payable ................................................ Total current liabilities .................................... Shareholders‘ equity Common shares ..................................................... Retained earnings .................................................. Total shareholders‘ equity .............................. Total liabilities and shareholders‘ equity .........................

$13,000 3,000 4,550 20,550 $10,000 37,000 47,000 $67,550

(Assets = Liabilities + Shareholders‘ equity) LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.15 2024 Mar. 31 Fees Earned ................................................. Income Summary ...................................

89,500

31 Income Summary .......................................... Salaries Expense ................................... Rent Expense......................................... Depreciation Expense ............................ Supplies Expense .................................. Insurance Expense ................................ Utilities Expense..................................... Income Tax Expense .............................

71,500

31 Income Summary .......................................... Retained Earnings..................................

18,000

31 Retained Earnings ........................................ Dividends Declared ................................

2,000

89,500

46,400 6,000 4,400 4,000 3,500 2,400 4,800

18,000

2,000

(Statement of income accounts are closed to the Income Summary account) LO 5 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.16 a.

Service revenue ............................................ Expenses Salaries expense.................................... Repairs and maintenance expense ........ Supplies expense ................................... Utilities expense ..................................... Income tax expense ............................... Net income....................................................

$126,000 $65,000 15,000 6,000 2,000 5,700

93,700 $ 32,300

(Revenues increase net income and expenses decrease net income) b. Nov 30 Service Revenue .......................................... Income Summary ...................................

126,000 126,000

30 Income Summary .......................................... Salaries Expense ................................... Repairs and Maintenance Expense ....... Supplies Expense .................................. Utilities Expense..................................... Income Tax Expense .............................

93,700

30 Income Summary .......................................... Retained Earnings..................................

32,300

30 Retained Earnings ........................................ Dividends Declared ................................

5,000

65,000 15,000 6,000 2,000 5,700

32,300

5,000

(Statement of income accounts are closed to the Income Summary account)

BRIEF EXERCISE 4.16 (CONTINUED) c. Service Revenue Nov 30 Bal. 126,000 Nov 30 CE1 126,000 Nov 30 Bal. 0 Salaries Expense Nov 30 Bal. 65,000 Nov 30 CE2 65,000 Nov 30 Bal. 0 Supplies Expense Nov 30 Bal. 6,000 Nov 30 CE2 Nov 30 Bal. 0 Utilities Expense Nov 30 Bal. 2,000 Nov 30 CE2 Nov 30 Bal. 0

6,000

2,000

Income Tax Expense Nov 30 Bal 5,700 Nov 30 CE2 Nov 30 Bal.

5,700 0

Dividends Declared 5,000 Nov 30 CE4 Nov 30 Bal.

5,000 0

Nov 30 Bal

Income Summary Nov 30 CE2 93,700 Nov 30 CE1 126,000 Bal. 32,300 Nov 30 CE3 32,300 Nov 30 Bal. 0 Retained Earnings Dec. 1 50,000 Nov 30 CE4 5,000 Nov 30 CE3 32,300 Nov 30 Bal. 77,300

Repairs and Maintenance Expense Nov 30 Bal. 15,000 Nov 30 CE2 15,000 Nov 30 Bal. 0 LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 4.17 a. c. e. g. i. k. m.

Yes Yes Yes Yes No Yes No

b. d. f. h. j. l.

Yes Yes No No Yes No

LO 5 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 4.1 1. a. The performance obligation is: to deliver transportation service. b. Since the performance by WestJet is not complete until the flight actually occurs, revenue should not be recognized until December. WestJet should recognize the revenue in December when the customer has been provided with the flight. 2. a. The performance obligation is: to deliver a magazine on a monthly basis b. Revenue should be recognized as each magazine is delivered (on a monthly basis). 3. a. The performance obligation is: to provide baseball games b. Revenue should be recognized on a per game basis over the season from April to October, since that is when the games are provided to the fans. 4. a. The performance obligation is: to lend cash in exchange for interest income b. Interest income should be accrued and recognized by RBC Financial Group evenly over the term of the loan. 5. a. The performance obligation is: to deliver a sweater b. Revenue should be recognized when the sweater is shipped to the customer in September. 6. a. The performance obligations are: to deliver beer and two mugs. b. Revenue should be recognized on a monthly basis over the six-month subscription period. In the first month, the delivery of two mugs will satisfy that performance obligation. LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.2 Service revenue Expenses Operating expenses Insurance expense

Income before income tax Income tax expense Net income c.

a. Accrual Basis $52,000

b. Cash Basis $44,000

31,000 1,000 32,000

27,500 2,000 29,500

20,000 3,000 $17,000

14,500 $14,500

The accrual basis of accounting provides more useful information for decision makers because it recognizes revenue when earned and expenses when incurred. This provides a better measurement of performance because it records what has happened regardless of the movement of cash. This also enhances the predictive ability of the statement of income.

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.3 a. Transaction

Cash Basis

Accrual Basis

Revenue from services

Revenues are recorded when they are collected

Revenues are recorded when they are earned

Purchase equipment

Equipment is expensed when the cash is paid out

Equipment is an asset that is depreciated over its useful life

Pay insurance

Full amount expensed when cash is paid

Insurance is a prepayment until consumed and expensed

Employee salaries

Expensed when paid

Accrued when owed to employees

The proper accrual accounting would include: 1. 2. 3.

The recognition of revenue from providing consulting services when earned. The recognition of equipment in the accounts when purchased, followed by recording depreciation expense over the years of use of the equipment. The recognition of the payment for insurance as Prepaid Insurance which will then be allocated to Insurance Expense during the periods of benefit, over the next two years. Any unpaid salaries at the end of the accounting period are recognized as expenses and as salaries payable.

EXERCISE 4.3 (CONTINUED) b.

Due to the terms of payment offered to customers (90 days) and the timing of payments for operating expenses, it is not surprising that the business has experienced delays in cash inflows compared to cash outflows. In addition, when prepayments are involved, large sums of cash are paid out for things like equipment or for prepaid insurance, which require immediate payment but will become expenses over several years. Consequently, it is highly probable, particularly at the start of a new business, that net income is realized, while at same time, cash resources are scarce. Quite often, new businesses require financing to cover cash shortfalls until they have been able to accumulate sufficient cash to cover their business activities.

LO 1 BT: C Difficulty: M Time: 25 min. AACSB: None CPA: cpa.t001 CM: Reporting

EXERCISE 4.4 Step Step 1: Is there a contract?

Analysis Yes, both parties have agreed to enter into a contract. The services to be provided, price, and payment terms have been agreed to and each party‘s rights under the contract are clear. The contract is consistent with both parties‘ lines of business, meaning it has commercial substance. There are no indications of any concerns regarding collectibility as the purchase of the service is paid with credit cards. The contract includes a single performance obligation: providing entertainment service.

The transaction price is $3,740,000. (6,800 x $550) Because there is only a single performance obligation, the transaction price does not have to be allocated.

Revenue for the month of August should be recognized by KickIT Ltd. after it has performed the delivery of the serviced for the month. Once the entertainment service has been provided, that portion (1/10) of the performance obligation has been satisfied and revenue in the amount of $374,000 ($3,740,000 ÷ 10) can be recognized.

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa.t001 CM: Reporting

EXERCISE 4.5 Step Step 1: Is there a contract?

Analysis Yes, both parties have agreed to enter into a contract. The services to be provided, price, and payment terms have been agreed to and each party‘s rights under the contract are clear. The contract is consistent with both parties‘ lines of business, meaning it has commercial substance. There are no indications of any concerns regarding collectibility. The contract includes a single performance obligation: providing lawn treatment service.

The transaction price is $43,800. (146 x $300) Because there is only a single performance obligation, the transaction price does not have to be allocated.

a. No revenue can be recognized in the month of April as no performance obligation has been fulfilled. b. Revenue for the month of May should be recognized by Green Lawn Ltd. after it has performed the delivery of the service for the month. Once the lawn treat service has been provided, that portion (1/4) of the performance obligation has been satisfied and revenue in the amount of $10,950 ($43,800 ÷ 4) can be recognized.

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.6 a.

2024 June Aug. Sept. Nov. Dec.

2024 Dec.

1 31 4 30 5

Prepaid Insurance ................................. Cash ............................................

1,800

Prepaid Rent ......................................... Cash ............................................

6,500

Cash ..................................................... Deferred Revenue .......................

3,600

Prepaid Cleaning................................... Cash ............................................

2,000

Cash...................................................... Deferred Revenue .......................

1,500

Insurance Expense ............................... Prepaid Insurance........................ ($1,800 × 7/12 months = $1,050)

1,050

Rent Expense........................................ Prepaid Rent ................................ ($6,500 × 4/5 months = $5,200)

5,200

Deferred Revenue ................................. Sponsorship Revenue ................. ($3,600 × 4/9 games = $1,600)

1,600

Repairs and Maintenance Expense ...... Prepaid Cleaning .........................

1,000

1,800 6,500 3,600 2,000 1,500

1,050

5,200

1,600

Deferred Revenue ................................. 1,025 Sponsorship Revenue ................. ($1,500 – $475 not played = $1,025 played)

1,000

1,025

EXERCISE 4.6 (CONTINUED) c.

Prepaid Insurance June 1 1,800 Dec. 31 Adj. Dec. 31 Bal. 750

Aug. 31 Dec. 31 Bal.

Prepaid Rent 6,500 Dec. 31 Adj. 1,300

Deferred Revenue Sept. 4 Dec. 5 Dec. 31 Adj. 1,600 Dec. 31 Adj. 1,025 Dec. 31 Bal.

Prepaid Cleaning Nov. 30 2,000 Dec. 31 Adj. Dec. 31 Bal. 1,000

Insurance Expense Dec. 31 Adj. 1,050 1,050

Dec. 31 Adj.

Rent Expense 5,200

5,200

3,600 1,500

Sponsorship Revenue Dec. 31 Adj. Dec. 31 Adj.

1,600 1,025

2,475

Dec. 31 Bal.

2,625

Repairs and Maintenance Expense Dec. 31 Adj. 1,000 1,000

Note: The Cash account has not been included in this solution, as per the instructions. LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.7 a.

2024 Dec. 31

Depreciation Expense .......................................... Accumulated Depreciation—Vehicles ............ ($33,000 ÷ 3 = $11,000 per year)

11,000

Depreciation Expense .......................................... Accumulated Depreciation—Equipment ........ ($15,000 ÷ 5 × 6/12 = $1,500)

1,500

11,000

1,500

Cost Accumulated depreciation $33,000 ÷ 3 × 2 $15,000 ÷ 5 × 6/12 Carrying amount c.

Vehicles $33,000

Equipment $15,000

22,000 000 000 $11,000

1,500 $13,500

The answer to part b. above would not change if the company prepared its depreciation entries monthly rather than annually.

LO 2 BT: AP Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.8 a.

2024 Dec.

31 31

2025 Jan.

21 6

4 2

Utilities Expense................................................... Accounts Payable .......................................

425

Salaries Expense ................................................. Salaries Payable ......................................... ($3,500 × 2/7 days = $1,000)

1,000

Interest Expense .................................................. Interest Payable .......................................... ($45,000 × 5% × 1/12 months = $188 (rounded))

188

Accounts Receivable............................................ Fees Earned ...............................................

300

Accounts Receivable............................................ Rent Income ...............................................

6,000

Accounts Payable ................................................ Cash ...........................................................

425

Salaries Payable .................................................. Salaries Expense ................................................. Cash ...........................................................

1,000 2,500

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

188

Cash..................................................................... Accounts Receivable ..................................

300

Cash..................................................................... Accounts Receivable ..................................

6,000

425

1,000

188

300 6,000

425

3,500

188

300 6,000

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.9 a.

July

2 7 14

15 21 28 b.

July

Prepaid Rent ........................................................ Cash ...........................................................

1,500

Supplies ............................................................... Accounts Payable .......................................

200

Cash .................................................................... Accounts Receivable .................................. ($6,550  2)

3,275

Cash .................................................................... Bank Loan Payable.....................................

1,000

Cash .................................................................... Deferred Revenue ......................................

1,000

Accounts Receivable............................................ Service Revenue ........................................

1,500

Accounts Receivable............................................ Service Revenue ........................................

800

Rent Expense....................................................... Prepaid Rent ............................................... ($1,500 ÷ 2 = $750)

750

Supplies Expense ................................................ Supplies ...................................................... ($1,200 + $200 − $500 = $900)

900

Depreciation Expense .......................................... Accumulated Depreciation—Equipment ..... ($15,000 ÷ 5 x 1/12)

250

1,500 200 3,275

1,000 1,000 1,500 800

750

900

250

EXERCISE 4.9 (CONTINUED July

Interest Expense .................................................. Interest Payable .......................................... ($1,000 × 5% × ½ x 1/12 months)

Salaries Expense ................................................. Salaries Payable..........................................

2,500

Deferred Revenue ............................................... Service Revenue .........................................

2,000

2,500

2,000

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.10 1.

July

Interest Receivable ............................................... Interest Income ............................................ ($20,000 × 3% × 1/12 months)

Supplies Expense ................................................. Supplies ($24,000 – $18,600) ....................

5,400

Rent Expense ....................................................... Prepaid Rent ($6,600 ÷ 4) ...........................

1,650

Salaries Expense ................................................. Salaries Payable..........................................

3,100

Depreciation Expense .......................................... Accumulated Depreciation—Buildings......... ($6,000 ÷ 12 months)

500

Deferred Revenue ................................................ Service Revenue .........................................

4,700

Repairs and Maintenance Expense ...................... Accounts Payable ........................................

2,300

5,400

1,650

3,100

500

4,700

2,300

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.11 1.

Mar. 031

Depreciation Expense .......................................... Accumulated Depreciation—Equipment ...... ($21,600 ÷ 4 × 3/12 months)

1,350

Deferred Revenue ................................................ Rent Income ($9,600 × 2/3) .........................

6,400

Interest Expense .................................................. Interest Payable .......................................... ($20,000 × 6% × 1/12 months)

100

Supplies Expense ................................................. Supplies ($2,800 – $850) ............................

1,950

Insurance Expense .............................................. Prepaid Insurance ....................................... ($14,400 × 3/12)

3,600

Income Tax Expense ............................................ Income Tax Payable ....................................

3,200

1,350

6,400

100

1,950

3,600

3,200

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.12

Net Income

Total Assets

Total Liabilities

Total Shareholders‘ Equity

Incorrect balances

$90,000

$170,000

$70,000

$100,000

Adjustments: 1. Salaries 2. Rent 3. Depreciation

(10,000) 4,000 (9,000)

(9,000)

10,000 (4,000) 00000 0

(10,000) 4,000 (9,000)

Correct balances

$75,000

$161,000

$76,000

$ 85,000

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.13 a.

January entry: Deferred Revenue................................... Service Revenue .....................................................

Adj.

Deferred Revenue Jan. 1 Bal. 1,600 Jan. 31 Bal.

1,600 1,600

2,350 750

The balance in Deferred Revenue on January 1, 2024 was $2,350 ($750 + $1,600). b.

Journal entry to record depreciation: Depreciation Expense ...................................................... Accumulated Depreciation ..........................

120 120

1 month = $120; Annual depreciation = $1,440 ($120 × 12) Number of months depreciated = accumulated depreciation ($3,000)  monthly depreciation ($120) = 25 months or 2 years, 1 month Therefore, the equipment is 2 years, 1 month old. It would have been purchased on January 1, 2022.

EXERCISE 4.13 (CONTINUED c.

Journal entry to adjust insurance: Insurance Expense ...... Prepaid Insurance ..............................

400 400

Since the prepaid insurance is $1,200, we can assume that 3 months ($1,200 ÷ $400 = 3) of the policy remain. Consequently, if it expires at $400 per month, then the policy is $3,600 ÷ $400 = 9 months old and it was purchased on May 1, 2023. Prepaid Insurance May 1, 2023 4,800 May 1 to Dec. 31 Adj. Dec. 31, 2023 Bal. 1,600 Jan. 31 Adj. Jan. 31, 2024 Bal. 1,200

3,200 400

The original insurance policy premium was $4,800 ($400 × 12). The monthly adjustments made May 1 through December 31 totalled $3,200 ($400 × 8).

EXERCISE 4.13 (CONTINUED) d.

Journal entry to adjust supplies: Supplies Expense ........................ Supplies 950 Supplies Expense

Adj. Jan. 31 Bal.

950 950

Jan. 1 Bal. Purchase Jan. 31 Bal.

950

Supplies 900 750 Adj. 700

950

Derive the balance by working backward up through the T account. Therefore, the balance in Supplies on January 1 was $900 ($700 + $950 – $750).

Journal entry to record income tax payable: Income Tax Expense ............................................ 100 Income Tax Payable ........................................... 100

Income Tax Expense Adj. Jan. 31 Bal.

100 100

Income Tax Payable Jan. 1 Bal. Payment 75 Adj. Jan. 31 Bal.

125 100 150

Derive the balance by working backward up through the T account. The balance in Income Tax Payable on January 1 was $125 ($150 − $100 + $75). This balance owing must be paid within three months of the company‘s year end. LO 2,3,4 BT: AP Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.14 FRASER VALLEY SERVICES LTD. Adjusted Trial Balance August 31, 2024

Debit Cash ................................................................................................. $ 11,430 Accounts receivable ......................................................................... 18,225 Supplies ............................................................................................ 3,400 Prepaid insurance............................................................................. 3,450 Equipment ........................................................................................ 25,600 Accumulated depreciation—equipment ............................................ Accounts payable ............................................................................. Salaries payable ............................................................................... Interest payable ................................................................................ Rent payable .................................................................................... Income tax payable .......................................................................... Deferred revenue.............................................................................. Bank loan payable, due 2027 ........................................................... Common shares ............................................................................... Retained earnings ............................................................................ Dividends declared ...........................................................................600 Service revenue................................................................................ Salaries expense .............................................................................. 19,200 Rent expense ................................................................................... 15,000 Depreciation expense ....................................................................... 2,275 Supplies expense ............................................................................. 1,750 Interest expense ............................................................................... 1,500 Insurance expense ........................................................................... 1,100 Income tax expense ......................................................................... 2,000 Totals ..................................................................... $105,530

Credit

$ 5,905 2,800 2,200 1,500 1,250 1,500 700 25,000 5,000 5,400 54,275

000 0000 $105,530

(Total debits = Total credits) LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.15 a. FRASER VALLEY SERVICES LTD Statement of Income Year Ended August 31, 2024

Revenues Service revenue .................................................................... Expenses Salaries expense .................................................................. Rent expense ....................................................................... Depreciation expense ........................................................... Supplies expense ................................................................. Interest expense ................................................................... Insurance expense ............................................................... Total expenses ............................................................ Income before income tax ............................................................. Income tax expense ...................................................................... Net income ....................................................................................

$54,275

$19,200 15,000 2,275 1,750 1,500 1,100 40,825 13,450 2,000 $11,450

[Revenues – Expenses = Net income or (Loss)]

EXERCISE 4.15 (CONTINUED b. FRASER VALLEY SERVICES LTD. Statement of Changes in Equity Year Ended August 31, 2024

Balance, September 1, 2023......................... Issued common shares ................................. Net income .................................................... Dividends declared ....................................... Balance, August 31, 2024 .............................

Common Shares $4,000 1,000 00 000 $5,000

Retained Earnings $ 5,400 11,450 (600) $16,250

Total Equity $ 9,400 1,000 11,450 (600) $21,250

(Beginning equity ± Changes to equity = Ending equity)

EXERCISE 4.15 (CONTINUED) c.

FRASER VALLEY SERVICES LTD. Statement of Financial Position August 31, 2024

Assets Current assets Cash .............................................................................................. Accounts receivable....................................................................... Supplies ......................................................................................... Prepaid insurance .......................................................................... Total current assets .............................................................. Property, plant, and equipment Equipment .................................................................. $25,600 Less: Accumulated depreciation—equipment............ 5,905 Total assets ............................................................................................

$11,430 18,225 3,400 3,450 36,505

19,695 $56,200

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable .......................................................................... Salaries payable ............................................................................ Interest payable ............................................................................. Rent payable ................................................................................. Income tax payable........................................................................ Deferred revenue ........................................................................... Total current liabilities ........................................................... Non-current liabilities Bank loan payable ......................................................................... Total liabilities ....................................................................... Shareholders‘ equity Common shares ......................................................... $ 5,000 Retained earnings ...................................................... 16,250 Total shareholders‘ equity ..................................................... Total liabilities and shareholders‘ equity ................................................. (Assets = Liabilities + Shareholders‘ equity)

$ 2,800 2,200 1,500 1,250 1,500 700 9,950 25,000 34,950

21,250 $56,200

LO 4 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.16 a. Dec.

Service Revenue .............................................. Interest Income ................................................. Income Summary ....................................

396,000 9,000

Income Summary.............................................. Salaries Expense ..................................... Office Expense ........................................ Depreciation Expense .............................. Utilities Expense ...................................... Interest Expense ...................................... Income Tax Expense ...............................

330,400

Income Summary.............................................. Retained Earnings ...................................

74,600

Retained Earnings ............................................ Dividends Declared ..................................

10,500

405,000

240,000 21,500 20,000 19,000 11,250 18,650 74,600

10,500

(Statement of income accounts are closed to the Income Summary account)

EXERCISE 4.16 (CONTINUED b. Income Summary Dec. 31 CE2 330,400 Dec. 31 CE1 Bal. Dec. 31 CE3 74,600 Dec. 31 Bal. Retained Earnings Jan. 1 Bal. Dec. 31 CE4 10,500 Dec. 31 CE3 Dec. 31 Bal. Dividends Declared Dec. 31 Bal. 10,500 Dec. 31 CE4 Dec. 31 Bal. 0

Salaries Expense Dec.31 Bal. 240,000 405,000 Dec. 31 CE2 240,000 74,600 Dec. 31 Bal. 0 Office Expense 0 Dec. 31 Bal. 21,500 Dec. 31 CE2 21,500 185,000 Dec. 31 Bal. 0 74,600 Depreciation Expense 249,100 Dec. 31 Bal. 20,000 Dec. 31 CE2 20,000 Dec. 31 Bal. 0 10,500

Utilities Expense Dec. 31 Bal.

Service Revenue Dec.31 Bal. 396,000 Dec. 31 CE1 396,000 Dec.31 Bal. 0

Dec 31 CE1

Interest Income Dec. 31 Bal. 9,000 Dec.31 Bal.

19,000 Dec. 31 CE2

Dec. 31 Bal.

19,000

0 Interest Expense

Dec. 31 Bal.

11,250 Dec. 31 CE2

9,000 Dec. 31 Bal. 0

11,250

0 Income Tax Expense

Dec. 31 Bal.

18,650 Dec. 31 CE2

Dec. 31 Bal.

LO 5 BT: AP Difficulty: S Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

18,650

EXERCISE 4.17 a. 2024 Aug. 31 31

031 31

Service Revenue ...................................... Income Summary ............................

54,275

Income Summary ...................................... Salaries Expense ............................. Rent Expense .................................. Depreciation Expense ...................... Supplies Expense ............................ Interest Expense .............................. Insurance Expense .......................... Income Tax Expense .......................

42,825

Income Summary ...................................... Retained Earnings ...........................

11,450

Retained Earnings .................................... Dividends Declared ..........................

600

54,275 19,200 15,000 2,275 1,750 1,500 1,100 2,000 11,450 600

(Statement of income accounts are closed to the Income Summary account)

EXERCISE 4.17 (CONTINUED b.

FRASER VALLEY SERVICES LTD. Post-Closing Trial Balance August 31, 2024

Cash .................................................................................. Accounts receivable .......................................................... Supplies ............................................................................ Prepaid insurance ............................................................. Equipment ......................................................................... Accumulated depreciation—equipment ............................. Accounts payable .............................................................. Salaries payable ................................................................ Interest payable ................................................................. Rent payable ..................................................................... Income tax payable ............................................................ Deferred revenue .............................................................. Bank loan payable ............................................................. Common shares ................................................................ Retained earnings ............................................................. Totals ............................................................................ (Total debits = Total credits)

Debit $11,430 18,225 3,400 3,450 25,600

00000 0 $62,105

Credit

$ 5,905 2,800 2,200 1,500 1,250 1,500 700 25,000 5,000 16,250 $62,105

LO 5 BT: AP Difficulty: S Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.18 a.

Mar. 31 Service Revenue ........................................... Interest Income ............................................. Income Summary ...................................

956,000 19,000

31 Income Summary .......................................... Depreciation Expense ............................ Salaries Expense ................................... Utilities Expense ..................................... Insurance Expense ................................ Income Tax Expense .............................

674,000

31 Income Summary .......................................... Retained Earnings ..................................

301,000

31 Retained Earnings ........................................ Dividends Declared ................................

21,000

975,000

50,000 561,000 9,000 12,000 42,000

301,000

21,000

(Statement of income accounts are closed to the Income Summary account) b.

Beginning balance April 1, 2023 .................................. $ 88,000 Add: Net income ......................................................... 301,000 389,000 Less: Dividends declared............................................ 21,000 Ending balance March 31, 2024 .................................. $368,000

LO 5 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 4.19 a.

Sept. 30 Service Revenue ........................................... Interest Income ............................................. Income Summary ...................................

550,000 4,000

30 Income Summary .......................................... Salaries Expense ................................... Repairs and Maintenance Expense ....... Insurance Expense ................................ Depreciation Expense ............................ Income Tax Expense .............................

526,000

30 Income Summary .......................................... Retained Earnings ..................................

28,000

30 Retained Earnings ........................................ Dividends Declared ................................

50,000

554,000

376,000 95,000 7,000 43,000 5,000

28,000

50,000

(Statement of income accounts are closed to the Income Summary account) b.

Beginning balance October 1, 2023 ............................ $ 230,000 Add: Net income ......................................................... 28,000 258,000 Less: Dividends declared............................................ 50,000 Ending balance September 30, 2024 .......................... $208,000

LO 5 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 4.1A Step Step 1: Is there a contract?

Step 2: What performance obligations are included in the contract? Step 3: What is the transaction price? Step 4: How should the transaction price be allocated to the performance obligations?

Analysis Yes, both parties have agreed to enter into a contract. The services to be provided, price, and payment terms have been agreed to and each party‘s rights under the contract are clear. The contract is consistent with both parties‘ lines of business, meaning it has commercial substance. There are no indications of any concerns regarding collectibility with Active Life Fitness Ltd. The contract includes two performance obligations: the provision of a six month membership to Active‘s gym and the provision of a personal fitness assessment and training plan. Each of these would be considered distinct services.

The transaction price is $51,600. (215 x $240) Because there are multiple (two) performance obligations, the transaction price must be allocated to each of them. The allocation will be done on the basis of the stand-alone selling price of each performance obligation. Performance Obligation Six month membership

Stand-Alone Selling Price

% of Total StandAlone Selling Price

Contract Price

Allocation of Contract Price

215 x $260 = $55,900

80.0%

× $51,600

$41,280

Personal fitness assessment and training plan Combined stand alone selling price

215 x $65 = $13,975 $69,875

20.0% 100.0%

× $51,600

$10,320 $51,600

PROBLEM 4.1A (CONTINUED) Step 5: Has a performance obligation been satisfied?

The first performance obligation, the six month membership fee will be recognized evenly over the six month period. An amount of $6,880 ($41,280 ÷ 6) will be recognized as revenue by January 31. The second performance obligation: providing a personal fitness assessment and training plan to each member, is satisfied by January 31. The revenue related to this obligation in the amount of $10,320 would be recognized at this point.

LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.2A 1. a.

2 a. b.

3.a.

4. a.

5. a. b.

Feb.

2 Prepaid Insurance .................................. Cash .................................................

12,000

Dec. 31 Insurance Expense ($12,000 x 11/12 months) Prepaid Insurance .............................

11,000

Mar. 15 Cash ....................................................... Deferred Revenue ............................

76,500

Dec. 31 Deferred Revenue ($76,500 × 9/12) ....... Service Revenue ..............................

57,375

Jul.

100,000

1 Equipment ............................................ Cash ................................................. Bank Loan Payable ...........................

12,000

11,000

76,500 57,375

20,000 80,000

Dec. 31 Depreciation Expense ...... 12,500 Accumulated Depreciation—Equipment ($100,000 ÷ 4 years × 6/12 months) Dec. 31 Interest Expense ........ 2,000 Interest Payable ................................ ($80,000 x 5% × 6/12) Nov.

1 Prepaid Advertising ................................ Cash ................................................. Accounts Payable ...........................

12,500

2,000 96,000 48,000 48,000

Dec. 31 Advertising Expense ($96,000 × 1/6 months) Prepaid Advertising ...........................

16,000

Dec.1

Cash ......................................................... Deferred Revenue ............................

10,000

Dec. 31 Deferred Revenue ($10,000 × 60%)....... Service Revenue ..............................

6,000

16,000

10,000 6,000

LO 2 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.3A 1. a. b.

2. a.

3. a.

4. a.

5. a.

Oct. 31

Accounts Receivable .......................... Service Revenue ...............................

Nov. 15

No entry required

Nov. 30

Cash.................................................. Accounts Receivable.........................

5,000 5,000

2,500 2,500

Oct. 31 Income Tax Expense ............................. 15,000 Income Tax Payable .........................

15,000

Nov. 15 Income Tax Payable .............................. 15,000 Cash...................................................

15,000

Oct. 31

Interest Receivable ........................... Interest Income ($50,000 x 12% x 1/12)

Nov. 15 Cash ...................................................... Interest Receivable ........................... Accounts Receivable ……………….. Oct. 31

Nov. 1

Oct. 31 Nov. 3

500 500 50,500 500 50,000

Interest Expense ............................... 1,000 Interest Payable (400,000 x 3% x 1/12) Interest Payable .................................... Cash..................................................

1,000 1,000

Salaries Expense .............................. 20,000 Salaries Payable (4 x $500 x 10 days) Salaries Payable .................................. Cash..................................................

1,000

20,000

20,000 20,000

LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.4A 1. a. June 1, 2024

b. Nov. 30, 2024

2. a. Oct. 1, 2024

b. Nov. 30, 2024

3. a. Feb. 16, 2024

b. Nov. 30, 2024

4. a. June 1, 2024

b. Nov. 30, 2024

c. Dec. 1, 2024

5. a. Nov. 2, 2024

Vehicles ..................................................... Cash ..................................................

80,000

Depreciation Expense................................ Accumulated Depreciation—Vehicles . ($80,000 ÷ 5 years x 6/12)

8,000

Cash (400 × $320) ..................................... Deferred Revenue .............................

128,000

Deferred Revenue ..................................... Ticket Revenue ($128,000 × 2/8 plays)

32,000

Supplies ..................................................... Cash ..................................................

2,100

Supplies Expense ($1,000 + $2,100 – $500) Supplies ............................................

2,600

Cash .......................................................... Bank Loan Payable ...........................

100,000

Interest Expense ........................................ Interest Payable ................................ ($100,000 × 6% × 1/12 months)

500

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

500

Cash .......................................................... Deferred Revenue .............................

80,000

8,000

128,000

32,000

2,100

2,600

100,000

500

PROBLEM 4.4A (CONTINUED) 5. b. Nov. 30, 2024

Deferred Revenue ..................................... Accounts Receivable ................................. Rent Income ......................................

40 360

Cash .......................................................... Accounts Receivable .........................

360

Salaries Expense ....................................... Salaries Payable [$7,000 × 7/7 days (Sunday through Saturday)] ...........

7,000

c. Dec. 2, 2024

Salaries Payable ........................................ Cash .............................

7,000 7,000

7. b. Nov. 30, 2024

Income Tax Expense ................................. Income Tax Payable .........................

1,250

Income Tax Payable .................................. Cash ..................................................

1,250

c. Dec. 4, 2024

6. b. Nov. 30, 2024

c. Dec. 14, 2024

400

360

7,000

1,250

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.5A a. 1. June 30

Rent Income ............................................................ Deferred Revenue ...........................................

57,000

Supplies Expense ($8,200 - $800) ......................... Supplies..........................................................

7,400

Insurance Expense ($14,400 x 3/12) ...................... Prepaid Insurance ..........................................

3,600

Advertising Expense ............................................... Repairs and Maintenance Expense ........................ Utilities Expense ..................................................... Accounts Payable ...........................................

110 4,450 215

Salaries Expense ($300 x 5) .................................. Salaries Payable.............................................

1,500

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

1,875

Income Tax Expense .............................................. Income Tax Payable .......................................

8,000

57,000

7,400

3,600

4,775

1,500

1,875

8,000

PROBLEM 4.5A (CONTINUED) b. ROADSIDE TRAVEL COURT LTD. Statement of Income Quarter Ended June 30, 2024

Revenues Rent income ($212,000 – $57,000) ................................ Expenses Salaries expense ($80,500 + $1,500) ............................. Repairs and maintenance expense ($4,300 + $4,450) ... Supplies expense ........................................................... Advertising expense ($3,800 + $110) ............................. Insurance expense ......................................................... Depreciation expense ..................................................... Interest expense ............................................................. Utilities expense ($900 + $215) ...................................... Total expenses ...................................................... Income before income tax ....................................................... Income tax expense ................................................................ Net income ..............................................................................

$155,000

$82,000 8,750 7,400 3,910 3,600 2,700 1,875 1,115 111,350 43,650 8,000 $ 35,650

[Revenues – Expenses = Net Income or (Loss)] LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.6A a. Prepaid Insurance 1.

After 8 months of insurance coverage the balance in the Prepaid Insurance account is $9,600. The remaining balance is for 16 months of coverage (24 months less 8 used in the previous fiscal year). $9,600 divided by 16 months equals $600 per month.

The policy was taken out on December 1, 2022. When the company made adjusting entries at the end of the prior fiscal year, on July 31, 2023, insurance expense for the period December 1, 2022 to July 31, 2023, which covers 8 months, would have been recorded. The entry would have been in the amount of $600 × 8 = $4,800. This would have reduced the Prepaid Insurance account to $9,600 ($14,400 – $4,800). During this past fiscal year ended July 31, 2024, this balance would have remained unchanged as no adjusting entries would have been prepared and recorded.

The insurance policy cost $14,400 and covers a 24-month period. The original purchase price of the policy was $14,400 ($600 per month part 1. above X 24 months).

By July 31, 2024, the adjusted balance in the Prepaid Insurance account will be $2,400 representing 4 months of insurance coverage from August 1 to November 30, 2024, the end of the term of the insurance policy. Remaining Months of Original Period of (3) Monthly Policy at Prepaid Cost Coverage Cost July 31, 2024 Insurance (1) (2) (1) ÷ (2) (4) (3) × (4) $14,400

24 months (Dec. 1, 2022 to Nov. 30, 2024)

$600

4 months

$2,400

PROBLEM 4.6A (CONTINUED) b.

Depreciation Expense

The annual depreciation expense on the building is calculated as follows: ($252,000 ÷ 30 years) = $ 8,400

The purchase date of the building was September 1, 2017. From September 1, 2017 to July 31, 2018, the depreciation expense recorded would have been $8,400 x 11/12 or $7,700. For the fiscal years 2019 to 2023, the depreciation expense recorded would have been $42,000 ($8,400 x 5). Consequently, the balance of the Accumulated Depreciation–Buildings account (unadjusted) at July 31, 2024 would be $49,700 ($7,700 + $42,000).

After an additional year‘s depreciation expense ($8,400) is recorded, the adjusted balance of the Accumulated Depreciation–Buildings account at July 31, 2024 would be $58,100 ($49,700 + $8,400).

Deferred Revenue

The amount of monthly revenue earned on digital magazine subscriptions is calculated as follows: 1,000 subscriptions x $60 divided by 24 months = $2,500

By July 31, 2023, the company has earned 7 of the 24 months of subscription revenue. This covers the period from January 1, 2023 to July 31, 2023. Initially the Deferred Revenue account received $60,000 from the sale of subscriptions. Of this amount 7/24 had been earned and an adjustment was made to reduce the balance by $17,500 ($2,500 x 7) and so the adjusted balance of Deferred Revenue at July 31, 2023 was $42,500, ($60,000 - $17,500). This balance represents 17 months at $2,500 per month of subscription service remaining. During this past fiscal year ended July 31, 2024, this balance would have remained unchanged since adjusting entries are only made annually.

PROBLEM 4.6A (CONTINUED) c. (continued) 3.

By July 31, 2024, the company has earned a further 12 of the 24 months of subscription revenue or $30,000. Consequently, the adjusted balance in the Deferred Revenue account is $12,500 ($42,500 - $30,000). This balance represents 5 months of subscription service remaining at $2,500 per month for the period August 1 - December 31.

Salaries Payable

The total salary paid on the last payday, Monday July 29 was in the amount of: 6 × $625 = $3,750 3 × $750 = 2,250 $6,000

The amount of salaries expense to be accrued at July 31, 2024 for three days (Monday to Wednesday) is: 6 × $625 x 3/5 = $2,250 3 × $750 x 3/5= 1,350 $3,600

The total salary that will be paid on Monday, August 5 will be the same as that of Monday July 29, $6,000.

PROBLEM 4.6A (CONTINUED) e. 1.

2024 July 31

Insurance Expense ($600 x 12) ......................... Prepaid Insurance ....................................

7,200

Depreciation Expense ....................................... Accumulated Depreciation—Buildings......

8,400

Deferred Revenue ............................................. Subscription Revenue ..............................

30,000

Salaries Expense .............................................. Salaries Payable.......................................

3,600

7,200

8,400

30,000

3,600

LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.7A a.

Cash Balance, December 31, 2024 = $177,600 cash receipts – $150,440 cash payments = $27,160.

b. (1) CREATIVE DESIGNS LTD. Statement of Income Year Ended December 31, 2024

Revenues Fees earned ($157,600 + $2,400) ........................... Expenses Salaries expense ($59,800 + $3,050) ...................... Rent expense ($20,000 – $2,000) ........................... Supplies expense ($8,600 – $1,260) ....................... Advertising expense ................................................ Depreciation expense ($35,400 ÷ 6) ........................ Insurance expense ($3,840 × 11/12) ...................... Total expenses ............................................... Income before income tax ................................................ Income tax expense ($6,000 + $7,000) ............................ Net income ....................................................................... [Revenues – Expenses = Net income or (Loss)]

$160,000 $62,850 18,000 7,340 6,800 5,900 3,520 104,410 55,590 13,000 $ 42,590

PROBLEM 4.7A (CONTINUED) b. (2) CREATIVE DESIGNS LTD. Statement of Changes in Equity Year Ended December 31, 2024

Common Shares

Retained Earnings

Total Equity

Balance, January 1 ........................................................................ $ 0 $ 0 Issued common shares ................................................................. 20,000 Net income ........................................................ 42,590 Dividends declared ........................................................................ 000 000 (10,000) Balance, December 31 .................................................................. $20,000 $32,590

$ 0 20,000 42,590 (10,000) $52,590

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 4.7A (CONTINUED) b. (3) CREATIVE DESIGNS LTD. Statement of Financial Position December 31, 2024

Assets Current assets Cash .................................................................. Accounts receivable ......................................... Supplies ............................................................ Prepaid rent....................................................... Prepaid insurance ($3,840 – $3,520) ................ Total current assets ................................... Property, plant, and equipment Equipment .......................................................... Less: Accumulated depreciation—equipment .... Total assets .................................................................

$27,160 2,400 1,260 2,000 320 33,140 $35,400 5,900

Liabilities and Shareholders‘ Equity Current liabilities Salaries payable ................................................. Income tax payable ............................................ Total current liabilities ................................ Total liabilities ............................................................... Shareholders‘ equity Common shares $20,000 Retained earnings .............................................. 32,590 Total shareholders‘ equity .......................... Total liabilities and shareholders‘ equity ......................

29,500 $62,640

$ 3,050 7,000 10,050 10,050

52,590 $62,640

(Assets = Liabilities + Shareholders‘ equity) LO 1,2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.8A a.

Revenue (total fees collected) ...................... Expenses Salaries expense ................................... Equipment............................................... Rent expense ......................................... Supplies expense .................................. Advertising expense ............................... Insurance expense ................................. Income tax expense ................................ Cash-based net income .................................

$157,600 $59,800 35,400 20,000 8,600 6,800 3,840 6,000

Cash-based net income .................................................. Accrual-based net income (from P4.7A) ......................... Difference ....................................................................... $(25,430) c.

140,440 $ 17,160 $ 17,160 42,590

I recommend the accrual basis of reporting because the accrual-based statement of income fairly portrays the performance of the business, with revenues and expenses measured in the financial period they were earned and incurred.

LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.9A a. 1.

2024 Jan. 31

Interest Expense...................................................... Interest Payable ($200,000 x 9% × 2/12 months) .......................

3,000

Advertising Expense ................................................ Accounts Payable ...........................................

1,000

Income Tax Expense ............................................... Income Tax Payable .......................................

1,700

3,000

1,000

1,700

No entry needed

Accounts Receivable ............................................... Fees Earned ...................................................

12,250

Insurance Expense ($6,000 ÷ 12)............................ Prepaid Insurance ..........................................

500

Salaries Expense..................................................... Salaries Payable.............................................

5,000

Depreciation Expense ............................................. Accumulated Depreciation—Equipment ($237,000 ÷ 10 yrs). ..................................... Accumulated Depreciation—Vehicles ($288,000 ÷ 8 yrs) .......................................

59,700

Deferred Revenue ................................................... Fees Earned ($35,000 x 10%) ........................

3,500

Supplies Expense .................................................... Supplies ($2,100 - $250) ...............................

1,850

10.

12,250

500

5,000

23,700 36,000

3,500

1,850

PROBLEM 4.9A (CONTINUED) b.

Jan. 31 Bal. 96,000 Jan. 31 Adj. 23,700 Jan. 31 Bal. 119,700

Cash Jan. 31 Bal. 17,800

Accounts Receivable Jan. 31 Bal. 12,700 Jan. 31 Adj. 12,250 Jan. 31 Bal. 24,950

Jan. 31 Bal. Jan. 31 Bal.

Supplies 2,100 Jan. 31 Adj. 250

Vehicles Jan.31 Bal. 288,000 Accumulated Depreciation—Vehicles Jan. 31 Bal. 42,000 Jan. 31 Adj. 36,000 Jan. 31 Bal. 78,000 1,850

Prepaid Rent Jan. 31 Bal. 12,000

Accounts Payable Jan. 31 Bal. Jan. 31 Adj. Jan. 31 Bal.

24,000 1,000 25,000

Bank Loan Payable Jan. 31 Bal. 200,000 Prepaid Insurance Jan. 31 Bal. 6,000 Jan. 31 Adj. Jan. 31 Bal. 5,500

Interest Payable Jan. 31 Adj.

3,000

Salaries Payable Jan. 31 Adj.

5,000

500

Equipment Jan. 31 Bal. 237,000

Accumulated Depreciation—Equipment Solutions Manual 4.398 Chapter 4 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

PROBLEM 4.9A (CONTINUED) b. (continued) Income Tax Payable Jan. 31 Adj. Deferred Revenue Jan. 31 Bal. Jan. 30 Adj. 3,500 Jan. 31 Bal.

Rent Expense Jan. 31 Bal 144,000 1,700

35,000 31,500

Common Shares Jan. 31 Bal. 128,000 Retained Earnings Jan. 31 Bal. 167,900 Fees Earned Jan. 31 Bal. 265,000 Jan. 31 Adj. 12,250 Jan. 31 Adj. 3,500 Jan. 31 Bal. 280,750 Salaries Expense Jan. 31 Bal. 89,800 Jan. 31 Adj. 5,000 Jan. 31 Bal. 94,800 Repairs and Maintenance Expense Jan. 31 Bal. 23,800

Interest Expense Jan. 31 Bal 48,000 Jan. 31 Adj. 3,000 Jan. 31 Bal 51,000 Advertising Expense Jan. 31 Bal. 75,000 Jan. 31 Adj. 1,000 Jan. 31 Bal 76,000

Jan. 59,700

Depreciation Expense 31 Adj.

Jan. 31 Adj.

Supplies Expense 1,850

Insurance Expense Jan. 31 Adj. 500 Income Tax Expense Jan. 31 Bal 1,700 Jan. 31 Adj. 1,700 Jan. 31 Bal. 3,400

PROBLEM 4.9A (CONTINUED) c.

CANADIAN PHOTO TOURS LIMITED Adjusted Trial Balance January 31, 2024

Debit Cash ..................................................................................... $ 17,800 Accounts receivable .............................................................. 24,950 Supplies ................................................................................ 250 Prepaid rent .......................................................................... 12,000 Prepaid insurance ................................................................. 5,500 Building .................................................................................237,000 Accumulated depreciation—equipment ................................ Vehicles ................................................................................288,000 Accumulated depreciation—vehicles .................................... Accounts payable.................................................................. Deferred Revenue................................................................. Salaries payable ................................................................... Income tax payable ............................................................... Interest payable .................................................................. . Bank loan payable, due 2027 ............................................... Common shares.................................................................... Retained earnings ................................................................. Fees earned .......................................................................... Salaries expense .................................................................. 94,800 Depreciation expense ........................................................... 59,700 Rent expense ........................................................................144,000 Repairs and maintenance expense....................................... 23,800 Insurance expense................................................................ 500 Supplies expense.................................................................. 1,850 Advertising expense .............................................................. 76,000 Interest expense ................................................................... 51,000 Income tax expense .............................................................. 3,400 Totals................................................................................. $1,040,550 (Total debits = Total credits)

Credit

$119,700 78,000 25,000 31,500 5,000 1,700 3,000 200,000 128,000 167,900 280,750

$1,040,550

LO 2,3,4 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.10A a. 2024 Nov. 9

13 13 19 20 21 23 23 27 28 30

Salaries Payable .......................................................... Salaries Expense ......................................................... Cash ...................................................................

1,000 1,200

Cash ............................................................................ Common Shares .................................................

5,000

Cash ............................................................................ Accounts Receivable ..........................................

12,400

Cash ............................................................................ Service Revenue .................................................

11,400

Supplies ....................................................................... Accounts Payable ...............................................

600

Accounts Payable ........................................................ Cash ...................................................................

4,600

Rent Expense .............................................................. Cash ...................................................................

600

Salaries Expense ......................................................... Cash ...................................................................

2,400

Accounts Receivable ................................................... Service Revenue .................................................

3,800

Dividends Declared ...................................................... Cash ...................................................................

500

Cash ............................................................................ Deferred Revenue ...............................................

1,100

2,200 5,000 12,400 11,400 600 4,600 600 2,400 3,800 500 1,100

PROBLEM 4.10A (CONTINUED) b. and d. Cash Nov. 1 Bal. 15,580 Nov. 13 5,000 Nov. 9 Nov. 13 12,400 Nov. 21 Nov. 19 11,400 Nov. 23 Nov. 30 1,100 Nov. 23 Nov. 28 Nov. 30 Bal. 35,180 Accounts Receivable Nov. 1 Bal. 15,820 Nov. 27 3,800 Nov. 13 Nov. 30 Bal. 7,220

Nov. 30 Bal.

Supplies 4,000 600 4,600 Nov. 30 Adj. 1,000

Nov. 1 Bal.

Equipment 18,000

Nov. 1 Bal. Nov. 20 Nov. 30 Bal.

2,200 4,600 600 2,400 500

Nov. 21

Nov. 9

12,400

Accounts Payable Nov. 1 Bal. 4,600 Nov. 20 Nov. 30 Bal. Salaries Payable Nov. 1 Bal. 1,000 Nov. 30 Bal. Nov. 30 Adj. Nov. 30 Bal. Income Tax Payable Nov. 30 Adj.

3,600

Accumulated Depreciation— Equipment Nov. 1 Bal. 3,600 Nov. 30 Adj. 300 Nov. 30 Bal. 3,900

Deferred Revenue Nov. 1 Bal. Nov. 30 Nov. 30 Bal. Nov. 30 Adj. 800 Nov. 30 Bal.

4,600 600 600

1,000 0 1,000 1,000

1,100

1,000 1,100 2,100 1,300

Common Shares Nov. 1 Bal. 10,000 Nov. 13 5,000 Nov. 30 Bal. 15,000

PROBLEM 4.10A CONTINUED) b. and d. (Continued) Retained Earnings Nov. 1 Bal.

Nov. 28

33,200

Dividends Declared 500 Service Revenue Nov. 19 11,400 Nov. 27 3,800 Nov. 30 Bal. 15,200 Nov. 30 Adj. 800 Nov. 30 Bal. 16,000

Nov. 23

Rent Expense 600

Income Tax Expense Nov. 30 Adj. 1,100 Salaries Expense 1,200 2,400 3,600 1,000 4,600 Supplies Expense Nov. 30 Adj. 3,600

Nov. 9 Nov. 23 Nov. 30 Bal. Nov. 30 Adj. Nov. 30 Bal.

Depreciation Expense Nov. 30 Adj. 300

PROBLEM 4.10A (CONTINUED) c. ALOU EQUIPMENT REPAIR CORP. Trial Balance November 30, 2024

Cash............................................................................ Accounts receivable .................................................... Supplies ...................................................................... Equipment ................................................................... Accumulated depreciation—equipment....................... Accounts payable ........................................................ Deferred revenue ........................................................ Common shares ......................................................... Retained earnings ...................................................... Dividends declared ..................................................... Service revenue .......................................................... Salaries expense ........................................................ Rent expense .............................................................. Totals ....................................................................

Debit $35,180 7,220 4,600 18,000

500

Credit

$ 3,600 600 2,100 15,000 33,200 15,200

3,600 600 $69,700

0000 00 $69,700

(Total debits = Total credits)

PROBLEM 4.10A (CONTINUED)

d. 2024 1. Nov. 30

Supplies Expense .................................. Supplies ($4,600 – $1,000) ...........

3,600

Salaries Expense ................................... Salaries Payable ...........................

1,000

3,600

1,000

Depreciation Expense ............................ 300 Accumulated Depreciation—Equipment ($18,000 ÷ 5 years x 1/12 months) Deferred Revenue .................................. Service Revenue ...........................

800

Income Tax Expense ............................. Income Tax Payable .....................

1,100

300

800

1,100

PROBLEM 4.10A (CONTINUED)

e. ALOU EQUIPMENT REPAIR CORP. Adjusted Trial Balance November 30, 2024

Debit Cash............................................................................. Accounts receivable ..................................................... Supplies ....................................................................... Equipment .................................................................... Accumulated depreciation—equipment........................ Accounts payable ......................................................... Salaries payable........................................................... Income tax payable ...................................................... Deferred revenue ......................................................... Common shares ........................................................... Retained earnings ........................................................ Dividends declared....................................................... Service revenue ........................................................... Salaries expense.......................................................... Rent expense ............................................................... Supplies expense ......................................................... Income tax expense ..................................................... Depreciation expense .................................................. Totals ........................................................................

Credit

$35,180 7,220 1,000 18,000 $ 3,900 600 1,000 1,100 1,300 15,000 33,200 500 16,000 4,600 600 3,600 1,100 300 $72,100

0,0 0 $72,100

(Total debits = Total credits)

PROBLEM 4.10A (CONTINUED) f. (1) ALOU EQUIPMENT REPAIR CORP. Statement of Income Month Ended November 30, 2024 Revenues Service revenue ................................................ Expenses Salaries expense .............................................. Supplies expense ............................................. Rent expense.................................................... Depreciation expense ....................................... Total expenses ........................................ Income before income tax ................ Income tax expense ................ Net income ................................................................

$16,000 $4,600 3,600 600 300 9,100 6,900 1,100 $ 5,800

[Revenues – Expenses = Net income or (Loss)] f. (2) ALOU EQUIPMENT REPAIR CORP. Statement of Changes in Equity Month Ended November 30, 2024 Common Shares

Retained Earnings

Balance, November 1 .................................................................... $10,000 $33,200 Issued common shares.................................................................. 5,000 Net income ................................................. 5,800 Dividends declared ........................................................................ 000000 (500) Balance, November 30 .................................................................. $15,000 $38,500

Total Equity $43,200 5,000 5,800 (500) $53,500

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 4.10A (CONTINUED) f. (3)

ALOU EQUIPMENT REPAIR CORP. Statement of Financial Position November 30, 2024 Assets Current assets Cash ............................................................................. Accounts receivable ...................................................... Supplies ........................................................................ Total current assets ............................................. Property, plant, and equipment Equipment................................................. $18,000 Less: Accumulated depreciation .............. 3,900 Total assets ...........................................................................

$35,180 7,220 1,000 43,400

14,100 $57,500

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ......................................................... Salaries payable ........................................................... Income tax payable ....................................................... Deferred revenue .......................................................... Total current liabilities .......................................... Shareholders‘ equity Common shares ....................................... $15,000 Retained earnings..................................... 38,500 Total shareholders‘ equity .................................... Total liabilities and shareholders‘ equity ................................

600 1,000 1,100 1,300 4,000

53,500 $57,500

(Assets = Liabilities + Shareholders‘ equity) LO 2,3,4 BT: AP Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.11A a.

2024 Nov. 30

Service Revenue .................................. Income Summary ........................

16,000

Income Summary ................................. Salaries Expense ........................ Supplies Expense ....................... Rent Expense.............................. Depreciation Expense ................. Income Tax Expense...................

10,200

Income Summary ................................. Retained Earnings .......................

5,800

Retained Earnings................................ Dividends Declared .....................

500

16,000

4,600 3,600 600 300 1,100

5,800

500

(Statement of income accounts are closed to the Income Summary account)

PROBLEM 4.11A (CONTINUED) b. Cash Nov. 1 Bal. 15,580 Nov. 13 5,000 Nov. 9 Nov. 13 12,400 Nov. 21 Nov. 19 11,400 Nov. 23 Nov. 30 1,100 Nov. 23 Nov. 28 Nov. 30 Bal. 35,180 Accounts Receivable Nov. 1 Bal. 15,820 Nov. 27 3,800 Nov. 13 Nov. 30 Bal. 7,220

Nov. 30 Bal.

Supplies 4,000 600 4,600 Nov. 30 Adj. 1,000

Nov. 1 Bal.

Equipment 18,000

Nov. 1 Bal. Nov. 20 Nov. 30 Bal.

2,200 4,600 600 2,400 500

Nov. 21

Nov. 9

Accounts Payable Nov. 1 Bal. 4,600 Nov. 20 Nov. 30 Bal. Salaries Payable Nov. 1 Bal. 1,000 Nov. 30 Bal. Nov. 30 Adj. Nov. 30 Bal.

4,600 600 600 1,000 0 1,000 1,000

12,400 Income Tax Payable Nov. 30 Adj.

3,600

Accumulated Depreciation— Equipment Nov. 1 Bal. 3,600 Nov. 30 Bal. 3,600 Nov. 30 Adj. 300 Nov. 30 Bal. 3,900

Deferred Revenue Nov. 1 Bal. Nov. 30 Nov. 30 Bal. Nov. 30 Adj. 800 Nov. 30 Bal.

1,100

1,000 1,100 2,100 1,300

Common Shares Nov. 1 Bal. 10,000 Nov. 13 5,000 Nov. 30 Bal. 15,000 Retained Earnings Nov. 1 Bal. 33,200 Nov. 30 CE4 500 Nov. 30 CE3 5,800 Nov. 30 Bal. 38,500

PROBLEM 4.11A (CONTINUED) b. (Continued)

Dividends Declared 500 Nov. 30 CE4 Nov. 30 Bal. 0 Nov. 28

500

Service Revenue Nov. 19 11,400 Nov. 27 3,800 Nov. 30 Bal. 15,200 Nov. 30 Adj. 800 Nov. 30 Bal. 16,000 Nov. 30 CE1 16,000 Nov. 30 Bal. 0

Rent Expense Nov. 23 600 Nov. 30 CE2 Nov. 30 Bal. 0

Income Tax Expense Nov. 30 Adj. 1,100 Nov. 30 CE2 Nov. 30 Bal. 0

600

1,100

Salaries Expense 1,200 2,400 3,600 1,000 4,600 Nov. 30 CE2 Nov. 30 Bal. 0 Nov. 9 Nov. 23 Nov. 30 Bal. Nov. 30 Adj. Nov. 30 Bal.

Supplies Expense Nov. 30 Adj. 3,600 Nov. 30 CE2 Nov. 30 Bal. 0

4,600

3,600

Depreciation Expense Nov. 30 Adj. 300 Nov. 30 CE2 Nov. 30 Bal. 0

300

Income Summary Nov. 30 CE2 10,200 Nov. 30 CE1 16,000 Bal. 5,800 Nov. 30 CE3 5,800 Nov. 30 Bal. 0

PROBLEM 4.11A (CONTINUED) b.

ALOU EQUIPMENT REPAIR CORP. Post-Closing Trial Balance November 30, 2024 Debit Cash............................................................. Accounts receivable ..................................... Supplies ....................................................... Equipment .................................................... Accumulated depreciation—equipment........ Accounts payable ......................................... Salaries payable .......................................... Income tax payable ...................................... Deferred revenue ......................................... Common shares ........................................... Retained earnings ........................................ Totals ......................................................

Credit

$35,180 7,220 1,000 18,000

00 0000 $61,400

$ 3,900 600 1,000 1,100 1,300 15,000 38,500 $61,400

(Total debits for permanent accounts = Total credits for permanent accounts) LO 5 BT: AP Difficulty: S Time: 50 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.12A a. OZAKI CORP. Adjusted Trial Balance September 30, 2024

Debit Cash ........................................................................................... $ 3,250 Accounts receivable ................................................................... 8,435 Supplies...................................................................................... 1,265 Equipment .................................................................................. 15,040 Accumulated depreciation—equipment ...................................... Accounts payable ....................................................................... Salaries payable ......................................................................... Interest payable .......................................................................... Income tax payable .................................................................... Deferred revenue ....................................................................... Bank loan payable ...................................................................... Common shares ......................................................................... Retained earnings ...................................................................... Dividends declared ..................................................................... 700 Fees earned ............................................................................... Depreciation expense ................................................................. 750 Interest expense ......................................................................... 105 Rent expense ............................................................................. 1,500 Salaries expense ....................................................................... 13,840 Supplies expense ....................................................................... 485 Utilities expense ......................................................................... 820 Income tax expense ................................................................... 600 Totals ................................................................................... $46,790 (Total debits = Total credits)

Credit

750 4,460 840 105 200 550 7,800 7,000 2,600

22,485

$46,790

PROBLEM 4.12A (CONTINUED) b. 2024 Sept. 30

Fees Earned ................................................. 22,485 Income Summary .................................

22,485

Income Summary .......................................... 18,100 Salaries Expense .................................. 13,840 Rent Expense ....................................... 1,500 Utilities Expense ................................... 820 Depreciation Expense ........................... 750 Supplies Expense ................................. 485 Interest Expense ................................... 105 Income Tax Expense ............................ 600

Income Summary .......................................... Retained Earnings ................................

4,385

Retained Earnings ........................................ Dividends Declared ...............................

700

4,385

700

(Statement of income accounts are closed to the Income Summary account)

PROBLEM 4.12A (CONTINUED) c. OZAKI CORP. Post-Closing Trial Balance September 30, 2024

Debit Cash ................................................................................... Accounts receivable ........................................................... Supplies ............................................................................. Equipment .......................................................................... Accumulated depreciation—equipment .............................. Accounts payable ............................................................... Salaries payable ................................................................. Interest payable.................................................................. Income tax payable ............................................................ Deferred revenue ............................................................... Bank loan payable .............................................................. Common shares ................................................................. Retained earnings .............................................................. Totals.............................................................................

Credit

$ 3,250 8,435 1,265 15,040 $

0000 0 $27,990

750 4,460 840 105 200 550 7,800 7,000 6,285 $27,990

(Total debits for permanent accounts = Total credits for permanent accounts) LO 4,5 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.13A a. 1.

2. 3.

4. 5.

9. 10.

11.

2024 Mar. 31

31 31

Depreciation Expense................................ ($54,000 ÷ 9 years × 1/12 months) Accumulated Depreciation—Furniture

500

Utilities Expense ........................................ Accounts Payable .............................

2,360

Supplies Expense ...................................... Supplies ($7,240 – $4,500)...............

2,740

Salaries Expense ....................................... Salaries Payable ...............................

10,000

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

785

Accounts Receivable ................................. Rent Income .....................................

2,870

Rent Income ($4,500 × 6mths x 50%) ....... Deferred Revenue ............................

13,500

Deferred Revenue ($250 x 300 x 20%) ..... Rent Income .....................................

15,000

Insurance Expense ($7,200 ÷ 12).............. Prepaid Insurance.............................

600

Depreciation Expense................................ ($187,200 ÷ 15 years × 1/12 months) Accumulated Depreciation—Buildings

1,040

Income Tax Expense ................................. Income Tax Payable .........................

1,750

500

2,360 2,740

10,000 785

2,870

13,500

15,000

600

1,040

1,750

PROBLEM 4.13A (CONTINUED b.

Mar 31 Bal. 54,000 Accumulated Depreciation—Furniture Mar 31 Bal. 35,500 Mar 31 Adj. 500 Mar 31 Bal. 36,000

Cash Mar 31 Bal. 40,000

Accounts Receivable Mar 31 Bal. 26,000 Mar 31 Adj. 2,870 Mar 31 Bal. 28,870

Mar 31 Bal. Mar 31 Bal.

Supplies 7,240 Mar 31 Adj. 4,500

Prepaid Insurance Mar 31 Bal. 6,000 Mar 31 Adj. Mar 31 Bal. 5,400

Accounts Payable Mar 31 Bal. Mar 31 Adj. Mar 31 Bal.

7,625 2,360 9,985

Salaries Payable Mar 31 Adj.

10,000

Interest Payable Mar 31 Adj.

785

Income Tax Payable Mar 31 Adj.

1,750

2,740

600

Land Mar 31 Bal. 230,000 Buildings Mar 31 Bal. 187,200 Accumulated Depreciation—Buildings Mar 31 Bal. 61,360 Mar 31 Adj. 1,040 Mar 31 Bal. 62,400

PROBLEM 4.13A (CONTINUED) b. (continued) Deferred Revenue Mar 31 Bal. Mar 31 Adj. 15,000 Mar 31 Adj. Mar 31 Bal.

75,000 13,500 73,500

Mortgage Payable Mar 31 Bal. 147,000 Common Shares Mar 31 Bal.

75,000

Retained Earnings Mar 31 Bal.

50,000

Dividends Declared Mar 31 Bal. 15,000

Mar 31 Adj.

Rent Income Mar 31 Bal. 300,399 13,500 Mar 31 Adj. 2,870 Mar 31 Adj. 15,000 Mar 31 Bal. 304,769

Salaries Expense Mar 31 Bal. 99,000 Mar 31 Adj. 10,000 Mar 31 Bal. 109,000

Mar 31 Bal. Mar 31 Adj. Mar 31 Bal.

Utilities Expense 45,000 2,360 47,360

Interest Expense Mar 31 Bal. 8,900 Mar 31Adj. 785 Mar 31 Bal. 9,685 Insurance Expense Mar 31 Bal. 1,200 Mar 31 Adj. 600 Mar 31 Bal. 1,800 Advertising Expense Mar 31 Bal. 944 Supplies Expense Mar 31 Adj. 2,740 Depreciation Expense Mar 31 Bal. 27,900 Mar 31 Adj. 500 Mar 31 Adj. 1,040 Mar 31 Bal. 29,440 Income Tax Expense Mar 31 Bal. 3,500 Mar 31 Adj. 1,750 Mar 31 Bal. 5,250

PROBLEM 4.13A (CONTINUED) c.

CASA SUITES LTD. Adjusted Trial Balance Mar 31, 2024

Debit Cash .................................................................................. $ 40,000 Accounts receivable........................................................... 28,870 Supplies ............................................................................. 4,500 Prepaid insurance .............................................................. 5,400 Land ................................................................................... 230,000 Buildings ............................................................................ 187,200 Accumulated depreciation—buildings ................................ Furniture ............................................................................ 54,000 Accumulated depreciation—furniture ................................. Accounts payable .............................................................. Salaries payable ................................................................ Interest payable ................................................................. Income tax payable............................................................ Deferred revenue ............................................................... Mortgage payable, due 2028 ............................................. Common shares ................................................................ Retained earnings.............................................................. Dividends declared ............................................................ 15,000 Rent income....................................................................... Salaries expense ............................................................... 109,000 Utilities expense................................................................. 47,360 Interest expense ................................................................ 9,685 Insurance expense ............................................................ 1,800 Advertising expense .......................................................... 944 Supplies expense .............................................................. 2,740 Depreciation expense ........................................................ 29,440 Income tax expense ........................................................... 5,250 Totals ............................................................................ $771,189 (Total debits = Total credits)

Credit

$ 62,400 36,000 9,985 10,000 785 1,750 73,500 147,000 75,000 50,000 304,769

000000 0 $771,189

PROBLEM 4.13A (CONTINUED) d. (1) CASA SUITES LTD. Statement of Income Year Ended Mar 31, 2024

Revenues Rent income.............................................. Expenses Salaries expense ...................................... Utilities expense........................................ Depreciation expense ............................... Interest expense ....................................... Insurance expense ................................... Supplies expense ..................................... Advertising expense ................................. Total expenses ................................ Income before income tax ................................. Income tax expense........................................... Net income ........................................................

$304,769 $109,000 47,360 29,440 9,685 1,800 2,740 944 200,969 103,800 5,250 $ 98,550

[Revenues – Expenses = Net income or (Loss)]

PROBLEM 4.13A (CONTINUED) d. (2) CASA SUITES LTD. Statement of Changes in Equity Year Ended Mar 31, 2024

Common Shares Balance, April 1, 2023 .................................................................... $69,000 Issued common shares .................................................................. 6,000 Net income ........................................................ Dividends declared ........................................................................ 00 0000 Balance, Mar 31, 2024 ................................................................... $75,000

Retained Earnings

Total Equity

$50,000

$ 119,000 6,000 98,550 (15,000) $208,550

98,550 (15,000) $133,550

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 4.13A (CONTINUED) d. (3) CASA SUITES LTD. Statement of Financial Position Mar 31, 2024 Assets Current assets Cash ............................................................. Accounts receivable ...................................... Supplies ........................................................ Prepaid insurance ......................................... Total current assets ................................... Property, plant, and equipment Land .............................................................. Buildings ....................................................... Less: Accumulated depreciation .................. Furniture ....................................................... Less: Accumulated depreciation .................. Total property, plant, and equipment ......... Total assets ...........................................................

$ 40,000 28,870 4,500 5,400 $ 78,770 $230,000 $187,200 62,400 $54,000 36,000

124,800 18,000 372,800 $451,570

PROBLEM 4.13A (CONTINUED) d. (3) (continued) Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ......................................... Salaries payable ........................................... Interest payable ............................................ Income tax payable ....................................... Deferred revenue .......................................... Total current liabilities ............................... Non-current liabilities Mortgage payable ......................................... Total liabilities............................................ Shareholders‘ equity Common shares ........................................... Retained earnings......................................... Total shareholders‘ equity ........................ Total liabilities and shareholders‘ equity ................

$9,985 10,000 785 1,750 73,500 $ 96,020 147,000 243,020 $75,000 133,550 208,550 $451,570

(Assets = Liabilities + Shareholders‘ equity)

PROBLEM 4.13A (CONTINUED) e.

The financial position and performance of a company can be evaluated in terms of its liquidity, profitability, and solvency. Liquidity Casa Suites does not appear at first glance to have a healthy liquidity position. Although it has a positive cash balance of $40,000, the company has a current ratio of only 0.8:1 ($78,770 ÷ $96,020). This seems to indicate that there are insufficient current assets to repay the company‘s current liabilities. It should be noted that simply looking at the current ratio does not tell the whole story and more investigation is required. For example, accounts receivable comprises 37% of current assets—you would want to know if they are all expected to be collected. More importantly, of the total current liabilities, 77% ($73,500 ÷ $96,020) is made up of deferred revenue, which will not require the payment of cash. Consequently, the current ratio is stronger than it first appears in terms of measuring the company‘s ability to repay its current liabilities. Profitability According to the statement of income, Casa Suites was profitable in 2024 with net income of $98,550. Casa also has a positive balance in retained earnings, which indicates it has been profitable in the past. The company also declared dividends of $15,000 in the past year, which maybe of interest to your friend if your friend is considering an income investment. Solvency The company has a large mortgage, which is in line with the cost of the property, plant, and equipment. Its total debt to assets is 53.8% ($243,020 ÷ $451,570). One would want to determine if that ratio is comparable to Casa Suites‘ competitors and industry. Overall, Casa Suites appears to have a good financial position. Its liquidity and profitability appear reasonable, and its solvency is not significantly high. However, a more complete analysis should be performed. Reviewing prior years‘ financial statements and some industry information would enable us to perform some comparative analysis to better evaluate Casa‘s financial health.

LO 2,3,4 BT: AN Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting Solutions Manual 4.424 Chapter 4 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

PROBLEM 4.14A a. May

Rent Income .................................................. Income Summary ..................................

304,769

Income Summary ........................................... Salaries Expense .................................. Utilities Expense ................................... Interest Expense ................................... Insurance Expense ............................... Supplies Expense ................................. Depreciation Expense ........................... Advertising Expense ............................. Income Tax Expense ............................

206,219

Income Summary ........................................... Retained Earnings ................................

98,550

Retained Earnings ......................................... Dividends Declared ...............................

15,000

304,769

109,000 47,360 9,685 1,800 2,740 29,440 944 5,250

98,550

15,000

(Statement of income accounts are closed to the Income Summary account)

PROBLEM 4.14A (CONTINUED) Cash Mar 31 Bal. 40,000

Accumulated Depreciation—Furniture Mar 31 Bal. 35,500 Mar 31 Adj. 500 Mar 31 Bal. 36,000

Accounts Receivable Mar 31 Bal. 26,000 Mar 31 Adj. 2,870 Mar 31 Bal. 28,870

Mar 31 Bal. Mar 31 Bal.

Supplies 7,240 Mar 31 Adj. 4,500

Prepaid Insurance Mar 31 Bal. 6,000 Mar 31 Adj. Mar 31 Bal. 5,400

Furniture Mar 31 Bal. 54,000

2,740

600

Land Mar 31 Bal. 230,000

Accounts Payable Mar 31 Bal. Mar 31 Adj. Mar 31 Bal.

7,625 2,360 9,985

Salaries Payable Mar 31 Adj.

10,000

Interest Payable Mar 31 Adj.

785

Income Tax Payable Mar 31 Adj.

1,750

Buildings Mar 31 Bal. 187,200 Accumulated Depreciation—Buildings Mar 31 Bal. 61,360 Mar 31 Adj. 1,040 Mar 31 Bal. 62,400

PROBLEM 4.14A (CONTINUED) b. (continued) Deferred Revenue Mar 31 Bal. Mar 31 Adj. 15000 Mar 31 Adj. Mar 31 Bal.

Utilities Expense Mar 31 Bal. 45,000 Mar 31 Adj. 2,360 Mar 31 Bal. 47,360 Mar 31 CE2 47,360 Mar 31 Bal. 0

75,000 13,500 73,500

Mortgage Payable Mar 31 Bal. 147,000 Common Shares Mar 31 Bal. Retained Earnings Mar 31 Bal. Mar 31 CE4 15,000 Mar 31 CE3 Mar 31 Bal. Dividends Declared Mar 31 Bal. 15,000 Mar 31CE4 Mar 31 Bal. 0 Rent Income Mar 31 Bal. Mar 31 Adj. 13,500 Mar 31 Adj. Mar 31 Adj. Mar 31 Bal. Mar31CE1 304,769 Mar 31 Bal. Salaries Expense Mar 31 Bal. 99,000 Mar 31 Adj. 10,000 Mar 31 Bal. 109,000 Mar 31 CE2 Mar 31 Bal. 0

75,000

50,000 98,550 133,550

15,000

304,769 2,870 15,000 304,769 0

Interest Expense Mar 31 Bal. 8,900 Mar 31 Adj. 785 Mar 31 Bal 9,685 Mar 31 CE2 Mar 31 Bal. 0 Insurance Expense Mar 31 Bal. 1,200 Mar 31 Adj. 600 Mar 31 Bal. 1,800 Mar 31 CE2 Mar 31 Bal. 0 Advertising Expense Mar 31 Bal. 944 Mar 31 CE2 Mar 31 Bal. 0 Supplies Expense Mar 31 Adj. 2,740 Mar 31 CE2 Mar 31 Bal. 0

9,685

1,800

944

2,740

109,000

PROBLEM 4.14A (CONTINUED) b. (continued) Depreciation Expense Mar 31 Bal. 27,900 Mar 31 Adj. 500 Mar 31 Adj. 1,040 Mar 31 Bal. 29,440 Mar 31 CE2 29,440 Mar 31 Bal. 0

Income Tax Expense Mar 31 Bal. 3,500 Mar 31 Adj. 1,750 Mar 31 Bal. 5,250 Mar 31 CE2 Mar 31 Bal. 0

5,250

Income Summary Mar 31 CE2 206,219 Mar 31 CE1 304,769 Bal. 98,550 Mar 31 CE3 98,550 Mar 31 Bal. 0

PROBLEM 4.14A (CONTINUED) c. CASA SUITES LTD. Post-Closing Trial Balance March 31, 2024

Debit Cash .................................................................................. Accounts receivable .......................................................... Supplies ............................................................................. Prepaid insurance.............................................................. Land .................................................................................. Buildings ............................................................................ Accumulated depreciation—buildings................................ Furniture ............................................................................ Accumulated depreciation—furniture................................. Accounts payable .............................................................. Salaries payable ................................................................ Interest payable ................................................................. Income tax payable ........................................................... Deferred revenue............................................................... Mortgage payable, due 2028 ............................................. Common shares ................................................................ Retained earnings .............................................................

$ 40,000 28,870 4,500 5,400 230,000 187,200

Totals ........................................................................

$549,970

Credit

$ 62,400 54,000 36,000 9,985 10,000 785 1,750 73,500 147,000 75,000 133,550 $549,970

(Total debits for permanent accounts = Total credits for permanent accounts) LO 5 BT: AP Difficulty: S Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.1B Step Step 1: Is there a contract?

Step 2: What performance obligations are included in the contract? Step 3: What is the transaction price? Step 4: How should the transaction price be allocated to the performance obligations?

Analysis Yes, both parties have agreed to enter into a contract. The services to be provided, price, and payment terms have been agreed to and each party‘s rights under the contract are clear. The contract is consistent with both parties‘ lines of business, meaning it has commercial substance. There are no indications of any concerns regarding collectibility with PhysioPro Ltd. The contract includes two performance obligations: the provision of five one-hour relaxation massage sessions and the provision of one deep tissue massage. Each of these would be considered distinct services.

The transaction price is $36,000. (120 x $300) Because there are multiple (two) performance obligations, the transaction price must be allocated to each of them. The allocation will be done on the basis of the standalone selling price of each performance obligation. Performance Obligation

Stand-Alone Selling Price

% of Total StandAlone Selling Price

Five one-hour relaxation massages

120 X $280 = $33,600

80.0%

× $36,000

$28,800

120 x $70 = $8,400

20.0%

× $36,000

$7,200

$42,000

100.0%

One deep tissue massage Combined stand-alone selling price

Contract Price

Allocation of Contract Price

$36,000

PROBLEM 4.1B (CONTINUED) Step 5: Has a performance obligation been satisfied?

The first performance obligation: one-hour relaxation massage session fee will be recognized at the rate of $48 per hour [$28,800 ÷ (120 x 5)] as each hour session is delivered. An amount of $19,200 (400 x $48) will be recognized as revenue by April 30. The second performance obligation: providing a deep tissue massage will generate a fee to be recognized at the rate of $60 per massage ($7,200 ÷ 120) as each massage is delivered and the performance obligation is satisfied. The revenue related to this obligation in the amount of $3,600 (60 x $60) is recognized by April 30.

LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.2B

1. a. Jan.

2 Supplies Cash

...... 2,100 ...............

b. Dec. 31 Supplies Expense ($2,100 – $550) ........ Supplies ...............

2. a. Mar.

2,100 1,550 1,550

1 Equipment .... 20,000 Cash .................................................

20,000

b. Dec. 31 Depreciation Expense ...... 3,333 Accumulated Depreciation—Equipment ($20,000 ÷ 5 years × 10/12 months)

3. a. June 1

3,333

Prepaid Insurance ...... 4,200 Cash .................................................

b. Dec. 31 Insurance Expense ($4,200 × 7/12 months) Prepaid Insurance ............................

4,200 2,450 2,450

4. a. Nov. 15 Cash ...... 1,275 Deferred Revenue ............................

1,275

b. Dec. 31 Deferred Revenue ($425 × 2) ...... 850 Revenue ...........................................

850

5. a. Dec. 15 Prepaid Rent ...... 2,500 Cash .................................................

2,500

b. Dec. 31 No entry required LO 2 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.3B 1. a.

Nov. 30

Dec.

2. a.

Dec.

3. a.

Dec.

Salaries Payable........................................ 4,200 Salaries Expense .................. 1,800 Cash ........................... 6,000

Nov.

30 Interest Expense .................................... 117 Interest Payable ........................... 117 ($20,000 × 7% × 1/12 months)

Interest Payable........................................ 117 Cash ........................... 117

Nov.

30 Accounts Receivable............................ 1,000 Service Revenue ........................... 1,000

Cash .......................................................... 1,000 Accounts Receivable ........................... 1,000

Nov.

30 Interest Receivable .............................. 10 Interest Income ........................... 10

Dec.

4,200

No entry required

Dec. 21

4. a.

Salaries Expense....................................... 4,200 Salaries Payable ($6,000 × 7/10 days) .

Cash Interest Receivable

.................. 10 ........................... 10

5. a.

Nov.

30 Income Tax Expense ........................... . 1,000 Income Tax Payable ........................... 1,000

Dec. 18

Income Tax Payable .................................. 1,000 Cash ........................... 1,000

LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.4B 1. a.

Mar. 1, 2024

Supplies................................................... Cash .............................

4,250 4,250

Dec. 31, 2024

Supplies Expense ($1,500 + $4,250 – $1,000) ..................... Supplies ............................................

4,750

2. a. b.

3. a.

4. a.

b. c. 5. b. c.

Jan. 2, 2024 Dec. 31, 2024

Aug. 2, 2024

Dec. 31, 2024

June 1, 2024

Dec. 31, 2024 Jan. 1, 2025 Dec. 31, 2024 Jan. 10, 2025

4,750

Vehicles ................................................... Cash .................................................

120,000

Depreciation Expense ............................ Accumulated Depreciation—Vehicles ($120,000 ÷ 4 years)

30,000

Cash ........................................................ Deferred Revenue (600 × $360) .......

216,000

Deferred Revenue ($216,000 × 4/9) ........ Ticket Revenue .................................

96,000

Cash ........................................................ Bank Loan Payable ...........................

30,000

Interest Expense...................................... Interest Payable ($30,000 × 6% × 1/12)

150

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

150

Salaries Expense..................................... Salaries Payable ($9,000 × 7/12)......

5,250

Salaries Expense..................................... Salaries Payable...................................... Cash .................................................

3,750 5,250

120,000 30,000

216,000

96,000

30,000

150 150 5,250

9,000

PROBLEM 4.4B (CONTINUED) 6. b.

7. b.

Dec. 31, 2024

Jan. 7, 2025

Dec. 31, 2024

Jan. 11, 2025

Accounts Receivable ............................... Rent Income .....................................

600

Cash ........................................................ Accounts Receivable ........................ Deferred Revenue ............................

1,200

Utilities Expense ...................................... Accounts Payable .............................

1,125

Accounts Payable .................................... Cash .................................................

1,125

600

600 600

1,125

LO 2,3 BT: AP Moderate: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.5B a. 1. Mar. 31

Service Revenue ........................................................ Deferred Revenue..............................................

20,000

Supplies Expense ($2,900 - $800) .............................. Supplies .............................................................

2,100

Insurance Expense ($3,360 x 3/12) ............................ Prepaid Insurance ..............................................

840

Utilities Expense ......................................................... Accounts Payable ..............................................

210

Salaries Expense ($100 x 4 x 2) ................................. Salaries Payable ................................................

800

Interest Expense ($12,000 x 7% x 3/12) .................... Interest Payable .................................................

210

Income Tax Expense .................................................. Income Tax Payable ..........................................

1,990

20,000

2,100

840

210

800

210

1,990

PROBLEM 4.5B (CONTINUED) b. FLY RIGHT TRAVEL AGENCY LTD. Statement of Income Quarter Ended March 31, 2024

Revenues Service revenue ($50,000 - $20,000) ................................... Expenses Salaries expense ($11,000 + $800) ...................................... Office expense ...................................................................... Supplies expense ................................................................. Advertising expense ............................................................. Insurance expense ............................................................... Utilities expense ($400 + $210) ............................................ Interest expense ................................................................... Depreciation expense ........................................................... Total expenses ............................................................ Income before income tax ............................................................. Income tax expense....................................................................... Net income ....................................................................................

$30,000

$11,800 2,600 2,100 1,700 840 610 210 400 20,260 9,740 1,990 $ 7,750

[Revenues – Expenses = Net Income or (Loss)] LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.6B a. 1.

Prepaid Advertising The monthly amount of advertising is calculated based on the annual contract amount paid of $8,400 divided by 12 months = $700.

The advertising contract for one year was paid by the business on Feb. 1, 2024, for a period of 12 months starting March 1. The Prepaid Advertising account was debited at that date for $8,400. The unadjusted balance would have remained unchanged on October 31, 2024 as no adjusting entries would have been prepared and recorded.

By October 31, 2024, after adjusting entries are prepared and posted to recognize the expiration of 8 months (8 ads running March 1 – October 31) of the contract ($8,400 x 8/12 = $5,600), the Prepaid Advertising account should have an adjusted balance of $2,800 ($8,400 – $5,600). This balance represents 4 months at $700 per month covering the period Nov. 1, 2024 to Feb. 28, 2025.

b. Deferred Revenue 1. The Deferred Revenue account has a balance of $135,000 because all amounts received during the year for leasing contracts were recorded into this account as follows:

Month

Term (in months)

Monthly Rent

Number of Leases

Unearned Revenue

Sept 1, 2024

$4,500

$135,000

This balance would have remained unchanged as no adjusting entries would have been prepared and recorded. 2.

By October 31, 2024, the company has earned $45,000 ($4,500 x 5 x 2). Consequently, the adjusted balance in the Deferred Revenue account is $90,000 ($135,000 - $45,000). This balance represents 4 months x 5 tenants at $4,500 per month.

PROBLEM 4.6B (CONTINUED) c.

Interest Expense

The monthly interest incurred on the bank loan is calculated as follows: $90,000 x 8% x 1/12 = $600

Since the interest is payable at maturity, 7 months of interest have accrued to October 31, 2024. The total is $4,200 ($600 x 7).

By April 1, 2025 a full year of interest will have accrued and will be payable in the amount of $7,200 ($600 x 12).

Depreciation Expense

The annual depreciation expense on the vehicles is calculated as follows: ($39,000 ÷ 5 years) = $ 7,800

The purchase date of the vehicles was April 1, 2023. From April 1, 2023 to October 31, 2023, the depreciation expense recorded would have been $7,800 x 7/12 or $4,550. Consequently, the balance of the Accumulated Depreciation–Vehicles account (unadjusted) at October 31, 2023 would be $4,550. During this past fiscal year ended October 31, 2024, this balance would have remained unchanged as no adjusting entries would have been prepared and recorded.

An annual amount of $7,800 would be recorded to Depreciation Expense for the year ended October 31, 2024. The adjusted balance of the Accumulated Depreciation–Vehicles account at October 31, 2024 would be $12,350 ($4,550 + $7,800).

PROBLEM 4.6B (CONTINUED) e. 1.

2024 Oct. 31

Advertising Expense ($700 x 8) ..................... Prepaid Advertising ..............................

5,600 5,600

Deferred Revenue ($4,500 x 5 x 2) ............... 45,000 Rent Income .......................................

45,000

Interest Expense ($90,000 × 8% × 7/12) ....... Interest Payable..................................

4,200

Depreciation Expense ($39,000 ÷ 5) .. 7,800 Accumulated Depreciation—Vehicles . ...................................................................

7,800

LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.7B a.

b. (1)

Cash Balance, April 30, 2024 = $86,500 cash receipts – $80,920 cash payments = $5,580. THE SHARP EDGE LTD. Statement of Income Six Months Ended April 30, 2024

Revenues Service revenue ($66,500 + $1,440).............................. Expenses Salaries expense ($14,200 + $4,240) ............................ Rent expense ($9,100 – $1,300) ................................... Depreciation expense ($47,040 ÷ 8 × 6/12) ................... Utilities expense ............................................................. Insurance expense ($2,760 × 6/12) ............................... Advertising expense ...................................................... Total expenses...................................................... Income before income tax....................................................... Income tax expense ($5,000 + $800) ..................................... Net income.............................................................................. [Revenues – Expenses = Net income or (Loss)]

$67,940 $18,440 7,800 2,940 1,900 1,380 920 33,380 34,560 5,800 $28,760

b. (2) THE SHARP EDGE LTD. Statement of Changes in Equity Six Months Ended April 30, 2024 Common Shares Balance, November 1, 2023 ............................................... $ 0 Issued common shares ...................................................... 20,000 Net income ............................................... 0000 00 Balance, April 30, 2024 ...................................................... $20,000 (Beginning equity ± Changes to equity = Ending equity)

Retained Earnings

Total Equity

$ 0 20,000 28,760 $48,760

28,760 $28,760

PROBLEM 4.7B (CONTINUED) b. (3) THE SHARP EDGE LTD. Statement of Financial Position April 30, 2024

Assets Current assets Cash .............................................................. Accounts receivable ...................................... Prepaid insurance ($2,760 – $1,380) ............. Prepaid rent ................................................... Total current assets .............................. Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation ................... Total assets ............................................................

$ 5,580 1,440 1,380 1,300 9,700 $47,040 2,940

44,100 $53,800

Liabilities and Shareholders‘ Equity Current liabilities Salaries payable ............................................ Income tax payable ........................................ Total current liabilities ........................... Total liabilities ......................................................... Shareholders‘ equity Common shares ............................................ Retained earnings .......................................... Total shareholders‘ equity ..................... Total liabilities and shareholders‘ equity .................

$ 4,240 800 5,040 5,040 $20,000 28,760 48,760 $53,800

(Assets = Liabilities + Shareholders‘ equity) LO 1,2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.8B a.

Total service revenue ...................................... Total expenses: Repair equipment ..................................... Salaries expense ...................................... Rent expense ............................................ Utilities expense ........................................ Insurance expense .................................. Advertising expense ................................. Income tax expense .................................. Net loss on a cash basis ..................................

$ 66,500 $47,040 14,200 9,100 1,900 2,760 920 5,000

80,920 $(14,420)

Cash based net loss ....................................... Accrual.based net income (from P4.7B) ......... Difference........................................................

$(14,420) 28,760 $ 43,180

I recommend the accrual basis of reporting because the accrual.based statement of income fairly portrays the performance of the business, with revenues and expenses recorded in the period they were earned and incurred.

LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.9B a.

2024

Dec. 31

2. 3.

5. 6.

8. 9. 10.

31 31

31 31 31

Insurance Expense ................................................. Prepaid Insurance ......................................... ($3,600 × 10/12 months)

3,000

Supplies Expense ................................................... Supplies ($2,500 – $570) ..............................

1,930

Depreciation Expense ............................................ Accumulated Depreciation—Vehicles............. ($58,000 ÷ 4 years)

14,500

Depreciation Expense ............................................ Accumulated Depreciation—Furniture ($16,000 ÷ 10)

1,600

Accounts Receivable .............................................. Service Revenue ...........................................

1,750

Interest Expense..................................................... Interest Payable.............................................. ($27,475 × 7% × 3/12 months)

481

Deferred Revenue .................................................. Service Revenue ........................................... ($600 × 2 months)

1,200

Salaries Expense (3 × $200) .................................. Salaries Payable ............................................

600

Rent Expense ...................................................... Prepaid Rent ..............................................

1,150

Income Tax Expense ............................................. Income Tax Payable ($2,850 – $2,000)

850

3,000

1,930

14,500

1,600

1,750 481

1,200

600 1,150 850

PROBLEM 4.9B (CONTINUED) b. Dec. 31 Bal.

Cash 4,600

Furniture Dec. 31 Bal. 16,000

Accounts Receivable Dec. 31 Bal. 8,220 Dec. 31 Adj. 1,750 Dec. 31 Bal. 9,970

Dec. 31 Bal. Dec. 31 Bal.

Supplies 2,500 Dec. 31 Adj. 570

Prepaid Insurance Dec. 31 Bal. 3,600 Dec. 31 Adj. Dec. 31 Bal. 600

Dec. 31 Bal. Dec. 31 Bal.

Prepaid Rent 2,300 Dec. 31 Adj. 1,150

Accumulated Depreciation— Furniture Dec. 31 Bal. 4,000 Dec. 31 Adj. 1,600 Dec. 31 Bal. 5,600

1,930

3,000

1,150

Vehicles Dec. 31 Bal. 58,000 Accumulated Depreciation— Vehicles Dec. 31 Bal. 14,500 Dec. 31 Adj. 14,500 Dec. 31 Bal. 29,000

Salaries Payable Dec. 31 Adj.

600

Interest Payable Dec. 31 Adj.

481

Income Tax Payable Dec. 31 Adj.

850

Deferred Revenue Dec. 31 Bal. Dec. 31 Adj. 1,200 Dec. 31 Bal.

3,600 2,400

Bank Loan Payable Dec. 31 Bal.

27,475

Common Shares Dec. 31 Bal.

5,000

Retained Earnings Dec. 31 Bal.

7,600

PROBLEM 4.9B (CONTINUED) b. (continued) Dividends Declared Dec. 31 Bal. 3,800 Service Revenue Dec. 31 Bal.125,600 Dec. 31 Adj. 1,750 Dec. 31 Adj. 1,200 Dec. 31 Bal.128,550 Salaries Expense Dec. 31 Bal. 67,000 Dec. 31 Adj. 600 Dec. 31 Bal. 67,600 Rent Expense Dec. 31 Bal. 12,650 Dec. 31 Adj. 1,150 Dec. 31 Bal. 13,800

Repairs and Maintenance Expense Dec. 31 Bal. 4,690

Interest Expense Dec. 31 Bal. 2,415 Dec. 31 Adj. 481 Dec. 31 Bal. 2,896

Supplies Expense Dec. 31 Adj. 1,930

Depreciation Expense Dec. 31 Adj. 14,500 Dec. 31 Adj. 1,600 Dec. 31 Bal. 16,100

Insurance Expense Dec. 31 Adj. 3,000

Income Tax Expense Dec. 31 Bal. 2,000 Dec. 31 Adj. 850 Dec. 31 Bal. 2,850

PROBLEM 4.9B (CONTINUED) c.

ORTEGA LIMO SERVICE LTD. Adjusted Trial Balance December 31, 2024

Debit Cash .....................................................................................$ 4,600 Accounts receivable .............................................................. 9,970 Supplies ................................................................................ 570 Prepaid insurance ................................................................. 600 Prepaid rent .......................................................................... 1,150 Vehicles ................................................................................ 58,000 Accumulated depreciation—vehicles .................................... Furniture ............................................................................... 16,000 Accumulated depreciation—furniture .................................... Salaries payable ................................................................... Interest payable .................................................................... Income tax payable ............................................................... Deferred revenue .................................................................. Bank loan payable, due September 1, 2027 ......................... Common shares.................................................................... Retained earnings ................................................................. Dividends declared ............................................................... 3,800 Service revenue .................................................................... Salaries expense .................................................................. 67,600 Depreciation expense ........................................................... 16,100 Rent expense ........................................................................ 13,800 Repairs and maintenance expense....................................... 4,690 Insurance expense................................................................ 3,000 Supplies expense.................................................................. 1,930 Interest expense ................................................................... 2,896 Income tax expense .............................................................. 2,850 Totals................................................................................. $207,556 (Total debits = Total credits)

Credit

$ 29,000 5,600 600 481 850 2,400 27,475 5,000 7,600 128,550

$207,556

LO 2,3,4 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.10B a. 2024 Sept. 6

Salaries Payable ........................................................ 1,400 Salaries Expense .............................................................................. 1,400 Cash .........................................................................................

2,800

Cash .......................................................................... Accounts Receivable .........................................

5,400 5,400

Cash .......................................................................... Service Revenue ...............................................

8,800

Cash .......................................................................... Common Shares ...............................................

5,000

Supplies ..................................................................... Accounts Payable ..............................................

2,000

Salaries Expense ....................................................... Cash ..................................................................

2,800

Accounts Payable....................................................... Cash ..................................................................

7,000

Rent Expense ............................................................. Prepaid Rent .............................................................. Cash ..................................................................

1,000 1,000

Accounts Receivable .................................................. Service Revenue ...............................................

1,600

8,800

5,000

2,000

2,800

7,000

2,000

1,600

PROBLEM 4.10B (CONTINUED) a. (continued) Sept. 27

Cash .......................................................................... Deferred Revenue .............................................

1,300

Dividends Declared .................................................... Cash ..................................................................

500

Income Tax Expense .................................................. Cash ..................................................................

600

1,300

500

600

b. and d.

Sept. 1 Bal. Sept. 6 Sept. 11 Sept. 12 Sept. 27

Cash 9,760 5,400 Sept. 6 8,800 Sept. 20 5,000 Sept. 21 1,300 Sept. 24 Sept. 28 Sept. 28

2,800 2,800 7,000 2,000 500 600

Sept. 30 Bal. 14,560 Accounts Receivable Sept. 1 Bal. 7,440 Sept. 26 1,600 Sept. 6 Sept. 30 Bal. 3,640 Sept. 30 Adj. 600 Sept. 30 Bal. 4,240

Supplies Sept. 1 Bal. 1,600 Sept. 17 2,000 Sept. 30 Bal. 3,600 Sept. 30 Adj. 2,800 Sept. 30 Bal. 800

Sept. 24

Prepaid Rent 1,000

Equipment Sept. 1 Bal. 30,000 5,400

Accumulated Depreciation—Equipment Sept. 1 Bal. 3,000 Sept. 30 Adj. 250 Sept. 30 Bal. 3,250

PROBLEM 4.10B (CONTINUED) b. and d. (continued)

Sept. 21

Accounts Payable Sept. 1 Bal. 7,000 Sept. 17 Sept. 30 Bal.

Deferred Revenue Sept. 1 Bal. Sept. 27 Sept. 30 Bal. Sept. 30 Adj. 800 Sept. 30 Bal.

Sept. 6

6,200 2,000 1,200

800 1,300 2,100 1,300

Salaries Payable Sept. 1 Bal. 1,400 1,400 Sept. 30 Bal. 0 Sept. 30 Adj. 1,680 Sept. 30 Bal. 1,680 Common Shares Sept. 1 Bal. 20,000 Sept. 12 5,000 Sept. 30 Bal. 25,000 Retained Earnings Sept. 1 Bal. 17,400

Sept. 28

Service Revenue Sept. 11 8,800 Sept. 26 1,600 Sept. 30 Bal. 10,400 Sept. 30 Adj. 600 Sept. 30 Adj. 800 Sept. 30 Bal. 11,800 Depreciation Expense Sept. 30 Adj. 250 Supplies Expense Sept. 30 Adj. 2,800

Salaries Expense Sept. 6 1,400 Sept. 20 2,800 Sept. 30 Bal. 4,200 Sept. 30 Adj. 1,680 Sept. 30 Bal. 5,880

Sept. 24

Rent Expense 1,000

Sept. 28

Income Tax Expense 600

Dividends Declared 500

PROBLEM 4.10B (CONTINUED) c. RIJO EQUIPMENT REPAIR CORP. Trial Balance September 30, 2024

Cash ........................................................... Accounts receivable.................................... Supplies ...................................................... Prepaid rent ................................................ Equipment .................................................. Accumulated depreciation—equipment ...... Accounts payable ....................................... Deferred revenue ........................................ Common shares ......................................... Retained earnings....................................... Dividends declared ..................................... Service revenue .......................................... Salaries expense ........................................ Rent expense ............................................. Income tax expense.................................... Totals ...................................................

Debit $14,560 3,640 3,600 1,000 30,000

Credit

$ 3,000 1,200 2,100 25,000 17,400 500 10,400 4,200 1,000 600 $59,100

000 000 $59,100

(Total debits = Total credits)

PROBLEM 4.10B (CONTINUED) d. 1.

2024 Sept. 30

Supplies Expense ..................................... Supplies ($3,600 – $800) .................

2,800

Salaries Expense ...................................... Salaries Payable ..............................

1,680

Accounts Receivable................................. Service Revenue ..............................

600

Depreciation Expense ............................... Accumulated Depreciation—Equipment ($30,000 ÷ 10 years ÷ 12 months)

250

Deferred Revenue ..................................... Service Revenue ..............................

800

2,800

1,680

600

250

800

PROBLEM 4.10B (CONTINUED) e.

RIJO EQUIPMENT REPAIR CORP. Adjusted Trial Balance September 30, 2024

Cash .......................................................................... Accounts receivable .................................................. Supplies .................................................................... Prepaid rent ............................................................... Equipment ................................................................. Accumulated depreciation—equipment ..................... Accounts payable ...................................................... Deferred revenue ...................................................... Salaries payable ........................................................ Common shares ........................................................ Retained earnings ..................................................... Dividends declared .................................................... Service revenue ........................................................ Salaries expense ....................................................... Supplies expense ...................................................... Rent expense ............................................................ Depreciation expense ................................................ Income tax expense .................................................. Totals .................................................................. (Total debits = Total credits)

Debit $14,560 4,240 800 1,000 30,000

Credit

$ 3,250 1,200 1,300 1,680 25,000 17,400 500 11,800 5,880 2,800 1,000 250 600 $61,630

000 000 $61,630

PROBLEM 4.10B (CONTINUED) f. (1) RIJO EQUIPMENT REPAIR CORP. Statement of Income Month Ended September 30, 2024

Service revenue ....................................................... Expenses Salaries expense ............................................ Supplies expense............................................ Rent expense .................................................. Depreciation expense ..................................... Total expenses ....................................... Income before income tax ........................................ Income tax expense ................................................. Net income .............................................................. [Revenues – Expenses = Net Income or (Loss)]

f. (2)

$11,800 $5,880 2,800 1,000 250 9,930 1,870 600 $ 1,270

RIJO EQUIPMENT REPAIR CORP. Statement of Changes in Equity Month Ended September 30, 2024

Common Shares Balance, September 1............................................... $20,000 Issued common shares ............................................. 5,000 Net income ................................................................ Dividends declared.................................................... 00 0000 Balance, September 30 ............................................. $25,000

Retained Earnings $17,400 1,270 (500) $18,170

Total Equity $37,400 5,000 1,270 (500) $43,170

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 4.10B (CONTINUED) f. (3) RIJO EQUIPMENT REPAIR CORP. Statement of Financial Position September 30, 2024

Assets Current assets Cash ............................................................................. Accounts receivable ...................................................... Supplies ........................................................................ Prepaid rent .................................................................. Total current assets.............................................. Property, plant, and equipment Equipment .................................................. $30,000 Less: Accumulated depreciation ............... 3,250 Total assets ...........................................................................

$14,560 4,240 800 1,000 20,600

26,750 $47,350

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable .......................................................... Salaries payable ........................................................... Deferred revenue .......................................................... Total current liabilities .......................................... Total liabilities ......................................................................... Shareholders‘ equity Common shares......................................... $25,000 Retained earnings ...................................... 18,170 Total shareholders‘ equity .................................... Total liabilities and shareholders‘ equity ................................

$ 1,200 1,680 1,300 4,180 4,180

43,170 $47,350

(Assets = Liabilities + Shareholders‘ equity) LO 2,3,4 BT: AP Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.11B a.

2024 Sept.

Service Revenue ..................................... Income Summary ...........................

11,800

Income Summary .................................... Salaries Expense ........................... Supplies Expense ........................... Rent Expense ................................. Depreciation Expense .................... Income Tax Expense ......................

10,530

Income Summary .................................... Retained Earnings ..........................

1,270

Retained Earnings ................................... Dividends Declared ..........................

500

11,800

5,880 2,800 1,000 250 600

1,270

(Statement of income accounts are closed to the Income Summary account)

500

PROBLEM 4.11B (CONTINUED b.

Sept. 1 Bal. Sept. 6 Sept. 11 Sept. 12 Sept. 27

Sept. 30 Bal.

Cash 9,760 5,400 Sept. 6 8,800 Sept. 20 5,000 Sept. 21 1,300 Sept. 25 Sept. 28 Sept. 28 14,560

Accounts Receivable Sept. 1 Bal. 7,440 Sept. 26 1,600 Sept. 6 Sept. 30 Bal. 3,640 Sept. 30 Adj. 600 Sept. 30 Bal. 4,240

2,800 2,800 7,000 2,200 500 600

Sept. 21

5,400

Sept. 30 Bal.

Supplies 1,600 2,000 3,600 Sept. 30 Adj. 2,800 800

Sept. 24

Prepaid Rent 1,000

Sept. 1 Bal.

Equipment 30,000

Sept. 1 Bal. Sept. 17 Sept. 30 Bal.

Accumulated Depreciation—Equipment Sept. 1 Bal. 3,000 Sept. 30 Adj. 250 Sept. 30 Bal. 3,250

Accounts Payable Sept. 1 Bal. 7,000 Sept. 17 Sept. 30 Bal.

Deferred Revenue Sept. 1 Bal. Sept. 27 Sept. 30 Bal. Sept. 30 Adj. 800 Sept. 30 Bal.

Sept. 4

Salaries Payable Sept. 1 Bal. 1,400 Sept. 30 Bal. Sept. 30 Adj. Sept. 30 Bal.

6,200 2,000 1,200

800 1,300 2,100 1,300

1,400 0 1,680 1,680

Common Shares Sept. 1 Bal. 20,000 Sept. 12 5,000 Sept. 30 Bal. 25,000

PROBLEM 4.11B (CONTINUED) b. (continued) Retained Earnings Sept. 1 Bal. 17,400 Sept. 30 Bal. 17,400 Sept. 30 CE4 500 Sept. 30 CE3 1,270 Sept. 30 Bal. 18,170

Income Tax Expense Sept. 28 600 Sept. 30 CE2 Sept. 30 Bal. 0

Dividends Declared Sept. 28 500 Sept. 30 CE4 Sept. 30 Bal. 0

Rent Expense Sept. 24 1,000 Sept. 30 CE2 1,000 Sept. 30 Bal. 0

500

Service Revenue Sept. 11 8,800 Sept. 26 1,600 Sept. 30 Bal. 10,400 Sept. 30 Adj. 600 Sept. 30 Adj. 800 Sept. 30 Bal. 11,800 Sept. 30 CE1 11,800 Sept. 30 Bal. 0 Depreciation Expense Sept. 30 Adj. 250 Sept. 30 CE2 Sept. 30 Bal. 0

250

600

Salaries Expense Sept. 6 1,400 Sept. 20 2,800 Sept. 30 Bal. 4,200 Sept. 30 Adj. 1,680 Sept. 30 Bal. 5,880 Sept. 30 CE 2 5,880 Sept. 30 Bal. 0 Income Summary Sept. 30 CE2 10,530 Sept. 30 CE1 11,800 Bal. 1,270 Sept. 30 CE3 1,270 Sept. 30 Bal. 0

Supplies Expense Sept. 30 Adj. 2,800 Sept. 30 CE2 2,800 Sept. 30 Bal. 0

PROBLEM 4.11B (CONTINUED) c. RIJO EQUIPMENT REPAIR CORP. Post-Closing Trial Balance September 30, 2024

Cash ............................................................. Accounts receivable ..................................... Supplies ....................................................... Prepaid rent.................................................. Equipment .................................................... Accumulated depreciation—equipment ........ Accounts payable ......................................... Deferred revenue ......................................... Salaries payable ........................................... Common shares ........................................... Retained earnings ........................................ Totals.....................................................

Debit $14,560 4,240 800 1,000 30,000

00 0000 $50,600

Credit

$ 3,250 1,200 1,300 1,680 25,000 18,170 $50,600

(Total debits for permanent accounts = Total credits for permanent accounts) LO 5 BT: AP Difficulty: S Time: 50 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.12B a. GRANT ADVERTISING AGENCY LIMITED Adjusted Trial Balance December 31, 2024

Cash .................................................................................... Trading investments ............................................................ Accounts receivable ............................................................ Supplies ............................................................................. Prepaid insurance ............................................................... Equipment ........................................................................... Accumulated depreciation—equipment ............................... Accounts payable ............................................................... Salaries payable.................................................................. Interest payable................................................................... Deferred revenue ................................................................ Income tax payable ............................................................. Bank loan payable ............................................................... Common shares ................................................................. Retained earnings ............................................................... Dividends declared.............................................................. Fees earned ........................................................................ Salaries expense ................................................................. Depreciation expense ......................................................... Rent expense ..................................................................... Supplies expense ............................................................... Insurance expense .............................................................. Interest expense.................................................................. Income tax expense ............................................................ Totals .........................................................................

Debit $ 11,000 10,850 19,750 1,265 800 66,000

Credit

$ 39,600 4,800 1,625 700 6,200 4,000 10,000 20,000 10,400 2,000 60,600 13,625 13,200 7,200 5,935 1,600 700 4,000 $157,925

000 0 00 $157,925

(Total debits = Total credits)

PROBLEM 4.12B (CONTINUED) b. 2024 Dec. 31

031

Fees Earned ............................................. Income Summary.............................

60,600

Income Summary ..................................... Salaries Expense ............................. Depreciation Expense ...................... Rent Expense .................................. Supplies Expense ............................ Insurance Expense .......................... Interest Expense .............................. Income Tax Expense .......................

46,260

Income Summary ..................................... Retained Earnings ...........................

14,340

Retained Earnings .................................... Dividends Declared..........................

2,000

60,600

13,625 13,200 7,200 5,935 1,600 700 4,000

14,340

2,000

(Statement of income accounts are closed to the Income Summary account)

PROBLEM 4.12B (CONTINUED) c. GRANT ADVERTISING AGENCY LIMITED Post-Closing Trial Balance December 31, 2024

Debit

Credit

Cash ..................................................................................$ 11,000 Trading investments .......................................................... 10,850 Accounts receivable........................................................... 19,750 Supplies ............................................................................. 1,265 Prepaid insurance .............................................................. 800 Equipment ......................................................................... 66,000 Accumulated depreciation—equipment ............................. Accounts payable .............................................................. Salaries payable ................................................................ Interest payable ................................................................. Deferred revenue ............................................................... Income tax payable............................................................ Bank loan payable ............................................................. Common shares ................................................................ Retained earnings.............................................................. 00 000 0 Totals ............................................................................ $109,665

$ 39,600 4,800 1,625 700 6,200 4,000 10,000 20,000 22,740 $109,665

(Total debits = Total credits) LO 4,5 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.13B a. 1. 2. 3.

6. 7. 8. 9.

10.

2024 Aug. 31 31 31

31 31 31 31

Insurance Expense ($12,720 × 3/12)............. Prepaid Insurance ................................

3,180

Supplies Expense ($6,990 – $1,380)............. Supplies ................................................

5,610

Depreciation Expense ................................... ($290,000 ÷ 50 years) Accumulated Depreciation—Buildings .

5,800

Depreciation Expense ................................... ($57,200 ÷ 10 years) Accumulated Depreciation—Furniture ..

5,720

Deferred Revenue ......................................... Rent Income ......................................... [(355 – 45) × $200]

62,000

Salaries Expense........................................... Salaries Payable ...................................

1,680

Utilities Expense ............................................ Accounts Payable .................................

3,120

Rent Income .................................................. Deferred Revenue ................................

6,000

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

700

Income Tax Expense ..................................... ................................ Income Tax Payable ...............

2,000

3,180 5,610

5,800

5,720 62,000

1,680 3,120 6,000 700

2,000

PROBLEM 4.13B (CONTINUED) b.

Cash Aug. 31 Bal. 38,820 Supplies Aug. 31 Bal. 6,990 Aug. 31 Adj. 5,610 Aug. 31 Bal. 1,380 Prepaid Insurance Aug. 31 Bal. 12,720 Aug. 31 Adj. 3,180 Aug. 31 Bal. 9,540 Land Aug. 31 Bal. 70,000 Buildings Aug.31 Bal. 290,000 Accumulated Depreciation— Buildings Aug. 31 Bal. 87,000 Aug. 31 Adj. 5,800 Aug. 31 Bal. 92,800 Furniture Aug. 31 Bal. 57,200

Accumulated Depreciation— Furniture Aug. 31 Bal. 22,880 Aug. 31 Adj. 5,720 Aug. 31 Bal. 28,600 Accounts Payable Aug. 31 Bal. 13,000 Aug. 31 Adj. 3,120 Aug. 31 Bal. 16,120 Deferred Revenue Aug. 31 Bal. 71,000 Aug. 31 Adj. 62,000 Aug. 31 Adj. 6,000 Aug. 31 Bal. 15,000 Salaries Payable Aug. 31 Adj.

1,680

Interest Payable Aug. 31 Adj.

700

Income Tax Payable Aug. 31 Adj.

2,000

Mortgage Payable Aug. 31 Bal. 120,000 Common Shares Aug. 31 Bal. 40,000

PROBLEM 4.13B (CONTINUED) b. (continued) Retained Earnings Aug. 31 Bal. 72,000 Dividends Declared Aug. 31 Bal. 10,000

Aug. 31 Adj.

Rent Income 6,000 Aug.31 Bal. 497,000 Aug. 31 Adj. 62,000 Aug. 31 Bal. 553,000

Salaries Expense Aug. 31 Bal. 306,000 Aug. 31 Adj. 1,680 Aug. 31 Bal. 307,680 Utilities Expense Aug. 31 Bal. 75,200 Aug. 31 Adj. 3,120 Aug. 31 Bal. 78,320 Repairs and Maintenance Expense Aug. 31 Bal. 28,250

Insurance Expense Aug. 31 Adj. 3,180 Supplies Expense Aug. 31 Adj. 5,610 Depreciation Expense Aug. 31 Adj. 5,800 Aug. 31 Adj. 5,720 Aug. 31 Bal. 11,520 Interest Expense Aug. 31 Bal. Aug. 31 Adj. Aug. 31 Bal.

7,700 700 8,400

Income Tax Expense Aug. 31 Bal. 20,000 Aug. 31 Adj.0 2,000 Aug. 31 Bal. 22,000

PROBLEM 4.13B (CONTINUED) c.

ROCKY MOUNTAIN RESORT INC. Adjusted Trial Balance

August 31, 2024

Cash ........................................................................ Supplies ....................................................................... Prepaid insurance ........................................................ Land............................................................................. Buildings ...................................................................... Accumulated depreciation—buildings .......................... Furniture ...................................................................... Accumulated depreciation—furniture ........................... Accounts payable ........................................................ Salaries payable .......................................................... Interest payable ........................................................... Income tax payable...................................................... Deferred revenue ......................................................... Mortgage payable, due 2028 ....................................... Common shares .......................................................... Retained earnings........................................................ Dividends declared ...................................................... Rent income ................................................................ Salaries expense ......................................................... Utilities expense........................................................... Repairs and maintenance expense ............................. Depreciation expense .................................................. Interest expense .......................................................... Supplies expense ........................................................ Insurance expense ...................................................... Income tax expense..................................................... Totals ...............................................................

Debit $ 38,820 1,380 9,540 70,000 290,000

Credit

$ 92,800 57,200 28,600 16,120 1,680 700 2,000 15,000 120,000 40,000 72,000 10,000 553,000 307,680 78,320 28,250 11,520 8,400 5,610 3,180 22,000 $941,900

, 000000 0 $941,900

(Total debits = Total credits)

PROBLEM 4.13B (CONTINUED) d. (1)

ROCKY MOUNTAIN RESORT INC. Statement of Income Year Ended August 31, 2024

Revenues Rent income............................................. Expenses Salaries expense ..................................... Utilities expense....................................... Repairs and maintenance expense ......... Depreciation expense .............................. Interest expense ...................................... Supplies expense .................................... Insurance expense .................................. Total expenses ............................... Income before income tax ................................ Income tax expense.......................................... Net income ......................................................

$553,000 $307,680 78,320 28,250 11,520 8,400 5,610 3,180 442,960 110,040 22,000 $ 88,040

[Revenues – Expenses = Net income or (Loss)] d. (2)

ROCKY MOUNTAIN RESORT INC. Statement of Changes in Equity Year Ended August 31, 2024 Common Shares

Retained Earnings

Balance, September 1, 2023 .......................................................... $35,000 $ 72,000 Issued common shares .................................................................. 5,000 Net income ........................................................ 88,040 Dividends declared......................................................................... 0000 00 (10,000) Balance, August 31, 2024 .............................................................. $40,000 $150,040 (Beginning equity ± Changes to equity = Ending equity)

Total Equity $107,000 5,000 88,040 (10,000) $190,040

PROBLEM 4.13B (CONTINUED) d. (3) ROCKY MOUNTAIN RESORT INC. Statement of Financial Position August 31, 2024 Assets Current assets Cash ........................................................ Supplies ................................................... Prepaid insurance .................................... Total current assets ........................... Property, plant, and equipment Land ......................................................... $ 70,000 Buildings .................................................. $290,000 Less: Accumulated depreciation ............. 92,800 197,200 Furniture .................................................. $57,200 Less: Accumulated depreciation ............. 28,600 28,600 Total property, plant, and equipment Total assets ........................................................ Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ...................................... Salaries payable ........................................ Interest payable ......................................... Income tax payable .................................... Deferred revenue ....................................... Total current liabilities ....................... Non.current liabilities Mortgage payable ...................................... Total liabilities ................................... Shareholders‘ equity Common shares ........................................ Retained earnings...................................... Total shareholders‘ equity ................. Total liabilities and shareholders‘ equity ............. (Assets = Liabilities + Shareholders‘ equity)

$ 38,820 1,380 9,540 49,740

295,800

$345,540

$16,120 1,680 700 2,000 15,000 $ 35,500 120,000 155,500 $ 40,000 150,040 190,040 $345,540

PROBLEM 4.13B (CONTINUED) e.

The financial position and performance of a company can be evaluated in terms of its liquidity, profitability, and solvency.

Liquidity Rocky Mountain Resort seems to being enjoying a strong liquidity position. It has a large cash balance of $38,820. The company has a positive current ratio of 1.4:1 ($49,740 ÷ $35,500) which would indicate that there are more than enough current assets on hand to meet currently maturing liabilities. It is also notable that current liabilities include a large amount (42.3%) of deferred revenue, which will not require a cash payment in future. Profitability According to the statement of income, Rocky Mountain Resort was profitable in 2024 with net income of $88,040. The resort also has a positive balance in retained earnings, which indicates it has been profitable in the past. The company also declared dividends of $10,000 in the past year, which may be of interest to your friend if your friend is considering an income investment. Solvency The company has a large mortgage, but this represents less than half of the value of the property, plant, and equipment so the bank should not be worried about security for the loan. The company‘s debt to assets ratio is 45% ($155,500 ÷ $345,540), so the level of debt held by the company is not extremely high which mitigates the risk of not being able to make interest payments. This, combined with strong liquidity and positive income, indicates that the company is not experiencing any solvency problems. Overall, Rocky Mountain Resort appears to have a healthy financial position. However, a more complete analysis should be performed before investing. Reviewing prior years‘ financial statements and industry information would enable us to perform some comparative analysis to better evaluate Rocky‘s financial health. LO 2,3,4 BT: AN Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 4.14B a. 2024 Aug. 31

031

Rent Income ............................................... Income Summary ...............................

553,000

Income Summary ........................................ Salaries Expense ............................... Utilities Expense ................................ Repairs and Maintenance Expense ... Depreciation Expense ........................ Interest Expense ................................ Supplies Expense .............................. Insurance Expense ............................ Income Tax Expense .........................

464,960

Income Summary ........................................ Retained Earnings .............................

88,040

553,000

307,680 78,320 28,250 11,520 8,400 5,610 3,180 22,000

88,040

Retained Earnings ...................................... 10,000 Dividends Declared ............................ 10,000 (Statement of income accounts are closed to the Income Summary account)

PROBLEM 4.14B (CONTINUED b. Cash Aug. 31 Bal. 38,820 Aug. 31 Bal. Aug. 31 Bal.

Supplies 6,990 Aug. 31 Adj. 1,380

Prepaid Insurance Aug. 31 Bal. 12,720 Aug. 31 Adj. Aug. 31 Bal. 9,540

Accounts Payable Aug. 31 Bal. 13,000 Aug. 31 Adj. 3,120 Aug. 31 Bal. 16,120 5,610

3,180

Deferred Revenue Aug. 31 Bal. 71,000 Aug. 31 Adj. 62,000 Aug. 31 Adj. 6,000 Aug. 31 Bal. 15,000 Salaries Payable Aug. 31 Adj.

1,680

Land Aug. 31 Bal. 70,000

Interest Payable Aug. 31 Adj.

700

Buildings Aug. 31 Bal.290,000

Income Tax Payable Aug. 31 Adj.

2,000

Accumulated Depreciation— Buildings Aug. 31 Bal. 87,000 Aug. 31 Adj. 5,800 Aug. 31 Bal. 92,800 Furniture Aug. 31 Bal. 57,200 Accumulated Depreciation— Furniture Aug. 31 Bal. 22,880 Aug. 31 Adj. 5,720 Aug. 31 Bal. 28,600

Mortgage Payable Aug. 31 Bal. 120,000 Common Shares Aug. 31 Bal. 40,000 Retained Earnings Aug. 31 Bal. 72,000 Aug. 31 CE4 10,000 Aug. 31 CE3 88,040 Aug. 31 Bal. 150,040 Dividends Declared Aug. 31 Bal. 10,000 Aug. 31 CE4 10,000 Aug. 31 Bal. 0

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Eighth Canadian Edition

PROBLEM 4.14B (CONTINUED) b. (continued) Rent Income Aug. 31 Bal. 497,000 Aug. 31 Adj. 6,000 Aug. 31 Adj. 62,000 Aug. 31 Bal. 553,000 Aug.31 CE1 553,000 Aug. 31 Bal. 0 Salaries Expense Aug. 31 Bal. 306,000 Aug. 31 Adj. 1,680 Aug. 31 Bal. 307,680 Aug.31 CE2 Aug. 31 Bal. 0

Aug. 31 Bal. Aug. 31 Adj. Aug. 31 Bal. Aug. 31 Bal.

Utilities Expense 75,200 3,120 78,320 Aug. 31 CE2 0

5,610

Depreciation Expense Aug. 31 5,800 Aug. 31 Adj. 5,720 Aug. 31 Bal. 11,520 Aug. 31 CE2 11,520 Aug. 31 Bal. 0

307,680

Interest Expense Aug. 31 Bal. Aug. 31 Adj. Aug. 31 Bal.

7,700 700 8,400 Aug. 31 CE2

Aug. 31 Bal.

8,400

78,320

Repairs and Maintenance Expense Aug. 31 Bal. 28,250 Aug. 31 CE2 28,250 Aug. 31 Bal. 0 Insurance Expense Aug. 31 Adj. 3,180 Aug. 31 CE2 Aug. 31 Bal. 0

Supplies Expense 5,610 Aug. 31 CE2 Aug. 31 Bal. 0 Aug. 31 Adj.

Income Tax Expense Aug. 31 Bal. 20,000 Aug. 31 2,000 Aug. 31 Bal. 22,000 Aug. 31 CE2 22,000 Aug. 31 Bal. 0 Income Summary

3,180

Aug.31 CE2 464,960 Aug.31 CE1 553,000 Bal. 88,040 Aug.31 CE3 88,040 Aug. 31 Bal. 0

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Eighth Canadian Edition

PROBLEM 4.14B (CONTINUED c.

ROCKY MOUNTAIN RESORT INC. Post-Closing Trial Balance

August 31, 2024 Debit Credit Cash...............................................................................$ 38,820 Supplies ............................................................................. 1,380 Prepaid insurance .............................................................. 9,540 Land ...................................................................................70,000 Buildings ............................................................................ 290,000 Accumulated depreciation—buildings ................................ $ 92,800 Furniture.............................................................................57,200 Accumulated depreciation—furniture ................................. 28,600 Accounts payable ............................................................... 16,120 Salaries payable................................................................. 1,680 Interest payable ................................................................. 700 Income tax payable ............................................................ 2,000 Deferred revenue ............................................................... 15,000 Mortgage payable .............................................................. 120,000 Common shares ................................................................. 40,000 Retained earnings .............................................................. 00 00000 150,040 Totals ......................................................................... $466,940 $466,940 (Total debits for permanent accounts = Total credits for permanent accounts) LO 5 BT: AP Difficulty: S Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Eighth Canadian Edition

ACR4.1 ACCOUNTING CYCLE REVIEW a. Aug.

1 3 6 10

13 15 17 22

27 29 31

Prepaid Advertising ................................................... Cash .................................................................

400

Prepaid Rent ............................................................. Cash .................................................................

380

Cash ......................................................................... Accounts Receivable ........................................

3,200

Salaries Expense ...................................................... Salaries Payable ....................................................... Cash .................................................................

1,700 1,420

Cash ......................................................................... Service Revenue ..............................................

3,800

Equipment ................................................................. Accounts Payable .............................................

2,000

Accounts Payable ...................................................... Cash .................................................................

2,000

Supplies .................................................................... Accounts Payable .............................................

800

Salaries Expense ...................................................... Cash .................................................................

2,900

Accounts Receivable ................................................ Service Revenue ..............................................

4,760

Cash ......................................................................... Deferred Revenue ............................................

780

Dividends Declared ................................................... Cash .................................................................

500

400 380 3,200

3,120 3,800 2,000 2,000 800

2,900

4,760 780 500

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Eighth Canadian Edition

ACR4.1 (CONTINUED) b., d., and g. Cash Aug

Aug.

1 Bal.

6,020 Aug.

400

3,200

380

3,800

3,120

780

2,000

2,900

500

31 Bal.

Interest Receivable Aug. 1 Bal.

Aug. 31 Adj.

Aug. 31 Bal.

40 Equipment

Aug. 1 Bal. 10,000

4,500

Aug. 15

Aug. 31 Bal. 12,000

Accounts Receivable Aug.

1 Bal. 4,310 Aug. 6 27

Aug.

3,200 Accumulated Depreciation—Equipment

4,760

31 Bal. 5,870 Prepaid Advertising

Aug.

400

Aug.

31 Bal.

200

Aug. 31

Aug.

1,030 Aug. 31

800

31 Bal.

960

Adj.

87 0

Aug. 10

Prepaid Rent Aug.

380 Aug. 31

Aug.

31 Bal.

2,000

Aug. 31 Adj.

2000

Aug. 31 Bal

2,200

Accounts Payable

Supplies 1 Bal.

Aug. 1 Bal.

Adj. 200 Aug. 17

Aug.

2,000

Adj. 380

2,000 Aug. 1 Bal.

2,300

2,000

800

Aug. 31 Bal.

3,100

Salaries Payable 1,420 Aug. 1 Bal.

1,420

Aug. 31 Adj.

1,540

Aug. 31 Bal.

1,540

Notes Receivable Aug. 1 Bal. 4,000 Solutions Manual 4.476 Chapter 4 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

ACR4.1 (CONTINUED) b., d., and g. (continued) Interest Income Aug. 31 Adj.

Income Tax Payable Aug.

31 Adj.

300

Aug. 31 CE

20 Aug.31 Bal.

Aug. 31 Adj.

Deferred Revenue 800 Aug. 1 Bal.

Salaries Expense 1,260

Aug. 10

1,700

780

2,900

Aug. 31 Bal.

1,240

Aug. 31 Adj.

1,540

Aug. 31 Bal.

6,140

Common Shares

Aug. 31 CE2

Aug. 1 Bal.

12,000

Aug. 31 Bal.

Retained Earnings

Aug. 31 CE4

6,140

0 Rent Expense

Aug. 1 Bal. Aug. 31 CE3

6,400 1,290

Aug. 31 Bal.

7,190

500

Aug. 31 Adj.

380 Aug. 31 CE2

Aug. 31 Bal.

380

0 Supplies Expense

Dividends Declared Aug. 31

500 Aug. 31 CE4

Aug. 31 Bal.

Aug. 31 Adj. 500

Aug. 31 CE2 Aug. 31 Bal.

Service Revenue

Aug. 31 CE1

870

Aug. 13

3,800

4,760

31 Adj.

800

Aug. 31 Bal.

9,360

Aug. 31 Bal.

870

Depreciation Expense Aug.

31 Adj.

200 Aug. 31 CE2

Aug. 31 Bal.

9,360

200

ACR4.1 (CONTINUED) b., d., and g. (continued) Income Tax Expense Aug. 31 Adj.

300

Aug. 31 CE 2 Aug 31 CE2

Aug. 31 Bal.

Income Summary

Aug. 31 CE 3

Aug. 31 Bal.

1,290

Aug. 31 Bal.

1,290

200 Aug 31

Aug. 31 Bal.

9,380

300

Advertising Expense Aug. 31 Adj.

8,090 Aug. 31 CE1

CE2

200

ACR4.1 (CONTINUED) c. TOBIQUE LTD. Trial Balance August 31, 2024

Cash ...................................................... Accounts receivable ............................. Prepaid advertising ............................... Supplies ................................................ Prepaid rent ........................................... Notes receivable .................................... Interest receivable ................................. Equipment ............................................. Accumulated depreciation—equipment . Accounts payable ................................. Deferred revenue .................................. Common shares ................................... Retained earnings ................................. Dividends declared ................................ Service revenue ..................................... Salaries expense .................................. Totals ..............................................

Debit $ 4,500 5,870 400 1,830 380 4,000 20 12,000

Credit

$ 2,000 3,100 2,040 12,000 6,400 500 8,560 4,600 $34,100

$34,100

(Total debits = Total credits)

ACR4.1 (CONTINUED) d. Aug. 31

31 31

Advertising Expense .................................................. Prepaid Advertising .......................................... ($400 × 1/2)

200

Rent Expense ............................................................ Prepaid Rent ....................................................

380

Salaries Expense ...................................................... Salaries Payable ..............................................

1,540

Depreciation Expense ............................................... Accumulated Depreciation—Equipment ...........

200

Supplies Expense...................................................... Supplies ($1,830 - $960) ..................................

870

Deferred Revenue ..................................................... Service Revenue ..............................................

800

Interest Receivable .................................................... Interest Income ................................................. ($4,000 × 6% × 1/12)

Income Tax Expense ................................................. Income Tax Payable .........................................

300

200

380 1,540

200

870

800

300

ACR4.1 (CONTINUED) e. TOBIQUE LTD. Adjusted Trial Balance August 31, 2024

Cash Accounts receivable ....................................... Prepaid advertising ......................................... Supplies .......................................................... Notes receivable .............................................. Interest receivable ........................................... Equipment ....................................................... Accumulated depreciation—equipment ........... Accounts payable ........................................... Salaries payable ............................................. Income tax payable ........................................ Deferred revenue ............................................ Common shares ............................................. Retained earnings .......................................... Dividends declared .......................................... Service revenue .............................................. Interest income ............................................... Salaries expense ............................................ Rent expense ................................................. Supplies expense ........................................... Depreciation expense ..................................... Advertising expense ....................................... Income tax expense ....................................... Totals ........................................................

Debit $ 4,500 5,870 200 960 4,000 40 12,000

Credit

$ 2,200 3,100 1,540 300 1,240 12,000 6,400 500 9,360 20 6,140 380 870 200 200 300 $36,160

$36,160

(Total debits = Total credits)

ACR4.1 (CONTINUED) f. (1) TOBIQUE LTD. Statement of Income Month Ended August 31, 2024

Revenues Service revenue .............................................. Interest income ............................................... Expenses Salaries expense ............................................ Supplies expense ............................................ Rent expense .................................................. Advertising expense ........................................ Depreciation expense ..................................... Total expenses ....................................... Income before income tax ........................................ Income tax expense ................................................. Net income ............................................................... [Revenues – Expenses = Net Income or (Loss)]

$9,360 20

$9,380

$6,140 870 380 200 200 7,790 1,590 300 $1,290

f. (2) TOBIQUE LTD. Statement of Changes in Equity Month Ended August 31, 2024 Common Retained Shares Earnings Balance, Aug. 1 ...................................................................... $12,000 $6,400 Net income.............................................................................. 00 0000 1,290 Dividends declared ................................................................. __ ____ (500) Balance, Aug. 31 .................................................................... $12,000 $7,190

Total Equity $18,400 1,290 (500) $19,190

(Beginning equity ± Changes to equity = Ending equity)

ACR4.1 (CONTINUED) f. (3) TOBIQUE LTD. Statement of Financial Position August 31, 2024 Assets Current assets Cash........................................................... Accounts receivable ................................... Note receivable, due October 31, 2024...... Interest receivable ...................................... Prepaid advertising .................................... Supplies ..................................................... Total current assets........................... Property, plant, and equipment Equipment .................................................. Less: Accumulated depreciation ................ Total assets.........................................................

$ 4,500 5,870 4,000 40 200 960 15,570 $12,000 2,200

9,800 $25,370

$3,100 1,540 300 1,240

Shareholders‘ equity Common shares ......................................... Retained earnings ...................................... Total shareholders‘ equity ................. Total liabilities and shareholders‘ equity .............

$12,000 7,190

$ 6,180

19,190 $25,370

(Assets = Liabilities + Shareholders‘ equity)

ACR4.1 (CONTINUED) g. Aug. 31

Service Revenue ....................................................... Interest Income.......................................................... Income Summary .............................................

9,360 20

31 Income Summary ...................................................... Salaries Expense ............................................. Rent Expense ................................................... Supplies Expense ............................................. Depreciation Expense ...................................... Advertising Expense ......................................... Income Tax Expense ........................................

8,090

31 Income Summary ...................................................... Retained Earnings ............................................

1,290

9,380 6,140 380 870 200 200 300

31 Retained Earnings ..................................................... 500 Dividends Declared .......................................... (Statement of income accounts are closed to the Income Summary account)

1,290

500

ACR4.1 (CONTINUED) h.

TOBIQUE LTD. Post-Closing Trial Balance August 31, 2024 Cash ................................................................ Accounts receivable ........................................ Prepaid advertising ......................................... Supplies .......................................................... Notes receivable .............................................. Interest receivable ........................................... Equipment Accumulated depreciation—equipment ........... Accounts payable ........................................... Salaries payable ............................................. Income tax payable ......................................... Deferred revenue ............................................ Common shares ............................................. Retained earnings ........................................... Totals..........................................................

Debit $ 4,500 5,870 200 960 4,000 40 12,000

000 000 $27,570

Credit

$ 2,200 3,100 1,540 300 1,240 12,000 7,190 $27,570

(Total debits for permanent accounts = Total credits for permanent accounts) LO 2,3,4,5 BT: AP Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

ACR4.2 ACCOUNTING CYCLE REVIEW a. July

Cash .......................................................................... Common Shares ..............................................

10,000

Prepaid Insurance ..................................................... Cash .................................................................

3,600

Prepaid Rent ............................................................. Cash .................................................................

8,000

Supplies .................................................................... Cash .................................................................

3,800

Equipment ................................................................. Cash ................................................................. Bank Loan Payable ..........................................

24,000

10,000

3,600

8,000

3,800

4,000 20,000

No entry required (consulting agreement)

Cash ......................................................................... Accounts Receivable ........................................

1,200

Deferred Revenue ..................................................... Fees Earned .....................................................

1,120

Salaries Expense ...................................................... Cash .................................................................

11,000

Accounts Payable ...................................................... Cash .................................................................

400

1,200

1,120

11,000

400

ACR4.2 (CONTINUED) a. (continued) July 18

Cash ......................................................................... Deferred Revenue ............................................

12,000

Accounts Receivable ................................................ Fees Earned .....................................................

28,000

Professional Fees Expense ....................................... Accounts Payable .............................................

2,200

Deferred Revenue ..................................................... Fees Earned .....................................................

10,000

Income Tax Expense ................................................. Income Tax Payable .................................................. Cash .................................................................

1,200 500

Cash ......................................................................... Accounts Receivable ........................................

15,000

Dividends Declared ................................................... Cash .................................................................

5,000

12,000

28,000

2,200

10,000

1,700 15,000

5,000

ACR4.2 (CONTINUED) b., d., and g. Cash July

July

Equipment

1 Bal.

15,230 July

3,600

10,000

8,000

1,200

3,800

12,000

4,000

15,000

11,000

400

1,700

5,000

31 Bal.

July

24,000

Accumulated Depreciation—Equipment July 31 Adj.

500

Accounts Payable July 17

400 July 1 Bal. 20

15,930

400 2,200

31 Adj.

800

July 31 Bal.

3,000

Accounts Receivable July July

1 Bal.

1,200 July 12

1,200

28,000

15,000

31 Bal.

13,000

Interest Payable July 31 Adj.

Salaries Payable

Prepaid Insurance July

3,600

July

31 Bal.

3,300

July 31 Adj.

100

July 31 Adj.

300

11,000

Income Tax Payable Supplies July July

1 Bal.

690

3,800

31 Bal.

3,240

July 25

500 July 1 Bal.

500

July 31 Bal.

July 31 Adj. 1,250

Deferred Revenue

Prepaid Rent July

8,000 July

July

31 Bal.

4,000

July 13

1,120

July 1 Bal.

1,120

10,000

12,000

July 31 Bal.

2,000

31 Adj. 4,000

ACR4.2 (CONTINUED) b., d., and g. (continued) Rent Expense

Bank Loan Payable 20,000 July

July 6

31 Adj.

4,000 July 31 CE2

Common Shares

July 31 Bal.

July 1 Bal.

3,600

10,000

July 31 Bal.

Professional Fees Expense

13,600 July 20

2,200 July 31 CE2

Retained Earnings July 1 Bal. July 31 CE4

5,000 July 31 CE3

11,500 July 31 Bal.

Supplies Expense July 31 Adj.

1,250

Dividends Declared 5,000 July

July 31 Bal.

2,200

6,770

July 31 Bal. 13,270

July 30

4,000

July 31 CE2

31 CE4 5,000

July 31 Bal.

1,250

0 Utilities Expense

Fees Earned July

1,120

28,000 July 31 Bal. 10,000

23 July

July 31 Adj.

31 Bal. 39,120

July 31 CE1 39,120 July 31 Bal.

800 July 31 CE2

July

0 Depreciation Expense

31 Adj.

500 July 31

July

800

31 Bal.

CE2

500

Salaries Expense July 16

Insurance Expense

11,000

July 31 Adj. 11,000

July

31 Adj.

300 July 31

July 31 Bal. 22,000 July 31 CE2 22,000 July July 31 Bal.

31 Bal.

CE2

300

ACR4.2 (CONTINUED) b., d., and g. (continued) Income Summary

Interest Expense July

31 Adj.

100

July 31 CE2 July 31

July 31 Bal.

CE2

32,350 July 31 CE1 39,120

100

Bal. July 31 CE3

6,770

6,770 July 31

Bal.

Income Tax Expense July 25

1,200 July 31 CE2

July 31 Bal.

1,200

ACR4.2 (CONTINUED) c. RIVER CONSULTANTS LTD. Trial Balance July 31, 2024

Cash ........................................................ Accounts receivable ................................ Prepaid insurance .................................... Supplies .................................................. Prepaid rent ............................................. Equipment ............................................... Accounts payable ................................... Deferred revenue .................................... Bank loan payable ................................... Common shares ..................................... Retained earnings ................................... Dividends declared .................................. Fees earned............................................. Salaries expense ..................................... Professional fees expense ....................... Income tax expense ................................. Totals............................................... (Total debits = Total credits)

Debit $15,930 13,000 3,600 4,490 8,000 24,000

Credit

$ 2,200 2,000 20,000 13,600 11,500 5,000 39,120 11,000 2,200 1,200 $88,420

$88,420

ACR4.2 (CONTINUED) d. July 31

31 31

Insurance Expense .................................................... Prepaid Insurance ............................................ ($3,600 × 1/12)

300

Rent Expense ............................................................ Prepaid Rent ....................................................

4,000

Supplies Expense...................................................... Supplies............................................................

1,250

Depreciation Expense ............................................... Accumulated Depreciation—Equipment ........... ($24,000 ÷ 4 × 1/12)

500

Interest Expense ....................................................... Interest Payable ............................................... ($20,000 × 6% × 1/12)

100

Salaries Expense ...................................................... Salaries Payable ..............................................

11,000

Utilities Expense ........................................................ Accounts Payable .............................................

800

300

4,000 1,250

500

100

11,000 800

ACR4.2 (CONTINUED) e. RIVER CONSULTANTS LTD. Adjusted Trial Balance July 31, 2024

Cash ............................................................. Accounts receivable ...................................... Prepaid insurance ......................................... Supplies ....................................................... Prepaid rent .................................................. Equipment ..................................................... Accumulated depreciation—equipment ........ Accounts payable ......................................... Interest payable ........................................... Salaries payable .......................................... Deferred revenue ......................................... Bank loan payable ........................................ Common shares ........................................... Retained earnings ........................................ Dividends declared ....................................... Fees earned ................................................. Salaries expense ......................................... Rent expense ............................................... Professional fees expense ........................... Supplies expense ......................................... Utilities expense ........................................... Depreciation expense .................................. Insurance expense ....................................... Interest expense .......................................... Income tax expense ..................................... Totals ........................................................

Debit $ 15,930 13,000 3,300 3,240 4,000 24,000

Credit

500 3,000 100 11,000 2,000 20,000 13,600 11,500

5,000 39,120 22,000 4,000 2,200 1,250 800 500 300 100 1,200 $100,820

$100,820

(Total debits = Total credits)

ACR4.2 (CONTINUED) f. (1) RIVER CONSULTANTS LTD. Statement of Income Month Ended July 31, 2024

Revenues Fees earned .................................................... Expenses Salaries expense ............................................ Rent expense .................................................. Professional fees expense .............................. Supplies expense ............................................ Utilities expense .............................................. Depreciation expense ..................................... Insurance expense .......................................... Interest expense ............................................. Total expenses ....................................... Income before income tax ........................................ Income tax expense ................................................. Net income ............................................................... [Revenues – Expenses = Net income or (Loss)]

$39,120 $22,000 4,000 2,200 1,250 800 500 300 100 31,150 7,970 1,200 $ 6,770

ACR4.2 (CONTINUED) f. (2) RIVER CONSULTANTS LTD. Statement of Changes in Equity Month Ended July 31, 2024 Common Retained Shares Earnings Balance, July 1 ............................................................................... $ 3,600 $11,500 Issued common shares .................................................................. 10,000 Net income ..................................................................................... 00 0000 6,770 Dividends declared ......................................................................... __ ____ (5,000) Balance, July 31 ............................................................................. $13,600 $13,270

Total Equity $15,100 10,000 6,770 (5,000) $26,870

(Beginning equity ± Changes to equity = Ending equity)

ACR4.2 (CONTINUED) f. (3) RIVER CONSULTANTS LTD. Statement of Financial Position July 31, 2024 Assets Current assets Cash........................................................... Accounts receivable ................................... Prepaid rent ............................................... Prepaid insurance ...................................... Supplies ..................................................... Total current assets........................... Property, plant, and equipment Equipment .................................................. Less: Accumulated depreciation ................ Total assets.........................................................

$15,930 13,000 4,000 3,300 3,240 39,470 $24,000 500

23,500 $62,970

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ....................................... Salaries payable ........................................ Interest payable ......................................... Deferred revenue ....................................... Total current liabilities ........................... Non.current liabilities Bank loan payable ..................................... Total liabilities.................................... Shareholders‘ equity Common shares ......................................... Retained earnings ...................................... Total shareholders‘ equity ................. Total liabilities and shareholders‘ equity ............. (Assets = Liabilities + Shareholders‘ equity)

$ 3,000 11,000 100 2,000 $16,100 20,000 36,100 $13,600 13,270 26,870 $62,970

ACR4.2 (CONTINUED) g. July 31 31

Fees Earned .............................................................. Income Summary .............................................

39,120

Income Summary ...................................................... Salaries Expense ............................................. Rent Expense ................................................... Professional Fees Expense .............................. Supplies Expense ............................................. Utilities Expense ............................................... Depreciation Expense ...................................... Insurance Expense ........................................... Interest Expense .............................................. Income Tax Expense ........................................

32,350

Income Summary ...................................................... Retained Earnings ............................................

6,770

Retained Earnings ..................................................... Dividends Declared ..........................................

5,000

39,120 22,000 4,000 2,200 1,250 800 500 300 100 1,200 6,770

5,000

(Statement of income accounts are closed to the Income Summary account)

Current ratio $39,470 $16,100

2.5:1

River Consultants has exceeded the benchmark of 2:1 for its current ratio. LO 2,3,4,5 BT: AP Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

CT4.1

FINANCIAL STATEMENT IMPACT

a. Service revenue Supplies expense Depreciation expense Salaries expense Utilities expense Interest expense Insurance expense Income tax expense Unadjusted net income Adjustments required: 1. Accrued salaries 2. Interest expense ($478,000 x 6%x1/12) 3. Depreciation expense ($1,440,000 ÷ 6 x 1/12) 4. Deferred revenue reduction Adjusted net income

$1,269,000 $ 38,000 165,000 660,000 7,000 17,000 66,000 29,000

$22,100 2,390 20,000 (18,000)

982,000 $287,000

26,490 $260,510

b. Current Assets

Working Capital

Current Liabilities

Cash

$152,00 0

Deferred revenue

$ 53,000

Accounts receivable

310,000

Accounts payable

110,000

Prepaid insurance

36,000

Unadjusted Adjustments:

498,000 Salaries payable Interest payable Deferred revenue

Adjusted

498,000

163,000 22,100 2,390 (18,000) 169,490

$335,000

328,510

c. Current Ratio Before adjustments: $498,000 ÷ $163,000 = 3.06 After adjustments: $498,000 ÷ 169,490 = 2.94 The current ratio was overstated based on the unadjusted balances. d. Total liabilities were understated by $6,490 ($22,100 + $2,390 - $18,000) before adjustments. Solutions Manual 4-498 Chapter 4 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

LO 2,3,4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

CT4.2 a.

FINANCIAL REPORTING CASE

Accounts appearing on North West‘s balance sheet that may have been used in an adjusting entry for prepayments include:  

Prepaid expenses Property and equipment

The related statement of earnings accounts that most likely include adjusting entries at the end of the year for prepayments include: 

Selling, operating, and administrative expenses o Depreciation expense (which North West calls amortization expense) which would be part of selling, operating, and administrative expenses o Insurance expense included would be part of selling, operating, and administrative expenses o Other choices are also possible

Accounts appearing on North West‘s balance sheet that may have been used in an adjusting entry for accruals include:  

Accounts payable and accrued liabilities Income tax payable

The related statement of earnings accounts that most likely include adjusting entries at the end of the year for accruals include:   

Wages, salaries and benefits which would be part of selling, operating, and administrative expenses Income tax expense Other choices are also possible

CT4.2 (CONTINUED) c.

The five-step process of revenue recognition includes: 1. 2. 3. 4.

Identify the contract with the client or customer. Identify the performance obligations in the contract. Determine the transaction price. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the company satisfies the performance obligation. For North West: 1. The contract is created when the customer selects goods in the stores. 2. The performance obligation is the provision of goods. 3. The transaction price is labelled for each item in the stores. 4. The per item price fulfils the total performance obligation in the contract. 5. The revenue is recognized when the customer goes though the cash register system and pays for the purchase. LO 1,2 BT: C Difficulty: M Time: 20 min. AACSB: Communication and Analytic CPA: cpa.t001 CM: Reporting

CT4.3

FINANCIAL REPORTING CASE

The five-step process of revenue recognition includes: 1. Identify the contract with the client or customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the company satisfies the performance obligation. For C Technologies Ltd.: 1. The contract was created on December 29, 2023 when the client signed a three-year maintenance contract. 2. The performance obligation is the provision of maintenance services. 3. The transaction price is $300,000 for the three year period. 4. There is a single task and so there are no other obligations in the contract that need to be allocated. 5. The revenue is recognized by C Technologies Ltd. as it satisfies the obligation under the contract and performs the maintenance work for the client over the three-year period. At the time of signing the three-year maintenance contact, the customer has not received any services and no revenue has been earned. Although $100,000 was collected at the time of signing the contract, the full amount should be recorded to the Deferred Revenue account. As the performance obligations of the contract (maintenance service) are delivered, revenue from the services provided can be recognized and the related deferred revenue reduced. This will ensure that the expenses incurred in the performance of the contract will be matched to the revenues recognized. The financial statements for 2023, 2024, and 2025 will be affected as follows: 

For 2023, only statement of financial position accounts will be affected. Cash and Deferred Revenue will increase.



For 2024, the statement of income will be affected. Revenue earned from the provision of the maintenance services will be recognized and there will be a corresponding entry to reduce the deferred revenue created when the cash was collected on Dec. 29, 2023. Related expenses will be recognized and matched to the revenues in the same accounting period.

The second collection of $100,000 on Dec. 29, 2024 will affect the statement of financial position. Cash and Deferred Revenue will increase. For 2025, the same effect for the statement of income will occur as is described for 2024. The deferred revenue created when the cash was collected on Dec. 29, 2024 will be reduced to zero as it is recognized as revenue in 2025. The third collection of $100,000 on Dec. 29, 2025 will affect the statement of financial position. Cash and Deferred Revenue will increase. LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

CT4.4

PROFESSIONAL JUDGEMENT CASE

To record the additional depreciation, the following would be recorded: Depreciation Expense Accumulated Depreciation—Furniture

400,000 400,000

To increase the accrual for operating expenses by $80,000 ($230,000 – $150,000) the following entry would be made: Office Expense Accounts Payable

300,000

To accrue the additional salary expense, the following would be recorded: Salaries Expense Salaries Payable

300,000

80,000

Income before income tax as originally determined Additional depreciation expense Additional salaries expense Additional office expense Income before income tax revised

80,000

$2,800,000 (300,000) (400,000) (80,000) $2,020,000

CT4.4 (CONTINUED) c.

Anna suggested that the useful life of the furniture be lowered to increase the amount of depreciation recorded in each year. This would lower income before income tax and strengthen management‘s argument that the company could not afford to increase salaries.

In order to accrue an expense such as severance pay, it must have been incurred. Since the decision to shut down the stores has not yet been made, it would be inappropriate to record such an expense.

It is not unusual for a company to have to accrue amounts for utilities prior to the invoice being received in order to record the expense in the appropriate period. The company should be able to make a reasonable estimate by calling the utility company and looking at past history. However, increasing the estimate from $150,000 to $230,000 appears to have been done without any adequate support or justification. This seems like an attempt to lower the net income of the company prior to negotiations with the union.

LO 2,3 BT: AN Difficulty: M Time: 30 min. AACSB: Ethics and Analytic CPA: cpa.t001, cpa.e001 CM: Reporting and Ethics

CT4.5 a.

ETHICS CASE

The stakeholders in this situation are:    

Sundream‘s controller Sundream‘s Chief Executive Officer Sundream‘s shareholders Sundream‘s creditors.

By adding $12,000 to sales revenue and reducing interest expense by $3,000, net income increases by $15,000. Deferred revenue reduces by $12,000 and interest payable reduces by $3,000. Consequently, the current and total liabilities would reduce by $15,000 and the shareholders‘ equity would increase by $15,000 on the statement of financial position. The Sundream Travel Agency‘s liquidity improves as a result of the changes suggested by the CEO. The current ratio should be 1.9:1 ($400,000 ÷ $210,000) but it is now increased to 2.1:1 [($400,000 ÷ ($210,000 – $12,000 – $3,000)].

Intentionally misrepresenting the company‘s financial condition and its results of operations is unethical and is also illegal. It is obvious from the request that the CEO‘s intention is to manipulate the amount of the current liabilities, to ensure that the current ratio conforms to the 2:1 requirement of the bank loan.

Accounting standards are known and understood by the users and the preparers of the financial statements. Those who prepare the financial statements are bound by the accounting standards. An intentional breach of these standards, as is suggested by the CEO in this case, cannot be passed off as an oversight or ignorance of the fundamental rules of accounting. Consequently, the CEO is aware of the breach in the accounting standards when he suggests the changes to the controller. He knows that his behaviour is unethical and his suggestions should be challenged by his controller.

LO 1,2,3 BT: E Difficulty: M Time: 20 min. AACSB: Ethics and Analytic CPA: cpa.t001, cpa.e001 CM: Reporting and Ethics

CT4.6 a.

FINANCIAL REPORTING CASE

Since First Capital Realty Inc. is required to release financial statements quarterly, it would need to post adjusting entries at least quarterly. Since Skyline Group of Companies only releases financial statements annually, it will need to prepare adjusting entries at least annually. Although external financial statements are released on a quarterly basis for First Capital and on an annual basis for Skyline, it is likely that management of both companies would need monthly financial statements so that they can assess the company‘s performance on a timely basis. For this reason, it is likely that the adjusting entries are prepared on a monthly basis for each of the companies and that there are no significant differences in the accounting cycle for each company.

The criteria for, and timing of, revenue recognition may differ between the two companies, depending on their source of revenue. This is not likely though given that the two companies are both REITs, but it is possible depending on the terms of specific performance contracts. In terms of financial reporting, Skyline would not be required to prepare a statement of changes in equity, but rather would prepare a statement of retained earnings. Skyline would also not report other comprehensive income in the shareholders‘ equity section of its statement of financial position and it would not prepare a statement of comprehensive income (we will learn more about comprehensive income in a later chapter). First Capital Realty would prepare a statement of changes in equity and a statement of comprehensive income (if it had any other comprehensive income). Otherwise, the remaining financial statements would be the same for each company. Compared with ASPE, additional disclosure is required by companies reporting under IFRS in the notes to the financial statements.

LO 2 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa.t001 CM: Reporting

CT4.7

SERIAL CASE

a. 1.

June 30 Advertising Expense .......................................... Supplies ....................................................

600

30 Depreciation Expense ....................................... Accumulated Depreciation—Buildings ($165,000 ÷ 30 years)

5,500

30 Depreciation Expense ....................................... Accumulated Depreciation—Equipment. ...

7,070

30 Depreciation Expense ....................................... Accumulated Depreciation—Vehicles

4,200

30 Interest Expense ............................................... Interest Payable .........................................

30 Insurance Expense ($12,000 × 6/12 months) .... Prepaid Insurance .....................................

6,000

30 Utilities Expense ................................................ Accounts Payable .....................................

1,025

30 Accounts Receivable ......................................... Service Revenue .......................................

1,600

30 Salaries Expense (2 × 20 × $25) ....................... Salaries Payable ........................................

1,000

30 Income Tax Expense ......................................... Income Tax Payable ..................................

5,000

600

5,500

7,070

4,200

6,000

1,025

1,600

1,000

5,000

CT4.7 (CONTINUED) b.

Note: June balances were taken from the answer to CT3.7.

Cash June 30 Bal. 34,534

June 30 Bal.

Accounts Receivable June 30 Bal. 10,490 30 Adj. 1,600 June 30 Bal. 12,090

Accumulated Depreciation—Equipment June 30 Bal. 14,000 30 Adj. 7,070 June 30 Bal. 21,070 Vehicles June 30 Bal. 52,500

Inventory June 30 Bal. 16,250 Supplies June 30 Bal. 4,375 June 30 Adj. June 30 Bal. 3,775 Prepaid Insurance June 30 Bal. 12,000 June 30 June 30 Bal. 6,000

Equipment 44,520

Accumulated Depreciation—Vehicles June 30 Adj. 4,200 600

6,000

Accounts Payable June 30 Bal. 30 Adj. June 30 Bal.

6,240 1,025 7,265

Deferred Revenue June 30 Bal. 1,000

Land June 30 Bal. 100,000

Salaries Payable June 30 Adj. 1,000

Buildings June 30 Bal 165,000

Interest Payable June 30 Adj.

Accumulated Depreciation—Buildings June 30 Bal. 137,500 30 Adj. 5,500 June 30Bal. 143,000

Income Tax Payable June 30 Adj. 5,000 Bank Loan Payable June 30 Bal. 22,500

CT4.7 (CONTINUED) b. (continued) Mortgage Payable June 30 Bal. 53,200

Office Expense June 30 Bal 18,000

Common Shares June 30 Bal.

Utilities Expense June 30 Bal. 12,200 30 Adj. 1,025 June 30 Bal. 13,225

300

Retained Earnings June 30Bal 146,788 Dividends Declared June 30 Bal. 30,000

Advertising Expense June 30 Bal. 9,000 30 Adj. 600 June 30 Bal. 9,600

Rent Income June 30 Bal. 6,000

Insurance Expense June 30 Adj. 6,000

Service Revenue June 30 Bal 638,758 30 Adj. 1,600 June 30 Bal. 640,358

Property Tax Expense June 30 Bal. 5,950

Supplies Expense June 30 Bal. 51,250

Interest Expense June 30 Bal. 5,299 30 Adj. 50 June 30 Bal. 5,349

Salaries Expense June 30 Bal.441,918 30 Adj. 1,000 June 30 Bal.442,918

Income Tax Expense June 30Bal. 13,000 30 Adj. 5,000 June 30 Bal. 18,000

Depreciation Expense June 30 Adj. 5,500 30 Adj. 7,070 30 Adj. 4,200 June 30 Bal. 16,770

CT4.7 (CONTINUED) c. ANTHONY BUSINESS COMPANY LTD. Adjusted Trial Balance June 30, 2023 Debit Cash .................................................................... Accounts receivable ............................................ Inventory ............................................................. Supplies .............................................................. Prepaid insurance ............................................... Land .................................................................... Buildings ............................................................. Accumulated depreciation—buildings ................. Equipment ........................................................... Accumulated depreciation—equipment ............... Vehicles .............................................................. Accumulated depreciation—vehicles .................. Accounts payable ................................................ Deferred revenue ................................................ Salaries payable.................................................. Interest payable................................................... Income tax payable ............................................. Bank loan payable............................................... Mortgage payable ............................................... Common shares .................................................. Retained earnings ............................................... Dividends declared.............................................. Rent income ........................................................ Service revenue .................................................. Salaries expense................................................. Supplies expense ................................................ Depreciation expense ......................................... Office expense .................................................... Utilities expense .................................................. Advertising expense ............................................ Insurance expense .............................................. Property tax expense .......................................... Interest expense.................................................. Income tax expense ............................................ Totals ............................................................... (Total debits = Total credits)

Credit

34,534 12,090 16,250 3,775 6,000 100,000 165,000 $ 143,000 44,520 21,070 52,500 4,200 7,265 1,000 1,000 50 5,000 22,500 53,200 300 146,788 30,000 6,000 640,358

442,918 51,250 16,770 18,000 13,225 9,600 6,000 5,950 5,349 18,000 $1,051,731

000 0000 $1,051,731

CT4.7 (CONTINUED) d. Revenues: Service revenue Rent income Expenses Salaries expense Supplies expense Depreciation expense Office expense Utilities expense Advertising expense Insurance expense Property tax expense Interest expense Income tax expense Net income Net income Cash Difference

$640,358 6,000 442,918 51,250 16,770 18,000 13,225 9,600 6,000 5,950 5,349 18,000

$646,358

587,062 $ 59,296

$59,296 34,534 $24,762

LO 2,3,4 BT: AP Difficulty: M Time: 70 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

Legal Notice

CHAPTER 5 MERCHANDISING OPERATIONS LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6.

Identify the differences between service and merchandising companies. Prepare entries for purchases under a perpetual inventory system. Prepare entries for sales under a perpetual inventory system. Prepare a single-step and a multiple-step statement of income. Calculate the gross profit margin and profit margin. Record purchases and sales under a periodic inventory system (Appendix 5A). 7. Account for sales returns and sales discounts under ASPE (Appendix 5B)

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO 1.

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO

15.

22.

29.

2. 3. 4. 5. 6. 7.

1 1 1 1 2 2

C C C C C AP

9. 10 11. 12. 13. 14.

2,3 2,3 2,3 2,3 3 3

C C C C C C

16. 17. 18. 19. 20. 21.

3 3 4 4 4 4

1. 2.

C AN

5. 6.

9. 10.

4 4

AN AP

7. 8.

2,3 2 3 3

AP AP

3. 4.

1 1 1 2

AP AP

11. 12.

4 4

1. 2. 3. 4.

1 2,3 2,3 2

C AN AP AP

5. 6. 7. 8.

3 2 2,3,4 4

AP AN AP AP

9. 10. 11. 12.

1. 1,4 AN 2. 1,2,3 AN 3 2,3,4,5 AP 4. 2,3 AP

5. 6. 7. 8.

2,3,4 3 3 4

AP AP AP AN

C C C C K C

23. 24. 25. 26. 27. 28.

4 5 5 5 5 6

C C C C C C

30. 31. 32.

6 7 7

C C C

AP C

13. 14.

4,5 4,5

AN AN

17. 18.

6 6

AP AP

AP C

15. 16.

6 6

AP AP

19. 20.

6 7

AP AP

13. 14. 15. 16.

4,5 5 6 2,3,6

AN AN AP AP

17. 18. 19.

6 6 7

AN AP AP

1,6 6 6 5,6

AN AP AP AP

17.

1,5 2,4

AN AN

Brief Exercises

Exercises 4 4 4,5 4,5

AP AP AN AN

Problems: Set A and B 9. 10. 11. 12.

4 4,5 4,5 5

AP AN AN AN

13. 14. 15. 16.

Accounting Cycle Review 1.

2,3,4

1. 2.

1,4,5 5

AN AN

Cases 3. 4.

4,5 2,3,5

E E

5. 6.

2 3

C C

7. 8.

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

Difficulty:

Time: AACSB

Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflec. Thinking Reflective Thinking

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

ANSWERS TO QUESTIONS 1.

(a)

The operating cycle is the time it takes to go from cash to cash in producing revenues.

(b)

The normal operating cycle for a merchandising company is likely to be longer than that of a service company because, in a merchandising company, inventory must first be purchased and sold, and then the receivables must be collected, whereas, in a service company, the services only need to be provided (not purchased first and then stored until sold) and then the receivables must be collected.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

The income measurement process of a merchandising company is the same as the service company in that net income is arrived at by deducting expenses from revenues.

(b)

The income measurement process of a merchandising company differs from that of a service company in that its revenue is derived from sales revenue, not service revenue. In addition, cost of goods sold is deducted from sales revenue to determine gross profit, before operating and other expenses, similar in both types of companies, are deducted (or other income is added).

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The company needs to compare the cost of the detailed record keeping required in a perpetual inventory system to the benefits of having the additional information about the inventory. One of the benefits of a perpetual inventory system is the ability to answer questions from customers about merchandise availability. In a used clothing business, this may not be of much benefit unless each inventory item is unique. Another benefit is the monitoring of inventory quantities in order to avoid running out of stock. Again, this may not be of benefit since the company does not order recurring or similar merchandise, and may not have a supplier to order from. But if the company is selling used clothing on consignment, it will need to track each item in order to determine which consignor to pay when an item is sold. The company should carefully determine the cost of the detailed record keeping required, in particular for a new company. A perpetual inventory system requires more record keeping and therefore is more expensive to use. For example, a perpetual inventory system usually requires an investment in a point-of-sale system that is integrated with the inventory system.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

A physical count is an important control feature. By using a perpetual inventory system, a company knows what should be on hand. Performing a physical count and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock.

LO 1 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

The key distinction between a periodic inventory system and a perpetual inventory system is whether or not information on inventory and cost of goods sold (units and dollars) are always (perpetually) available or only known when inventory counts are conducted (periodically). Because information on the cost of goods sold is only known after an inventory count has been carried out under the periodic system, no entry is made for the cost of goods sold at the time of each sale. Instead, cost of goods sold is a residual number, determined by subtracting ending inventory (as determined by the inventory account) from cost of goods available for sale. This means that any goods not included in ending inventory are assumed to have been sold. In order to arrive at the cost of goods available for sale, separate accounts are set up in the general ledger to keep track of the purchases, freight-in, purchase returns and allowances, and purchase discounts. Under the periodic inventory system, management is not able to look up in the general ledger accounts for the balance of inventory at a particular point in time. In order to arrive at the inventory value, a physical count of the inventory must be performed.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The reason for recording the purchase of merchandise for resale in a separate account is to enable a company to determine its cost of goods sold and gross profit. This information is useful in managing costs and setting prices.

LO 2 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

The value of the purchase discount to Butler‘s Roofing is $480 ($48,000 × 1%).

(b)

Failing to take advantage of the discount terms is like paying the supplier an extra $480 in order to settle a $47,520 invoice 20 days later. This works out to 1.01% [$480 ÷ $47,520] every 20 days. On an annual basis this amounts to 18.4% [($480 ÷ $47,520 × (365 ÷ 20)]. Butler‘s should take advantage of the cash discount offered.

LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

Once the inventory on hand has been determined from an inventory count, a comparison is made with the amount reported by the perpetual inventory system. Due to shrinkage or theft, or possibly even from accounting errors, there is likely to be less inventory on hand than as per the accounting records. The perpetual record must be adjusted to the amount according to the inventory count and the difference is charged to Cost of Goods Sold.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

Lebel Ltée should record the sale as revenue in June, when the goods are sold to a customer. When the merchandise was purchased in April, it should be recorded as an asset, inventory. It should be recorded as cost of goods sold (an expense) in June when the inventory is sold and the revenue is recognized. This is necessary in order to match the cost with the related revenue

(b)

Lebel‘s customer should recognize the purchase in June, when the inventory is received.

LO 2,3 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

(a)

FOB shipping point means that the goods are placed free on board by the seller at the point of shipping. The buyer pays the freight costs from the point of shipping to the buyer‘s destination because title passes at shipping point. FOB destination means the goods are delivered by the seller to their destination, where the title passes. The seller pays for shipping to the buyer‘s destination.

(b)

FOB shipping point will result in a debit to the Inventory account by the buyer because title has transferred at shipping point and the inventory is now owned by the buyer. FOB destination will result in a debit to Freight Out by the seller because they are paying for the freight.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

In a perpetual inventory system, purchase returns are credited to Inventory because the items purchased have been returned to the vendor and are no longer available to be sold to customers. Sales returns are recorded to the account Refund Liability which was increased at the time of recording the sale. Sales returns are not debited directly to the Sales account because this would not provide information about the goods returned. This information can be useful in making decisions. Debiting returns directly to sales may also cause problems in comparing sales for different periods

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

At a sales transaction, Estimated Inventory Returns is debited (increased) for the cost of goods expected to be returned by customers. At a sales return transaction, Estimated Inventory Returns is credited (decreased) for the cost of returned goods that are re-established in inventory or discarded if not saleable. Estimated Inventory Returns appears as a current asset on the statement of financial position, below inventory.

LO 2,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

A contract may have multiple deliverables for goods or services. These deliverables lead to multiple separate performance obligations for the seller under the contract terms. Since not all goods or services may be delivered at the same time, whenever a performance obligation is satisfied from a partial delivery, a calculation must be made in order to record the corresponding revenue earned for that delivery and corresponding satisfaction of the performance of obligation.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

A variable consideration is an amount that will reduce the total contract amount to what is ultimately collected on a contract. Variable consideration includes expected sales returns and allowances and rebates. It also includes sales discounts that management expects will be claimed by customers. In the case of sales returns and allowances, the amount of sales that is recorded is reduced by the estimated amount that will be returned or for which a sales allowance will be granted. This amount is recorded to Refund Liability.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

Sales discounts are a variable consideration under a sales contract. Sales discounts reduce the amount of the sales to the amount that is ultimately collected from customers. At the time of the sale, the amount estimated as a reduction in the sales price is recorded. If a company considers changing discount terms from 2/10, n/30 to 1/10, n/30, the amount of sales that will be recorded at the point of sale will be increased by approximately 1%.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

The account Estimated Inventory Returns is increased with a debit when a sale transaction is recorded for the amount of the cost of goods expected to be returned by customers. The amount recorded to the Estimated Inventory Returns account reduces the amount recorded to Cost of Goods Sold in the second entry of the sales transaction. When a customer returns merchandise and it is restored to inventory, the Inventory account is debited and the Estimated Inventory Returns is credited. By using the Estimated Inventory Returns, the cost of goods sold is not overstated at the time of the sale.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

The sales taxes are collected on behalf of the federal and provincial governments, and must be periodically remitted to these authorities. Sales taxes that are collected from selling a product or service are not recorded as revenue, instead they are recorded as a liability until they are paid to the government.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Unrealized gains and losses that are not included in net income are included in other comprehensive income. Comprehensive income is determined by adding net income with other comprehensive income.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

In a single-step statement of income, all data are classified into two categories: (1) revenues and (2) expenses. It is referred to as a singlestep statement of income because only a single step—subtracting expenses from revenues—is needed to determine income before income tax. A multiple-step statement of income requires several steps to determine income before income tax. First, cost of goods sold is deducted from sales to determine gross profit. Operating expenses are then deducted to calculate income from operations. Finally, other income and expenses are added or deducted to determine income before income tax. The deduction of income tax to calculate net income (loss) is the same under both formats. In addition, both formats produce the same profit amount for the period.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

North West Company uses a multiple-step statement of income.

LO 4 BT: K Difficulty: S Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

(a)

When classifying expenses by their nature, they are reported in accordance with their natural classification (for example, salaries, depreciation, and so on). When classifying expenses by their function, they are reported according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling).

(b)

It does not matter whether a single-step or multiple-step statement of income is prepared, expenses must be classified either by nature or by function.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

22.

Because Overwaitea is a private enterprise, it can follow Accounting Standards for Private Enterprises (ASPE). Companies following ASPE can classify their expenses in whatever manner is useful to them. Loblaws, which follows IFRS, must classify its expenses by their nature or their function.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

Interest expense is a non-operating expense because it relates to how a company‘s operations are financed, not to the company‘s main operations.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

24.

The difference between gross profit margin and profit margin is that the gross profit margin measures the amount by which the selling price exceeds the cost of goods sold while the profit margin measures the extent to which sales cover all expenses (including the cost of goods sold).

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

25.

Factors affecting a company‘s gross profit margin include the selling price and the cost of the merchandise. Recall that gross profit = sales  cost of goods sold. Selling products with a higher price or ―mark-up‖ or selling products with a lower cost would result in an increased gross profit margin. Selling products with a lower price (perhaps due to increased competition that results in lower selling prices) or selling products with a higher cost (perhaps due to price increases from suppliers and shippers) would result in a lower gross profit margin.

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

26.

High gross profit Computer services and

Low gross profit Low-price retail companies such

software companies Pharmaceutical manufacturers Luxury goods retailers

Walmart Grocery stores Forestry and wood products

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

27.

Initially, an investor would be impressed with a 20% increase Mahrez‘s net income. Upon scrutiny of the statement of income, this first impression changes as net income from the ongoing and regular operations has in fact decreased by $5 million as the source of the $15 million increase in net income is an unusual gain or the sale of a factory for $20 million. The investor will therefore recognize that the $20 million gain is a one-time transaction that is not likely to recur in the future. Mahrez is now operating with one less factory for its future operations, which may negatively affect future income.

*28. Accounts Purchase Returns and Allowances Purchase Discounts Freight In

(a) Added/Deducted Deducted Deducted Added

(b) Normal Balance Credit Credit Debit

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*29.

Periodic System Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased (Purchases – Purchase Discounts – Purchase Returns and Allowances + Freight In) – Ending Inventory Ending inventory and cost of goods sold for the period are calculated at the end of the period. Perpetual System Cost of Goods Sold = the cost of the item(s) sold Cost of goods sold is calculated at the time of each sale and recorded as an increase (debit) to the Cost of Goods Sold account and a decrease (credit) to the Inventory account.

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

*30

Accounts used by a company using the periodic inventory system that are not used by a company using the perpetual inventory system include: Purchases, Purchases Discounts, Purchase Returns and Allowances and Freight In.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*31.

Under ASPE, the account that is used for sales returns is Sales Returns. Sales Returns is a contra revenue account to Sales and is shown immediately after sales on the statement of income. When deducted from sales we arrive at the result known as net sales.

LO 7 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*32.

Under ASPE sales discounts are recorded when the supplier offers terms such as 1/10, n/30 and the buyer takes advantage of these terms to pay within the discount period, which in this case is 10 days from the invoice date. When paid within the discount period, 1% of the invoice amount is recorded to the account Sales Discount which is a contra revenue account to Sales and is shown immediately after sales on the statement of income. When deducted from sales we arrive at the result known as net sales.

LO 7 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5.1 a.

The company with the most efficient operating cycle is Company A as it uses the fewest number of days in its cycle to obtain cash.

The company which is most likely a service company is Company A as it does not have to manufacture or deliver inventory and consequently takes the fewest number of days to obtain cash. Company C, with the highest number of days in its operating cycle, is likely the manufacturing company, and the merchandising company would be in the middle (Company B), with neither the highest nor the lowest number of days in its operating cycle.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.2 a.

[1] Income before tax = $100 – $65 = $35 [2] Net income = $35 (from [1]) – $9 = $26 [3] Cost of goods sold = $100 – $60 = $40 [4] Operating expenses = $60 – $35 = $25 [5] Income tax expense = $35 – $26 = $9

Company A is the service company, since it has no cost of goods sold. Company B is the merchandising company, since it has cost of goods sold.

LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.3 (a) (b) (c) (d) (e) (f)

Cost of Goods Available for Sale = $80,000 + $100,000 = $180,000 Ending Inventory = $180,000 - $120,000 = $60,000 Purchases = $115,000 - $50,000 = $65,000 Cost of Goods Sold = $115,000 - $35,000 = $80,000 Beginning Inventory = $160,000 - $110,000 = $50,000 Costs of Goods Sold = $160,000 – $29,000 = $131,000

LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.4 a. Beginning Balance Purchases

Inventory 55,000 220,000 26,000 Purchase returns 9,700 Purchase discounts

Freight in

2,700 218,000 Cost of goods sold

Ending Balance

24,000

Although not required, the following are the journal entries of the transactions. Purchases

Inventory .................................................................. 220,000 Accounts Payable ...............................................

220,000

Purchase Returns

Accounts Payable .................................................... Inventory .............................................................

26,000

Purchase Discounts

Accounts Payable ($220,000 – $26,000) ................. 194,000 Inventory ($194,000 × 5%) ................................. Cash ...................................................................

Freight In

Inventory .................................................................. Accounts Payable ...............................................

Cost of Sales

26,000

9,700 184,300

2,700 2,700

Cost of Goods Sold .................................................. 218,000 Inventory .............................................................

218,000

b. Cost of Goods Sold .................................................. Inventory ($24,000 - $22,000).............................

2,000 2,000

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.5 Pocras Corporation (Buyer): Aug. 24 Inventory ................................................................. Accounts Payable ...............................................

32,000

Wydell Inc. (Seller): Aug. 24 Accounts Receivable ................................................ Sales ...................................................................

32,000

Cost of Goods Sold .................................................. Inventory .............................................................

32,000

32,000 14,400 14,400

LO 2,3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.6 Jan.

Inventory ................................................................. Accounts Payable ...............................................

45,000 45,000

No entry necessary – Freight costs paid by Fundy Corp.

Accounts Payable .................................................... Inventory .............................................................

6,000

Accounts Payable ($45,000 - $6,000) ...................... Cash ...................................................................

39,000

Feb. 11

6,000

39,000

LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.7 Jan.

Feb. 11

Accounts Receivable ................................................ Refund Liability ($45,000 x 15%) ........................ Sales ...................................................................

45,000

Cost of Goods Sold .................................................. Estimated Inventory Returns ($25,200 x 15%) ......... Inventory .............................................................

21,420 3,780

Freight Out ............................................................... Cash ...................................................................

900

Refund Liability ........................................................ Accounts Receivable ..........................................

6,000

Inventory .................................................................. Estimated Inventory Returns ..............................

3,360

Cash ......................................................................... Accounts Receivable ($45,000 - $6,000) ............

39,000

6,750 38,250

25,200

900

6,000

3,360

39,000

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.8 Allocate the transaction price in proportion of the stand-alone selling prices:

Excavator Grapple bucket Total

Stand-alone Selling price $220,000 30,000 $250,000

Excavator sale Accessory sale Total

Allocated Selling price $202,400 27,600 $230,000

($220,000 ÷ $250,000 = 88%) ($30,000 ÷ $250,000 = 12%)

($230,000 x 88%) ($230,000 x 12%)

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.9 a.

Sales ......................................................................... Less: Cost of goods sold ........................................... Gross profit .................................................................

$1,070,000 658,000 $ 412,000

Gross profit ................................................................. Less: Administrative expenses .................................. Selling expenses .............................................. Income from operations ..............................................

$412,000 $160,000 110,000

Income from operations .............................................. Add: Other income.................................................... Less: Other expenses ................................................ Income before income tax ...........................................

$26,000 (35,000)

270,000 $142,000 $142,000

Income before income tax ........................................... Less: Income tax expense ......................................... Net income .................................................................

_ (9,000) $133,000 $133,000 27,000 $106,000

LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.10 As the name suggests, numerous steps are required in determining net income in a multiple-step statement. a. b. Item Single-Step Multiple-Step Depreciation expense Cost of goods sold Freight out Income tax expense Interest expense income and expenses Interest income expenses Rent income expenses Salaries expense Operating expenses Sales

Expenses Expenses Expenses Income tax expense Expenses

Operating expenses Cost of goods sold Operating expenses Income tax expense Other

Revenues

Other income and

Revenues

Other income and

Expenses Revenues

Sales

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.11 a. KAI CORPORATION Statement of Income (Single-Step) Year Ended December 31, 2024 Revenues Sales ......................................................................... Expenses Cost of goods sold..................................................... Salaries expense ....................................................... Depreciation expense................................................ Insurance expense .................................................... Income before income tax .............................................. Income tax expense Net income

$3,980,000 $1,925,000 921,000 278,000 128,000

3,252,000 728,000 132,000 $ 596,000

b. KAI CORPORATION Statement of Income (Multiple-Step) Year Ended December 31, 2024 Sales......................................................................................................... $3,980,000 Cost of goods sold .................................................................................... 1,925,000 Gross profit ............................................................................................... 2,055,000 Operating expenses Salaries expense .......................................................... $921,000 Depreciation expense................................................... 278,000 Insurance expense ....................................................... 128,000 Total operating expenses ............................................................... 1,327,000 Income before income tax ........................................................................ 728,000 Income tax expense ................................................................................. 132,000 Net income ............................................................................................... $ 596,000 (Revenues – Cost of goods sold – Operating expenses = Income from operations) LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.12 a.

The company is using a multiple-step form of statement of income.

The company is classifying its expenses by their function. They are reported according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling).

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.13 a. 2024 2023 Sales $250,000 Cost of goods sold Gross profit 112,500 Operating expenses Income from operations Other income ______ Income before income taxes Income tax expense Net income $42,500

$200,000 137,500 86,000 50,000 62,500 10,000 62,500 20,000 $41,000

114,000 40,000 46,000 56,000 15,000

b. 2024 Gross profit margin

Profit margin

2023

$112,500 $250,000

= 45.0%

$42,500 $250,000

= 17.0%

$86,000 $200,000

$41,000

43.0%

20.5%

$200,000

Modder Corporation‘s gross profit margin increased in 2024 indicating an increase in the percentage mark-up, or a reduction in the cost of goods sold, or both. On the other hand, in 2024, the company‘s profit margin dropped. The decrease in profit margin is caused by other income in 2023 that was not available in 2024. Operating expenses were 20% of sales in both years. The income tax rate also increased in 2024 (32% vs 26.8%).

LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and : cpa-t005CM: Reporting and Finance

BRIEF EXERCISE 5.14 a. ($ in millions)

2021

2020

Gross profit

= $16,292.1 – $10,101.6

$6,190.5

= $14,871.0 – $9,260.4

2021

($ in millions)

$5,610.6

2020

Gross profit margin

$6,190.5 $16,292.1

38.0%

$5,610.6 $14,871.0

= 37.7%

Profit margin

$1,260.7 $16,292.1

7.7%

$862.5 $14,871.0

= 5.8%

Canadian Tire Corporation‘s gross profit margin increased in 2021. Sales increased 9.6%, [($16,292.1 - $14,871.0) ÷ $14,871.0] and cost of goods sold increased 9.1% [($10,101.6 - $9,260.4) ÷ $9,260.4] which lead to the increased gross profit margin. The profit margin also increased in 2021. Operating expenses or interest or income tax expense must have decreased as a percentage of sales.

LO 4,5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance

*BRIEF EXERCISE 5.15 Jan.

Purchases ................................................................ Accounts Payable ...............................................

45,000 45,000

No entry necessary - Freight costs paid by Fundy Corp.

Accounts Payable .................................................... Purchase Returns and Allowances .....................

6,000

Accounts Payable ($45,000 - $6,000) ...................... Cash .................................................................

39,000

Feb. 11

6,000

39,000

LO 6 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 5.16 Jan.

45,000 6,750 38,250

No cost of goods sold entry at time of sale

Freight Out ............................................................... Cash ...................................................................

900

Refund Liability......................................................... Accounts Receivable ..........................................

6,000

6 Feb. 11

900

6,000

No cost of goods sold entry at the time of return Cash ......................................................................... Accounts Receivable ($45,000 - $6,000) ............

39,000 39,000

LO 6 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 5.17 a.

Purchases ..................................................................... Less: Purchase returns and allowances ...................... Purchase discounts ............................................ Net purchases ...............................................................

$880,000 $13,000 14,000

27,000 $853,000

Net purchases ............................................................... Add: Freight in ............................................................ Cost of goods purchased ..............................................

$853,000 16,000 $869,000

Beginning inventory ...................................................... Add: Cost of goods purchased ................................... Cost of goods available for sale .................................... Less: Ending inventory ................................................ Cost of goods sold ........................................................

$ 96,000 869,000 965,000 82,000 $883,000

Sales ........................................................................... Less: Cost of goods sold ............................................... Gross profit ...................................................................

$1,708,000 883,000 $825,000

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 5.18 a. Cost of goods sold Beginning inventory ........................................... Purchases .......................................................... Less: Purchase returns and allowances ............ Purchase discounts .................................. Net purchases .................................................... Add: Freight In ................................................... Cost of goods purchased ................................... Cost of goods available for sale ......................... Ending inventory ................................................ Cost of goods sold ............................................. b.

$105,000 $195,000 $ 6,600 20,400

27,000 168,000 5,250 173,250 278,250 120,000 $158,250

There would be no difference in the remainder of the statement of income for Halifax Limited whether the periodic or perpetual inventory systems were used. Purchases – Purchase returns and allowances – Purchase discounts + Freight-in = Cost of goods purchased (Beginning inventory + Cost of goods purchased – Ending inventory = Cost of goods sold)

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 5.19 Dec. 31

Inventory (ending) .................................................... 68,000 Cost of Goods Sold .................................................. 401,000* Purchase Discounts ................................................. 6,000 Inventory (beginning) .......................................... Purchases ........................................................... Freight In.............................................................

75,000 388,000 12,000

* Cost of goods sold = Beginning inventory + Purchases  Purchase discounts  Purchase returns and allowances + Freight in – Ending inventory Cost of goods sold = $75,000 + $388,000  $6,000 + $12,000 – $68,000 = $401,000 LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 5.20 EDSON LTD. Statement of Income (Multiple-Step) Year Ended December 31, 2024 Sales......................................................................................................... Less: Sales returns ........................................................... $8,000 Sales discounts ....................................................... 7,000 Net sales................................................................................................... Cost of goods sold .................................................................................... Gross profit ............................................................................................... Operating expenses Salaries expense .......................................................... $220,000 Depreciation expense................................................... 20,000 Total operating expenses ............................................................... Income from operations ............................................................................ Other income and expenses Interest expense .................................................................................. Income before income tax ........................................................................ Income tax expense ................................................................................. Net income ...............................................................................................

$935,000 15,000 920,000 380,000 540,000

240,000 300,000 10,000 290,000 87,000 $203,000

(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations) LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 5.1 a.

Sleep Country Canada Holdings Inc. is a merchandiser (retailer), Fasken Martineau LLP is a service company, and Atlantic Grocery Distributors Ltd. is a merchandiser (wholesaler).

The operating cycle of these three businesses will be different. The longest operating cycle will be experienced by the retailer, as the sales of merchandise will be the slowest. The organization with the shortest operating cycle will be the service firm that does not sell inventory. The third company, the distributing wholesaler, will have an operating cycle between that of the retailer and the law firm because its inventory is more likely to sell faster and the law firm has no inventory to sell.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 5.2 Item a. 1. Asset

Account Debited b. Inventory

c. a. +$3,500 Asset

Account Credited b. c. Cash –$3,500

–$750 Asset

Inventory

–$750

3. Asset

Accounts Payable Inventory

+$4,000 Liability

+$4,000

4. Asset

Inventory

+$400 Asset

Accounts Payable Cash

5. Liability

Accounts Payable Accounts Receivable

–$3,500 Asset Asset +$10,000 Revenue

Cash Inventory Sales

–$3,430 –$70 +$9,231

Liability

Refund Liability Inventory

+$769

2. Liability

6. Asset

Expense Cost of Goods Sold Estimated Asset Inventory Returns 7. Liability Refund Liability Expense Cost of Goods Sold 8. Expense Freight Out 9. Liability Asset

10. Asset

Refund Liability Inventory

Cash

+$3,692 Asset +$308 -$550 Asset Asset +$220 +$600 Asset -$400 Asset +$160 Asset

+$8,000 Asset

–$400

–$4,000

Cash Estimated Inventory Returns Cash

–$550

Accounts Receivable Estimated Inventory Returns Accounts Receivable

–$400

–$220 –$600

–$160 –$8,000

LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.3 a. Sept.

2 Inventory (750 × $20).................................................. Accounts Payable ..................................................

15,000

10 Accounts Payable (10 × $20) ...................................... Inventory ................................................................

200

11 Accounts Receivable (260 × $30) ............................... Refund Liability ($7,800 × 4%) .............................. Sales .....................................................................

7,800

Cost of Goods Sold .................................................... Estimated Inventory Returns ($5,200 × 4%) ............... Inventory (260 × $20) ............................................

4,992 208

14 Refund Liability (10 × $30) .......................................... Accounts Receivable .............................................

300

Inventory (10 × $20).................................................... Estimated Inventory Returns .................................

200

29 Accounts Payable ($15,000 – $200) ........................... Cash ......................................................................

14,800

30 Cash ........................................................................... Accounts Receivable ($7,800 - $300)....................

7,500

15,000

200

312 7,488

5,200

300

200

14,800

7,500

EXERCISE 5.3 (CONTINUED) b. Sept. 1 Bal. 2 14 Sept. 30 Bal.

Sept. 11 Sept. 30 Bal.

Inventory 2,000 Sept.10 15,000 11 200 11,800

200 5,200

Cost of Goods Sold 4,992 4,992 c.

Ending Inventory: Number of calculators at September 30: 100 + 750 – 10 – 260 + 10 = 590 Cost of calculators at September 30: 590 × $20 = $11,800 Cost of Goods Sold: Number of calculators sold in September: 260 – 10 = 250 Cost of calculators sold in September: 260 x $20 = $5,200 less 4% $208 = $4,992 LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.4 April

Inventory........................................................ Accounts Payable ....................................

28,000

Inventory........................................................ Cash.........................................................

700

Supplies......................................................... Accounts Payable ....................................

5,000

Accounts Payable .......................................... Inventory ..................................................

3,500

Accounts Payable ($28,000 – $3,500)........... Cash ........................................................

24,500

28,000

700

5,000

3,500

24,500

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.5 April

Accounts Receivable ..................................... Refund Liability ($28,000 x 15%) ............. Sales ........................................................

28,000 4,200 23,800

Cost of Goods Sold ....................................... 16,150 Estimated Inventory Returns ($19,000 x 15%) 2,850 Inventory .................................................. 6

No entry necessary - Freight costs paid by Olaf.

No entry necessary.

Refund Liability .............................................. Accounts Receivable................................

3,500

Inventory........................................................ Estimated Inventory Returns ....................

2,300

Cash .............................................................. Accounts Receivable ($28,000 – $3,500)

24,500

19,000

3,500

2,300

24,500

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.6 Boyle should choose to borrow cash at 8% 10 days from the date of the invoice. The amount borrowed could be as little as the amount of the invoice less the purchase discount. This is the amount needed to settle the payment 10 days from the date of the invoice and earn the purchase discount of 1%. The loan can then be repaid after 20 days, which would be the date the invoice would have been paid if the loan had not been obtained. The relevant period is 20 days because this is the amount of time a loan would be outstanding in order to make the choice to pay within the discount period. Converting a 1% discount for 20 days equals an annualized interest rate of 18.43% calculated as follows (1/99 × 365 ÷ 20) = 18.43%. Paying 8% to the bank to receive 18.43% from the supplier is the more favourable procedure to follow. LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 5.7 a.

Dec.

3 Accounts Receivable .......................................... Refund Liability ($68,000 x 3%) ..................... Sales .............................................................

68,000

3 Cost of Goods Sold ............................................. Estimated Inventory Returns ($36,000 x 3%) ..... Inventory........................................................

34,920 1,080

2,040 65,960

36,000

7 No entry necessary.

Dec.

8 Refund Liability ................................................... Accounts Receivable .....................................

2,100

Inventory ............................................................. Estimated Inventory Returns .........................

1,150

11 Cash ................................................................... Accounts Receivable ($68,000 – $2,100) ......

65,900

3 Inventory ............................................................. Accounts Payable ..........................................

68,000

7 Inventory ............................................................. Cash ..............................................................

900

8 Accounts Payable ............................................... Inventory........................................................

2,100

11 Accounts Payable ($68,000 – $2,100) ................ Cash ..............................................................

65,900

2,100

1,150

65,900

68,000

900

2,100

Sales ................................................................................... Cost of goods sold .............................................................. Gross profit .........................................................................

65,900 $65,960 34,920 $31,040

LO 2,3,4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.8 Allocate the transaction price in proportion of the stand-alone selling prices:

Laser printers (100 x $400) Toner cartridges (125 x $80) Total

Stand-alone Selling price $40,000 ($40,000 ÷ $50,000 = 80%) 10,000 ($10,000 ÷ $50,000 = 20%) $50,000

Laser printers Toner cartridges Total

Allocated Selling price $36,800 ($46,000 x 80%) 9,200 ($46,000 x 20%) $46,000

The amount of revenue that can be recognized in March when the laser printers are delivered is $36,800. March 26

Accounts Receivable .......................................... Sales .............................................................

36,800

Cost of Goods Sold (100 x $290) ........................ Inventory........................................................

29,000

36,800

29,000

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.9 a. Sales Cost of goods sold Gross profit b. Expenses: Advertising expense Depreciation expense Income tax expense Interest expense Salaries expense Net income c.

$2,624,000 1,114,000 $1,510,000

$112,000 188,000 61,000 117,000 776,000

Current assets: Accounts receivable Cash Inventory Prepaid expenses Total current assets

$187,000 71,000 232,000 29,000 $519,000

Current liabilities: Accounts payable Deferred revenue Property tax payable Refund liability Salaries payable Total current liabilities

$134,000 32,000 18,000 21,000 26,000 $231,000

1,254,000 $ 256,000

d. We know that Swirsky Corporation is in the first year of operations because there was no Retained Earnings balance. LO 4 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA:cpa-t001 CM: Reporting

EXERCISE 5.10 a. BLUE DOOR CORPORATION Statement of Income (Single-Step) Year Ended December 31, 2024 Revenues Sales ......................................................................... Interest income .......................................................... Rent income ............................................................. Expenses Cost of goods sold..................................................... Salaries expense ....................................................... Depreciation expense................................................ Interest expense ........................................................ Advertising expense .................................................. Freight out ................................................................. Insurance expense ....................................................

$2,589,500 30,000 24,000

$2,643,500

$1,172,000 705,000 125,000 62,000 55,000 25,000 23,000

Income before income tax .............................................. ............................. Income tax expense ..................................................................................... Net income ...................................................................................................

2,167,000 476,500 70,000 $ 406,500

EXERCISE 5.10 (CONTINUED) b. BLUE DOOR CORPORATION Statement of Income (Multiple-Step) Year Ended December 31, 2024 Sales......................................................................................................... $2,589,500 Cost of goods sold .................................................................................... 1,172,000 Gross profit ............................................................................................... 1,417,500 Operating expenses Salaries expense .......................................................... $705,000 Depreciation expense................................................... 125,000 Advertising expense ..................................................... 55,000 Freight out .................................................................... 25,000 Insurance expense ....................................................... 23,000 Total operating expenses ............................................................... 933,000 Income from operations ............................................................................ 484,500 Other income and expenses Interest income ............................................................. $30,000 Rent income ................................................................. 24,000 Interest expense ........................................................... (62,000) (8,000) Income before income tax ........................................................................ 476,500 Income tax expense ................................................................................. 70,000 Net income ............................................................................................... $ 406,500 (Revenues – Cost of goods sold – Operating expenses = Income from operations) c.

Blue Door Corporation is classifying its expenses by nature, such as salaries, depreciation, and advertising. There is no classification of expenses into administrative or selling as would be the case if classifying expenses by functional areas. For smaller companies such as this one, the difference between classification of items on the statement of income by function or nature is not significant.

LO 4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.11 a.

Young Ltd. Sales ....................................................................................... Less: Cost of goods sold ......................................................... *Gross profit [1] .......................................................................

$89,000 58,750 $30,250

Gross profit.............................................................................. Less: Operating expenses....................................................... *Income from operations [2] ....................................................

$30,250 19,500 $10,750

Income from operations .......................................................... Add: Other income .................................................................. *Income before income tax [3].................................................

$10,750 750 $11,500

Income before income tax ....................................................... Less: Income tax expense....................................................... *Net income [4]........................................................................

$11,500 2,300 $ 9,200

Rioux Ltée Sales ..................................................................................... $100,000 *Less: Cost of goods sold [5]................................................... 60,000 Gross profit.............................................................................. $ 40,000 Gross profit.............................................................................. *Less: Operating expenses [6] ................................................ Income from operations ..........................................................

$40,000 22,000 $18,000

Income from operations .......................................................... Less: Other expenses ............................................................. *Income before income tax [7].................................................

$18,000 2,000 $16,000

Income before income tax ....................................................... *Less: Income tax expense [8] ................................................ Net income ..............................................................................

$16,000 3,200 $12,800

* Indicates missing amount

EXERCISE 5.11 (CONTINUED) b.

Young

Rioux

Gross profit margin 40.0%

$30,250 ÷ $89,000 =

Profit margin 12.8%

$9,200 ÷ $89,000 = 10.3%

34.0%

$40,000 ÷ $100,000 =

$12,800 ÷ $100,000 =

Rioux has the better gross profit margin and the better profit margin.

LO 4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 5.12 a.

Marchant Ltd. *Sales [1] ............................................................................... Less: Cost of goods sold ....................................................... Gross profit ...........................................................................

$1,432,000 657,000 $ 775,000

Gross profit............................................................................ Less: Operating expenses..................................................... *Income from operations [2] ..................................................

$775,000 580,000 $195,000

Income from operations ........................................................ Add: Other income ................................................................ *Income before income tax [3]...............................................

$195,000 3,600 $198,600

Income before income tax ..................................................... Less: Income tax expense..................................................... *Net income [4]......................................................................

$198,600 38 600 $160,000

Sales ..................................................................................... Less: Cost of goods sold ...................................................... *Gross profit [5] ....................................................................

$2,130,000 1,172,000 $958,000

Gross profit............................................................................ *Less: Operating expenses [6] .............................................. Income from operations ........................................................

$958,000 648,000 $310,000

Income from operations ........................................................ Less: Other expenses ........................................................... *Income before income tax [7]...............................................

$310,000 _ 4,100 $305,900

Income before income tax ..................................................... *Less: Income tax expense [8] .............................................. Net income ............................................................................

$305,900 55,000 $250,900

Dueck Ltd.

* Indicates missing amount

EXERCISE 5.12 (CONTINUED) b.

Marchant

Dueck

Gross profit margin 45.0%

$775,000 ÷ $1,432,000 = 54.1%

$958,000 ÷ $2,130,000 =

Profit margin 11.8%

$160,000 ÷ $1,432,000 = 11.2%

$250,900 ÷ $2,130,000 =

Marchant has the better gross profit margin and Dueck has the better profit margin.

LO 4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 5.13 a. MONTMORENCY LTÉE Statement of Income (Multiple-step) Year Ended August 31, 2024 Sales ....................................................................................................... Cost of goods sold .................................................................................... Gross profit ............................................................................................... Operating expenses Administrative expenses .............................................. $670,000 Selling expenses .......................................................... 260,000 Total operating expenses ............................................................... Income from operations ............................................................................ Other income and expenses Interest expense .................................................................................. Income before income tax ........................................................................ Income tax expense ................................................................................. Net income ...............................................................................................

$7,090,000 4,030,000 3,060,000

930,000 2,130,000 270,000 1,860,000 560,000 $1,300,000

(Revenues – Cost of goods sold – Operating expenses = Income from operations)

Expenses are classified by function (cost of goods sold, administrative, selling).

Gross profit margin

$3,060,000 ÷ $7,090,000 = 43.2%

Profit margin

$1,300,000 ÷ $7,090,000 = 18.3%

LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 5.14 (in USD millions) a.

Gross profit margin 2021: ($47,262 – $36,689) ÷ $47,262 = 22.4% 2020: ($43,638 – $33,590) ÷ $43,638 = 23.0% 2019: ($42,879 – $32,918) ÷ $42,879 = 23.2% Profit margin (using net income) 2021: $1,798 ÷ $47,262 = 3.8% 2020: $1,541 ÷ $43,638 = 3.5% 2019: $1,464 ÷ $42,879 = 3.4%

The gross profit margin has shown deterioration over the three-year period. The trend is different for the profit margin, where the results of 2021 exceeded those of 2019 and 2020.

Profit margin (using income from operations) 2021: $2,391 ÷ $47,262 = 5.1% 2020: $2,009 ÷ $43,638 = 4.6% 2019: $1,900 ÷ $42,879 = 4.4% The profit margin using net income and the profit margin using income from operations grew steadily over the three-year period. The major elements that are in the calculation of the profit margin ratio but are not in the profit margin using income from operations are other income and expenses, and income tax expense.

LO 5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*EXERCISE 5.15 Olaf Corp. (Buyer) a. Apr. 3 Purchases ................................................................... Accounts Payable ..................................................

28,000

6 Freight In ..................................................................... Cash ......................................................................

700

7 Supplies ...................................................................... Accounts Payable ..................................................

5,000

8 Accounts Payable ....................................................... Purchase Returns and Allowances ........................

3,500

30 Accounts Payable ($28,000 – $3,500) ........................ Cash .....................................................................

24,500

28,000

700

5,000

3,500

24,500

DeVito Ltd. (Seller) a. Apr. 3 Accounts Receivable .................................................. Refund Liability ($28,000 x 15%) ........................... Sales .....................................................................

28,000

8 Refund Liability ........................................................... Accounts Receivable .............................................

3,500

30 Cash .......................................................................... Accounts Receivable ($28,000 – $3,500) ..............

24,500

4,200 23,800

3,500

24,500

LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 5.16 a.

Duvall Ltd. (Seller) (1) Perpetual Inventory System June 10 Accounts Receivable ........................................ Refund Liability ($5,000 x 10%) ................... Sales ........................................................... Cost of Goods Sold ........................................... Estimated Inventory Returns ($3,000 x 10%) ... Inventory......................................................

5,000 500 4,500 2,700 300 3,000

11 No entry 12 Refund Liability ................................................. Accounts Receivable ...................................

500

Cost of Goods Sold ........................................... Estimated Inventory Returns .......................

300

19 Cash ................................................................. Accounts Receivable ($5,000 – $500) .........

4,500

(2) Periodic Inventory System June 10 Accounts Receivable ........................................ Refund Liability ($5,000 x 10%) ................... Sales ...........................................................

500

300

4,500

5,000 500 4,500

11 No entry 12 Refund Liability ................................................. Accounts Receivable ...................................

500

19 Cash ................................................................. Accounts Receivable ($5,000 – $500) .........

4,500

500

4,500

*EXERCISE 5.16 (CONTINUED) b.

Pele Ltd. (Buyer) (1) Perpetual Inventory System June 10 Inventory ............................................................. Accounts Payable ..........................................

5,000 5,000

11 Inventory (freight) ................................................ Cash ..............................................................

250

12 Accounts Payable ............................................... Inventory........................................................

500

19 Accounts Payable ($5,000 – $500) ..................... Cash ..............................................................

4,500

(2) Periodic Inventory System June 10 Purchases ......................................................... Accounts Payable ........................................

5,000

250

500

4,500

5,000

11 Freight In........................................................... Cash ............................................................

250

12 Accounts Payable ............................................. Purchase Returns and Allowances ..............

500

19 Accounts Payable ($5,000 – $500) ................... Cash ............................................................

4,500

250

500 4,500

LO 2,3,6 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 5.17 [1] $1,420 = $200) [2] $1,550 = [3] $1,750 = [4] $270 = $1,250) [5] $270 = Yr 1) [6] $1,950 = $100) [7] $230 = $550) [8] $2,030 = [16]) [9] $1,950 = $1,500)

($1,500 – $50 – $30)

[10] $7,560 =

($7,210 + $150 +

($1,420 + $130) ($1,550 + $200) ($1,750 – $1,480)

[11] $590 = [12] $8,800 = [13] $7,550 =

($7,800 – $7,210) ($1,000 + $7,800) ($8,800 [12]) –

[4] (same as ending, Yr 1)

[14] $1,250 =

given (same as ending,

($100 + $50 + $1,800)

[15] $8,050 =

($8,550 – $400 –

($2,030 [8] – $1,800)

[16] $8,600 =

($8,050

($2,300 – $270 [5])

[17] $9,850 =

($1,250 [14] + $8,600

($2,300 – $350)

[18] $8,350 =

($9,850

[15]

[17]

–

LO 6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 5.18 a. LIVELY LIMITED Statement of Income Year Ended February 29, 2024 Sales Cost of goods sold Inventory, beginning Purchases $273,000 Less: Purchase discounts 39,000 Purchase returns and allowances 20,800 Net purchases 213,200 Add: Freight in 8,450 Cost of goods purchased Cost of goods available for sale Less: Inventory, ending Cost of goods sold Gross profit Operating expenses Administrative expenses Selling expenses Total operating expenses Income from operations Other income and expenses Interest expense Income before income tax Income tax expense Net income

$392,600 $ 54,600

221,650 276,250 79,300 196,950 195,650 $120,900 9,100 130,000 65,650 7,800 57,850 9,300 $ 48,550

(Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale)

b. Feb. 29

Inventory (ending) .................................................... 79,300 Cost of Goods Sold .................................................. 196,950 Purchase Returns and Allowances .......................... 20,800 Purchase Discounts ................................................. 39,000 Inventory (beginning) .......................................... Purchases ........................................................... Freight In.............................................................

54,600 273,000 8,450

LO 6 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 5.19 a. May

20,000

Cost of Goods Sold .................................................. Inventory .............................................................

8,000

Sales Returns and Allowances ................................. Accounts Receivable ..........................................

1,500

Sales Returns and Allowances ................................. Accounts Receivable ..........................................

2,000

Inventory .................................................................. Cost of Goods Sold .............................................

1,200

20,000

8,000

1,500

2,000

1,200

Cash ........................................................................ 16,170 Sales Discounts [($20,000 - $1,500 - $2,000) x 2%] 330 Accounts Receivable ($20,000 - $1,500 - $2,000)

16,500

If Resistant received the payment on May 27 instead of May 7, the sales discount would not apply as the payment was received after the terms given of 2/10, n/30. The payment received would be recorded as follows:

May 27

Accounts Receivable ................................................ Sales ...................................................................

Cash ......................................................................... Accounts Receivable ..........................................

16,500 16,500

Gross profit = Net sales – Cost of goods sold = ($20,000 - $1,500 - $2,000 - $330) – ($8,000 - $1,200) = $9,370

LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 5.1A a.

A company‘s operating cycle is the average time it takes to go from cash to cash in producing revenues. The operating cycle for a merchandising company covers the period of time between when you purchase your inventory, to when you sell it, and to when you eventually collect the accounts receivable from a sale. The hair salon is having problems paying for its products because it purchases a two-month supply, paying for it immediately, with cash flow from the current month‘s operations. There is an insufficient cash float available to purchase two months of supply at one time, and to pay immediately rather than taking advantage of the 30-day payment period. The hair salon‘s inventory is contributing to the problem of reduced cash flow and gross profit because some items have been in stock for a long period of time. This further extends the operating cycle for those items.

The physical inventory count comparison with the perpetual inventory record has flagged discrepancies. There is an issue concerning the way in which the perpetual record is being maintained and updated because staff members sometimes forget to scan the products that they use on customers. There may also be a possibility that goods are being stolen by customers or employees. Accounting errors could also be the source of the discrepancy, in which case the company‘s procedures should be reviewed, and if necessary, internal controls should be strengthened. Possible solutions could be having the system require that items be scanned before a product sale can be rung in. In addition, the procedures taken to perform the physical inventory count should be reviewed to determine if the count is the source of the discrepancies. The count should be performed more frequently, not necessarily for all inventory items but particularly for those items that had discrepancies from the count performed at the end of six months. The results of the more frequent counts should be monitored to see if the discrepancies with the perpetual inventory records are diminishing.

PROBLEM 5.1A (CONTINUED) b. (continued) The hair salon should use the perpetual inventory system to help determine which inventory items are out-of-stock and which items are taking a long time to sell. By managing what inventory is purchased, fewer markdowns of the selling price will be required, and sales should increase as there will be less chance for a stock-out. Finally, the full 30 days should be taken on the terms with your supplier, in order to have more cash on hand when needed. c.

For control reasons, a physical inventory count must always be taken at least once a year, and ideally more often under the perpetual inventory system. By using a perpetual inventory system, a company knows what inventory should be on hand. Performing a physical count and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock. The staff may be forgetting to scan intentionally. Enforcing the scanning procedure will strengthen internal control over cash receipts. If staff can avoid scanning product, they may also attempt to avoid recording a cash sale altogether, pocketing the extra cash. This theft would lead to unrecorded revenues and would reduce the gross profit performance of the salon.

Data analytics could assist Karen in determining the sales trends of those products that are the most popular with customers that often cause stockouts and those products that are not selling well and may need to be written down. Seasonal trends might be detected using data analytics along with statistics of which price point is most popular when selling jewellery. With the information in hand, Karen can buy products more efficiently and possibly at a lower cost. Reduced stock-outs will lead to increased sales.

LO 1,4 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5.2A a. b. Nov.

Pastolio Ltd. is a wholesaler. Its suppliers are manufactures (olive oil producers) and its customers are grocery stores and restaurants. 2

Accounts Receivable (100 × $28) ............................ Refund Liability ($2,800 x 6%) ....................... Sales .............................................................

2,800

Cost of Goods Sold .................................................. Estimated Inventory Returns ($1,300 x 6%) ............. Inventory (100 × $13) ....................................

1,222 78

Inventory (200 × $11) ............................................... Accounts Payable ........................................

2,200

Inventory (200 × $12) ............................................... Accounts Payable ..........................................

2,400

Refund Liability......................................................... Accounts Receivable (5 × $28) ........................

140

Inventory (5 × $13) ................................................... Estimated Inventory Returns ............................

Accounts Payable .................................................... Inventory (10 × $12) ......................................

120

Accounts Receivable (30 × $40) .............................. Refund Liability ($1,200 x 6%) ....................... Sales .............................................................

1,200

Cost of Goods Sold .................................................. Estimated Inventory Returns ($360 x 6%) ................ Inventory (30 × $12) ......................................

338 22

Refund Liability......................................................... Accounts Receivable (4 × $28)......................

112

Cost of Goods Sold (4 x $13) ................................... Estimated Inventory Returns .........................

Cash ...................................................................... Accounts Receivable ($2,800 - $140 -$112)

2,548

168 2,632

1,300

2,200

2,400

140

120

72 1,128

360

112

2,548

PROBLEM 5.2A (CONTINUED) b. (continued)

Nov

Accounts Payable ($2,400 – $120) ........................ Cash ............................................................

2,280

Cash ........................................................................ Accounts Receivable ($40 x 30) ...................

1,200

Accounts Receivable (45 × $25) .............................. Refund Liability ($1,125 x 6%) ......................... Sales ................................................................

1,125

Cost of Goods Sold (45 × $12) ................................. Estimated Inventory Returns ($540 x 6%) ................ Inventory ..........................................................

508 32

2,280

1,200

68 1,057

540

c. Oct Nov

31* 4 8 10

Nov 30 Bal. * (150 × $13)

d. June

Inventory 1,950 Nov 2,200 2,400 65 30 4,295

2 13 14

1,300 120 360 540

Cost of Goods Sold .................................................. Inventory ($4,295 - $4,175) ..............................

120 120

LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.3A a. Aug.

Supplies ............................................................... Cash ..........................................................

2,500

Inventory .............................................................. Accounts Payable ......................................

35,000

Inventory .............................................................. Cash ..........................................................

1,200

Accounts Receivable ............................................ Refund Liability ($25,000 x 12%) ............... Sales .........................................................

25,000

Cost of Goods Sold .............................................. Estimated Inventory Returns ($10,000 x 12%) ..... Inventory....................................................

8,800 1,200

Freight Out ........................................................... Cash ..........................................................

500

Accounts Payable ................................................ Inventory....................................................

3,000

Equipment ............................................................ Accounts Payable ......................................

45,000

2,500

35,000

1,200

3,000 22,000

10,000

500

3,000

45,000

No entry necessary.

Inventory ................................................................ Cash ............................................................

3,000

Cash .................................................................. Accounts Receivable ...................................

25,000

Accounts Payable ($35,000 – $3,000) ................... Cash ($32,000 – $640) ................................ Inventory ($32,000 × 2%) ............................

32,000

3,000

25,000

31,360 640

PROBLEM 5.3A (CONTINUED) a. (continued) Aug.

Accounts Receivable .............................................. Refund Liability ($30,000 x 12%) ............... Sales ...........................................................

30,000

Cost of Goods Sold ................................................ Estimated Inventory Returns ($15,000 x 12%) ..... Inventory......................................................

13,200 1,800

3,600 26,400

15,000

No entry necessary

Refund Liability....................................................... Accounts Receivable ...................................

1,200

Inventory ................................................................ Estimated Inventory Returns .......................

650

1,200

650

b. and c. Sales % Aug. 6 Aug. 26 Total

$22,000 26,400 $48,400

Cost of Goods Sold $8,800 13,200 $22,000

Gross profit

$26,400

As a

54.5%

LO 2,3,4,5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 5.4A a. Oct.

Inventory .................................................................. Accounts Payable ...........................................

7,800

Inventory .................................................................. Cash ...............................................................

476

Inventory .................................................................. Accounts Payable ...........................................

2,700

Accounts Payable .................................................... Inventory .........................................................

300

7,800

476

2,700

300

Accounts Receivable ............................................... 12,000 Refund Liability ($12,000 x 1%) ...................... Sales ...............................................................

120 11,880

Cost of Goods Sold.................................................. Estimated Inventory Returns ($4,700 x 1%) ............ Inventory .........................................................

4,653 47 4,700

Cash ........................................................................ Accounts Receivable ......................................

5,479

Accounts Payable ($7,800 – $300) .......................... Inventory ($7,500 × 3%) ................................. Cash ($7,500 – $225) .....................................

7,500

5,479

225 7,275

Accounts Receivable ............................................... 13,300 Refund Liability ($13,300 x 1%) ...................... Sales ...............................................................

133 13,167

Cost of Goods Sold.................................................. Estimated Inventory Returns ($8,300 x 1%) ............ Inventory .........................................................

8,300

8,217 83

PROBLEM 5.4A (CONTINUED) 28

Accounts Payable .................................................... Inventory .........................................................

400

Accounts Payable ($2,700 – $400) .......................... Inventory ($2,300 × 1%) ................................. Cash ($2,300 – $23) .......................................

2,300

Cash ........................................................................ Accounts Receivable ......................................

8,945

400

23 2,277

8,945

b. Cash Oct. 1 Bal. 6,300 Oct. 4 Oct. 16 5,479 Oct. 17 Oct. 31 8,945 Oct. 29 Oct. 31 Bal. 10,696

476 7,275 2,277

Accounts Receivable Oct. 1 Bal 14,424 Oct. 16 Oct. 14 12,000 Oct. 26 13,300 Oct. 31

Oct. 12 Oct. 17 Oct. 28 Oct. 29

Accounts Payable 300 Oct. 3 7,500 Oct. 9 400 2,300 Oct. 31 Bal. Refund Liability Oct. 14 Oct. 26 Oct.31 Bal.

5,479 8,945

7,800 2,700

120 133 253

Oct. 31 Bal. 25,300

Oct. 1 Bal. Oct. 3 Oct. 4 Oct. 9

Oct. 31 Bal.

Inventory 22,500 Oct. 12 7,800 Oct. 14 476 Oct. 17 2,700 Oct. 26 Oct. 28 Oct. 29 19,528

300 4,700 225 8,300 400 23

Estimated Inventory Returns Oct. 14 47 Oct. 26 83 Oct. 31 Bal. 130 Common Shares Oct. 1 Bal. Oct. 31 Bal.

Sales Oct. 14 11,880 Oct. 26 13,167 Oct. 31 Bal. 25,047

Oct. 14 Oct. 26 Oct. 31 Bal.

Cost of Goods Sold 4,653 8,217 12,870 Retained Earnings Oct. 1 Bal. Oct. 31 Bal.

29,224 29,224

14,000 14,000

PROBLEM 5.4A (CONTINUED) c. ALPINE SNOWBOARD SHOP LIMITED Trial Balance October 31, 2024

Cash .................................................................................. $ Accounts receivable .......................................................... Inventory ........................................................................... Estimated inventory returns............................................... Refund liability .................................................................. Common shares ................................................................ Retained earnings ............................................................. Sales ................................................................................. Cost of goods sold ............................................................

Debit 10,696 25,300 19,528 130

12,870 $68,524

Credit

$ 253 14,000 29,224 25,047 _______ $68,524

(Total debit account balances = Total credit account balances) LO 2,3 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.5A a. July

2 4

Accounts Receivable................................................ 4,500 Refund Liability ($4,500 x 3%) ........................ Sales ...............................................................

135 4,365

Cost of Goods Sold .................................................. 2,910 Estimated Inventory Returns (3,000 x 3%)............... 90 Inventory .........................................................

3,000

Freight Out ...............................................................100 Cash................................................................

100

Inventory .................................................................. 7,000 Accounts Payable ...........................................

7,000

Inventory ..................................................................250 Cash

250

Cash ........................................................................ 1,500 Accounts Receivable.......................................

1,500

Refund Liability ........................................................ 90 Cash................................................................

Inventory .................................................................. 30 Estimated Inventory Returns ...........................

Accounts Payable ....................................................400 Inventory .........................................................

400

Cash ........................................................................ 3,500 Refund Liability ($3,500 x 3%) ........................ Sales ...............................................................

105 3,395

Cost of Goods Sold ..................................................970 Estimated Inventory Returns ($1,000 x 3%)............. 30 Inventory .........................................................

1,000

PROBLEM 5.5A (CONTINUED) a. (continued) July

Inventory .................................................................. 6,000 Accounts Payable ...........................................

6,000

No entry required (freight paid by Virtual Trainers)

Accounts Payable ($7,000 – $400) .......................... 6,600 Cash................................................................

6,600

Cash ........................................................................ 4,500 Accounts Receivable.......................................

4,500

Supplies ...................................................................700 Cash................................................................

700

Cost of Goods Sold ..................................................380 Inventory ......................................................... ($14,380* – $14,000 = $380 shortage)

380

* Unadjusted balance in Inventory account: $5,500 - $3,000 + $7,000 + $250 + $30 – $400 – $1,000 + $6,000 = $14,380

PROBLEM 5.5A (CONTINUED) b. July 1 Bal. July 8 July 13 July 27 July 31 Bal.

Cash 10,000 July 2 1,500 July 5 3,500 July 9 4,500 July 18 July 30 11,760

Accounts Receivable July 1 Bal. 4,500 July 8 July 2 4,500 July 27 July 31 Bal. 3,000

July 1 Bal. July 4 July 5 July 9 July 16 July 31 Bal.

Inventory 5,500 July 2 7,000 July 11 250 July 13 30 6,000 July 380 14,000

Estimated Inventory Returns July 2 90 July 9 July 13 30 July 31 Bal. 90

July 30 July 31 Bal.

July 11 July 18

July 9

100 250 90 6,600 700

1,500 4,500

3,000 400 1,000 31

Common Shares July 1 Bal. Jul 31 Bal.

9,000 9,000

Retained Earnings July 1 Bal. Jul 31 Bal.

11,000 11,000

Sales July 2 July 13 July 31 Bal.

July 2 July 31 Bal.

4,365 3,395 7,760

Freight Out 100 100

Cost of Goods Sold July 2 2,910 July 13 970 July 31 380 July 31 Bal. 4,260

Supplies 700 700

Accounts Payable 400 July 4 6,600 July 16 July 31 Bal.

7,000 6,000 6,000

Refund Liability 90 July 2 July 13 July 31 Bal.

135 105 150

PROBLEM 5.5A (CONTINUED) c. SMART HOME ELECTRONICS CORP. Statement of Income (Partial) Month Ended July 31, 2024

Sales .......................................................................... Cost of goods sold ....................................................... Gross profit ..................................................................

$7,760 4,260 $ 3,500

d. SMART HOME ELECTRONICS CORP. Statement of Financial Position (Partial) July 31, 2024

Assets Cash .................................................................. Accounts receivable .......................................... Inventory............................................................ Estimated inventory returns ............................... Supplies............................................................. Total current assets ................................

$11,760 3,000 14,000 90 700 $29,550

LO 2,3,4 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.6A a. Allocate the transaction price in proportion of the stand-alone selling prices:

Riding mowers (4 x $12,000) Push lawnmowers (20 x $800) Total

Stand-alone Selling price $48,000 ($48,000 ÷ $64,000 = 75%) 16,000 ($16,000 ÷ $64,000 = 25%) $64,000

Riding mowers Push lawnmowers Total

Allocated Selling price $45,000 ($60,000 x 75%) 15,000 ($60,000 x 25%) $60,000

The amount of revenue that can be recognized in April when 4 riding mowers and 14 lawnmowers are delivered: Riding mowers $45,000 Push lawnmowers (14/20 x $15,000) 10,500 Total sales $55,500 Cost of goods sold: Riding mowers (4 x $8,300) $33,200 Push lawnmowers (14 x $525) 7,350 Total cost of goods sold $40,550 b. April 26 Accounts Receivable........................................... Sales..............................................................

55,500 55,500

26 Cost of Goods Sold ............................................. Inventory ........................................................

40,550

5 Accounts Receivable ($15,000 - $10,500) .......... Sales..............................................................

4,500

5 Cost of Goods Sold (6 x $525) ............................ Inventory ........................................................

3,150

May 18 Cash.................................................................... Accounts Receivable .....................................

60,000

May

40,550

4,500

3,150

60,000

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.7A a. Allocate the transaction price in proportion of the stand-alone selling prices:

Trucks (15 x $80,000) Campers (15 x $20,000) Total

Stand-alone Selling price $1,200,000 ($1,200,000 ÷ $1,500,000 = 80%) 300,000 ($300,000 ÷ $1,500,000 = 20%) $1,500,000

Trucks Campers Total

Allocated Selling price $1,080,000 ($1,350,000 x 80%) 270,000 ($1,350,000 x 20%) $1,350,000

The amount of revenue that can be recognized in May when all trucks are delivered is $1,080,000 The amount of cost of goods sold is (15 x $68,000) $1,020,000 b. May

5 Accounts Receivable...........................................1,080,000 Sales..............................................................

1,080,000

5 Cost of Goods Sold .............................................1,020,000 Inventory ........................................................

1,020,000

25 Cash....................................................................1,000,000 Accounts Receivable .....................................

1,000,000

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.8A a. CLUB CANADA WHOLESALE INC. Statement of Income (Single-step) Year Ended December 31, 2024 Revenues Sales ........................................................................................ Interest income ........................................................................ Expenses Cost of goods sold................................................................... Administrative expenses ......................................................... Selling expenses ..................................................................... Interest expense ...................................................................... Income before income tax........................................................... Income tax expense .................................................................... Net income..................................................................................

$1,061,375 2,400 $806,240 88,515 42,100 12,350

$1,063,775

949,205 114,570 17,200 $ 97,370

PROBLEM 5.8A (CONTINUED) b. CLUB CANADA WHOLESALE INC. Statement of Income (Multiple-step) Year Ended December 31, 2024 Sales ..................................................................................... Cost of goods sold .................................................................. Gross profit ............................................................................. Operating expenses Administrative expenses .............................................. Selling expenses .......................................................... Total operating expenses ........................................ Income from operations .......................................................... Other income and expenses Interest income ................................................................. Interest expense ................................................................ Income before income tax....................................................... Income tax expense ................................................................ Net income..............................................................................

$1,061,375 806,240 255,135 $88,515 42,100 0 130,615 124,520 $(2,400) 12,350

9,950 114,570 17,200 $ 97,370

(Revenues – Cost of goods sold – Operating expenses = Income from operations) (Income from operations + Other income – Other expenses = Income before income taxes) c.

Both statements of income result in the same amount of net income. The multiplestep statement of income provides the user with more information than does the single-step statement of income. The multiple-step statement of income provides information on gross profit and income from operations, which is not included on the single-step statement of income.

Club Canada Wholesale Inc. is classifying its expenses by their function. They are reported according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling).

LO 4 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.9A a. Dec. 31

Insurance Expense ($3,000 × 11/12) ............................. Prepaid Insurance .................................................

2,750

Supplies Expense ........................................................... Supplies ($2,940 – $750) ......................................

2,190

Depreciation Expense ..................................................... Accumulated Depreciation—Buildings .................. Accumulated Depreciation—Equipment ...............

10,500

Salaries Expense ............................................................ Salaries Payable ..................................................

750

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

735

Deferred Revenue ($4,000 – $975)................................. Sales .....................................................................

3,025

Cost of Goods Sold ......................................................... Inventory ...............................................................

2,000

Income Tax Expense ...................................................... Income Tax Payable..............................................

500

2,750

2,190

6,000 4,500

750

735

3,025

2,000

Cost of Goods Sold ......................................................... 2,950 Inventory ............................................................... ($28,750 – $2,000 = $26,750; $26,750 – $23,800 = $2,950 shortage)

500

2,950

PROBLEM 5.9A (CONTINUED) b. Dec. 31 Dec.31 Bal.

Accumulated Depreciation— Equipment Dec. 31 18,000 Dec. 31 4,500 Dec. 31 Bal. 22,500

Cash 17,000 17,000

Accounts Receivable Dec. 31 31,700 Dec.31 Bal. 31,700

Accounts Payable Dec. 31 Dec.31 Bal.

33,735 33,735

Deferred Revenue 3,025 Dec. 31 Dec.31 Bal.

4,000 975

2,000 2,950

Dec. 31 Bal.

Inventory 28,750 Dec. 31 Dec. 31 23,800

Dec. 31 Dec. 31 Bal.

Supplies 2,940 Dec. 31 750

2,190

Salaries Payable Dec. 31 Dec. 31 Bal.

750 750

Dec. 31 Dec. 31 Bal.

Prepaid Insurance 3,000 Dec. 31 250

2,750

Interest Payable Dec. 31 Dec. 31 Bal.

735 735

Dec. 31 Dec.31 Bal.

Land 30,000 30,000

Income Tax Payable Dec. 31 Dec. 31 Bal.

500 500

Dec. 31 Dec.31 Bal.

Buildings 150,000 150,000

Bank Loan Payable Dec. 31 Dec.31 Bal.

147,100 147,100

Dec.31

Dec. 31

Accumulated Depreciation— Buildings Dec. 31 24,000 Dec. 31 6,000 Dec. 31 Bal.30,000

Dec. 31 Dec.31 Bal.

Equipment 45,000 45,000

PROBLEM 5.9A (CONTINUED) b. continued)

Dec. 31 Dec. 31 Bal.

Common Shares Dec. 31 Dec.31 Bal.

13,000 13,000

Retained Earnings Dec. 31 Dec.31 Bal.

31,425 31,425

Dividends Declared 2,000 2,000 Sales Dec. 31 259,995 Dec. 31 3,025 Dec.31Bal. 263,020

Cost of Goods Sold Dec. 31 171,225 Dec. 31 2,000 Dec. 31 2,950 Dec.31Bal. 176,175

Salaries Expense Dec. 31 30,950 Dec. 31 750 Dec. 31 Bal. 31,700 Depreciation Expense Dec. 31 10,500 Dec. 31 Bal. 10,500 Utilities Expense Dec. 31 5,100 Dec. 31 Bal. 5,100 Insurance Expense Dec. 31 2,750 Dec. 31 Bal. 2,750

Dec. 31 Dec. 31 Bal.

Supplies Expense 2,190 2,190

Interest Expense Dec. 31 8,090 Dec. 31 735 Dec. 31Bal. 8,825 Income Tax Expense Dec.31 5,500 Dec. 31 500 Dec.31 Bal. 6,000

PROBLEM 5.9A (CONTINUED) c. MESA INC. Adjusted Trial Balance December 31, 2024 Debit $ 17,000 31,700 23,800 750 250 30,000 150,000

Cash............................................................................ Accounts receivable ................................................... Inventory ..................................................................... Supplies ...................................................................... Prepaid insurance ....................................................... Land ............................................................................ Buildings ..................................................................... Accumulated depreciation—buildings ......................... Equipment ................................................................... 45,000 Accumulated depreciation—equipment....................... Accounts payable ........................................................ Deferred revenue ........................................................ Salaries payable ......................................................... Interest payable .......................................................... Income tax payable ..................................................... Bank loan payable ...................................................... Common shares.......................................................... Retained earnings ....................................................... Dividends declared ..................................................... 2,000 Sales ........................................................................... Cost of goods sold ...................................................... 176,175 Salaries expense ........................................................ 31,700 Depreciation expense ................................................. 10,500 Utilities expense .......................................................... 5,100 Insurance expense ...................................................... 2,750 Supplies expense ........................................................ 2,190 Interest expense ......................................................... 8,825 Income tax expense .................................................... 6,000 Totals ..................................................................... $543,740 (Total debit account balances = Total credit account balances)

Credit

$ 30,000 22,500 33,735 975 750 735 500 147,100 13,000 31,425 263,020

0000 000 $543,740

PROBLEM 5.9A (CONTINUED) d. MESA INC. Statement of Income Year Ended December 31, 2024

Sales .................................................................. Cost of goods sold ...................................................... Gross profit ................................................................. Operating expenses Salaries expense ............................................... Depreciation expense ........................................ Utilities expense ................................................. Insurance expense ............................................. Supplies expense .............................................. Total operating expenses ................................... Income from operations .............................................. Other income and expenses Interest expense ................................................ Income before income tax .......................................... Income tax expense ................................................... Net income .................................................................

$263,020 176,175 86,845 $31,700 10,500 5,100 2,750 2,190 52,240 34,605 8,825 25,780 6,000 $ 19,780

(Revenues – Cost of goods sold – Operating expenses = Income from operations) (Income from operations + Other income – Other expenses = Income before income tax)

PROBLEM 5.9A (CONTINUED) d. (continued) MESA INC. Statement of Changes in Equity Year Ended December 31, 2024

Balance, January 1 Issued common shares Net income Dividends declared Balance, December 31

Common Shares

Retained Earnings

$10,000 3,000

$31,425

0000 00 $13,000

19,780 (2,000) $49,205

Total Equity $41,425 3,000 19,780 (2,000) $62,205

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings) MESA INC. Statement of Financial Position December 31, 2015 Assets Current assets Cash ................................................................................................ $17,000 Accounts receivable .................................................................. 31,700 Inventory ..................................................................................... 23,800 Supplies ...................................................................................... 750 Prepaid insurance ...................................................................... 250 Total current assets ........................................................... 73,500 Property, plant, and equipment Land........................................................ $ 30,000 Buildings ................................................. $150,000 Less: Accumulated depreciation ............. 30,000 120,000 Equipment .............................................. $45,000 Less: Accumulated depreciation ............. 22,500 22,500 Total property, plant, and equipment 172,500 Total assets ............................................................................... $246,000

PROBLEM 5.9A (CONTINUED) d. (continued) Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ...................................................................... Deferred revenue ....................................................................... Salaries payable ........................................................................ Interest payable ......................................................................... Income tax payable ................................................................... Current portion of bank loan payable ......................................... Total current liabilities ...................................................... Non-current liabilities Bank loan payable ($147,100 – $9,800) .................................... Total liabilities ................................................................... Shareholders‘ equity Common shares ..................................................... $13,000 Retained earnings .................................................. 49,205 Total shareholders‘ equity....................................... Total liabilities and shareholders‘ equity ....................................

$ 33,735 975 750 735 500 9,800 46,495 137,300 183,795

62,205 $246,000

LO 4 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.10A a.

Gross profit margin

$255,135 ÷ $1,061,375 = 24.0%

Profit margin

$97,370 ÷ $1,061,375 = 9.2% b.

Existing balances Increase sales ($1,061,375 × 15%)

Sales

Gross Profit

Net Income

$1,061,375

$255,135

$97,370

27,000

159,206

Increase in gross profit Increase in operating expenses

(13,500)

Increase in income tax expense

(2,700)

Revised amounts

$1,220,581

$282,135 ÷ $1,220,581 =

Revised gross profit margin Revised profit margin

$282,135

$108,170

23.1%

$108,170 ÷ $1,220,581 = 8.9%

Both the gross profit margin and the profit margin have decreased, but the end result is an increase in net income, so the plan has merit. LO 4,5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 5.11A a. [1] [8]

Sales Accounts receivable

= $540,000 (given) = Sales × 30% = $540,000 × 30% = $162,000

b. [2]

Cost of goods sold

[9]

Inventory

= 90% × inventory purchased = 90% × $300,000 = $270,000 = 10% × inventory purchased = 10% × $300,000 = $30,000 or purchases less cost of goods sold = $300,000 less $270,000 = $30,000 = 20% × inventory purchased = 20% ×$300,000 = $60,000

[10] Accounts payable

c. [3]

Gross profit

[4] [5]

Operating expenses Income before income taxes

d. [6]

Income tax expense

[7]

Net income

[11] Income tax payable

= Sales – Cost of goods sold = $540,000 – $270,000 = $270,000 = $120,000 (given) = Gross profit – Operating expenses = $270,000 – $120,000 = $150,000

= Income before income taxes × 30% = $150,000 × 30% = $45,000 = Income before income taxes – Income tax expense = $150,000 – $45,000 = $105,000 = given as equal to income tax expense = $45,000

PROBLEM 5.11A (CONTINUED) e. Gross profit margin Profit margin

= $270,000 ÷ $540,000 = 50.0% = $105,000 ÷ $540,000 = 19.4%

If Psang Inc. has a higher than average gross profit margin, it is either because it is selling products at a higher price, (which is not the case), or because its cost of goods sold as a percentage of sales is smaller than its competitors. The resulting higher gross profit will be a contributing factor to a higher than average profit margin ratio. Other factors that could contribute to a higher than average profit margin ratio include lower than average operating expenses. LO 4,5 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.12A a.

(in $ millions) 2021

Current ratio

$1,354.8 $1,081.6

Gross profit margin

($7,684.9 – $4,173.3) $7,684.9

Profit margin

$1,458.8 $7,684.9

2020 = 1.3:1

= 45.7%

= 19.0%

$1,793.2 $848.4

($5,454.4 – $3,538.8) $5,454.4

$559.9 $5,454.4

2019 =

2.1:1

= 35.1%

= 10.3%

$1,410.5 $967.5

($4,658.3 – $3,618.6) $4,658.3

($269.7) $4,658.3

1.5:1

= 22.3%

= (5.8%)

Canfor‘s current ratio increased (improved) in 2020, but deteriorated in 2021. Canfor‘s gross profit margin experienced a constant increase (improvement) over the three-year period as did the profit margin.

Current ratio Gross profit margin Profit margin

2021 Industry Average 2.5:1 25.0% 3.0%

2021 Canfor Corporation 1.3:1 45.7% 19.0%

Canfor‘s current ratio is well below the industry average, but its gross profit margin and profit margin are significantly better than those of the industry. LO 5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*PROBLEM 5.13A a. Nov.

Accounts Receivable (100 × $28) ............................ Refund Liability ($2,800 x 6%) ........................ Sales ...............................................................

2,800

Purchases (200 × $11) ............................................ Accounts Payable ...........................................

2,200

Purchases (200 × $12) ............................................ Accounts Payable ...........................................

2,400

Refund Liability ........................................................ Accounts Receivable (5 × $28) .......................

140

Accounts Payable (10 × $12) ................................... Purchase Returns and Allowances .................

120

Accounts Receivable (30 × $40) ............................ Refund liability ($1,200 x 6%) ...................... Sales ...........................................................

1,200

Refund Liability....................................................... Accounts Receivable (4 × $28) ..................

112

Cash ...................................................................... Accounts Receivable ($2,800 - $140 -$112)

2,548

Accounts Payable ($2,400 – $120) ........................ Cash ............................................................

2,280

Cash .................................................................... Accounts Receivable ($40 x 30) .................

1,200

Accounts Receivable (45 × $25) ............................ Refund Liability ($1,125 x 6%)..................... Sales ...........................................................

1,125

168 2,632

2,200

2,400

140

120

72 1,128 112

2,548

2,280

1,200

68 1,057

*PROBLEM 5.13A (CONTINUED) b.

The advantages of the periodic inventory system are that it is simpler and cheaper (in terms of equipment and systems) compared to a perpetual inventory system. There are fewer accounting entries and cash registers do not need to be able to read bar codes to apply the appropriate cost as is required in the perpetual inventory system. However, a perpetual inventory system enables management to monitor purchases and sales to make the optimum use of the money available for stocking inventory. Fewer stock-outs are experienced when using the perpetual system as reductions in inventory levels can be quickly identified and restocking done, possibly automatically, before the business runs out of inventory. With the perpetual system, cost of goods sold can be reported at any time and consequently, timely reporting of results can be achieved. Perpetual systems allow management to quantify the cost of goods lost to theft. When customers make inquiries concerning the availability of stock from a merchant, a quick reply can be obtained and provided when a perpetual inventory system is used. Finally, fewer inventory counts are required, saving salary costs and minimizing lost sales from having to close the business for inventory counts.

LO 1,6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 5.14A a. Aug.

Supplies ............................................................... Cash ............................................................

2,500

Purchases ............................................................ Accounts Payable .......................................

35,000

Freight In .............................................................. Cash ............................................................

1,200

Accounts Receivable............................................ Refund Liability ($25,000 x 12%) ................ Sales ...........................................................

25,000

Freight Out ........................................................... Cash ............................................................

500

Accounts Payable ................................................ Purchase Returns and Allowances .............

3,000

Equipment ............................................................ Accounts Payable .......................................

45,000

2,500

35,000

1,200

3,000 22,000

500

3,000

45,000

No entry necessary.

Purchases ............................................................ Cash ............................................................

3,000

Cash .................................................................... Accounts Receivable ...................................

25,000

Accounts Payable ($35,000 – $3,000) ................. Cash ($32,000 – $640) ............................... Purchase Discounts ($32,000 × 2%) ...........

32,000

Accounts Receivable............................................ Refund Liability ($30,000 x 12%) ................ Sales ...........................................................

30,000

3,000

25,000

31,360 640

3,600 26,400

*PROBLEM 5.14A (CONTINUED) a. (continued) Aug.

No entry necessary

Refund Liability......................................................... Accounts Receivable .......................................

1,200

Accounts Payable ($35,000 – $3,000) ..................... Cash ...............................................................

32,000

1,200

b. Sept.

32,000

The cost of missing this purchase discount is the amount recorded in the Purchase Discounts account when the payment was made within the discount period ($32,000 × 2%) = $640. Expressing this in terms of an annual interest rate, it would be the equivalent of paying 37.4% ($640 ÷ $31,260 × 365/20) for the use of the money for 20 days. LO 6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 M: Reporting and Finance

*PROBLEM 5.15A a. Oct.

3 4

Purchases ...................................................................... Accounts Payable .................................................

7,800

Freight In ........................................................................ Cash ......................................................................

476

Purchases ...................................................................... Accounts Payable .................................................

2,700

Accounts Payable .......................................................... Purchase Returns and Allowances .......................

300

Accounts Receivable ....................................................... Refund Liability ($(12,000 x 1%) ........................... Sales .....................................................................

12,000

Cash .............................................................................. Accounts Receivable.............................................

5,479

Accounts Payable ($7,800 – $300) ................................ Purchase Discounts ($7,500 × 3%) ....................... Cash ($7,500 – $225)............................................

7,500

Accounts Receivable ....................................................... Refund Liability ($(13,300 x 1%) ........................... Sales .....................................................................

13,300

Accounts Payable .......................................................... Purchase Returns and Allowances .......................

400

Accounts Payable ($2,700 – $400) ................................ Purchase Discounts ($2,300 × 1%) ....................... Cash ($2,300 – $23) .............................................

2,300

Cash…………………………………………………………. Accounts Receivable………………………………...

8,945

7,800 476

2,700

300

120 11,880 5,479

225 7,275

133 13,167

400

23 2,277

8,945

*PROBLEM 5.15A (CONTINUED) b. Cash Oct. 1 Bal. 6,300 Oct. 4 Oct. 16 5,479 Oct. 17 Oct. 31 8,945 Oct. 29 Oct. 31 Bal. 10,696 Accounts Receivable Oct. 1 Bal. Oct. 16 14,424 Oct. 14 12,000 Oct. 26 13,300 Oct. 31 Oct. 30 Bal. 25,300

476 7,275 2,277

Oct. 12 Oct. 17 Oct. 28 Oct. 29

Refund Liability Oct. 14 Oct. 26 Oct.30 Bal.

Sales Oct. 14 11,880 Oct. 26 13,167 Oct. 30 Bal. 25,047

5,479

8,945

Inventory Oct. 1 Bal. 22,500 Oct. 30 Bal. 22,500 Accounts Payable 300 Oct. 3 7,500 Oct. 9 400 2,300 Oct. 30 Bal.

Retained Earnings Oct. 1 Bal. 29,224 Oct. 30 Bal. 29,224

Oct. 3 Oct. 9 Oct. 30 Bal.

Purchases 7,800 2,700 10,500

Purchase Returns and Allowances Oct. 12 300 Oct. 28 400 Oct. 30 Bal. 700 7,800 2,700

120 133 253

Purchase Discounts Oct. 17 Oct. 29 Oct. 30 Bal.

Oct. 4 Oct. 30 Bal.

225 23 248

Freight In 476 476

Common Shares Oct. 1 Bal. 14,000 Oct. 30 Bal. 14,000

*PROBLEM 5.15A (CONTINUED) c.

ALPINE SNOWBOARD SHOP LIMITED Trial Balance October 31, 2024

Debit Cash ...................................................................................... $ 10,696 Accounts receivable ............................................................... 25,300 Inventory ................................................................................ 22,500 Refund liability Common shares ..................................................................... Retained earnings .................................................................. Sales ...................................................................................... Purchases .............................................................................. Freight in ................................................................................ 10,500 Purchase returns and allowances .......................................... 476 Purchase discounts ................................................................ 00 00 $69,472 (Total debit account balances = Total credit account balances)

Credit

$ 253 14,000 29,224 25,047

700 248 $69,472

d. Apr. 30

Inventory (ending) .................................................... Cost of Goods Sold .................................................. Purchase Returns and Allowances .......................... Purchase Discounts ................................................. Inventory (beginning) .......................................... Purchases ........................................................... Freight In.............................................................

19,165 13,363* 700 248 22,500 10,500 476

*Cost of goods sold = Beginning inventory + Purchases  Purchase discounts  Purchase returns and allowances + Freight in – Ending inventory Cost of goods sold = $22,500 + $10,500 – $248 – $700 + $476 – $19,165 = $13,363 LO 6 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 5.16A a.

FEISTY LTD. Statement of Income (Partial) Year Ended April 30, 2024

Sales .......................................................................................................... $9,050,000 Cost of goods sold Inventory, May 1, 2023 ...................................................... $ 600,000 Purchases ................................................... $5,900,000 Less: Purchase discounts ........................... 40,000 Net purchases ............................................. 5,860,000 Add: Freight in ........................................... 120,000 Cost of goods purchased ................................................... 5,980,000 Cost of goods available for sale ......................................... 6,580,000 Inventory, April 30, 2024 .................................................... 700,000 Cost of goods sold ........................................................................... 5,880,000 Gross profit .................................................................................................. $3,170,000 (Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)

b. Apr. 30

Inventory (ending) .................................................... Cost of Goods Sold .................................................. Purchase Discounts ................................................. Inventory (beginning) .......................................... Purchases ........................................................... Freight In.............................................................

700,000 5,880,000 40,000 600,000 5,900,000 120,000

c. Gross profit margin: $3,170,000 $9,050,000

= 35.0%

Feisty‘s gross profit margin of 35% is better than the industry average of 30%. This indicates that Feisty is making a higher gross profit from each dollar of sales than the industry average, due to higher selling prices and/or lower costs for its inventory. LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*PROBLEM 5.17A a. Dec. 31

108,900 519,300 9,600 33,750 60,750 602,400 8,400

b. ACTIVE ATHLETIC WEAR INC. Statement of Income Year Ended December 31, 2024

Sales ................................................................................... Cost of goods sold Inventory, January 1 .................................................................. Purchases .......................................................... $602,400 Less: Purchase discounts .................................... 33,750 Purchase returns and allowances ............... 9,600 Net purchases ...................................................... Add: Freight in ...................................................... Cost of goods purchased .......................................................... Cost of goods available for sale ................................................ Less: Inventory, December 31 .................................................. Cost of goods sold .............................................................. Gross profit ...................................................................................... Operating expenses Administrative expenses ............................................................ Selling expenses........................................................................ Total operating expenses ................................................... Income from operations ................................................................... Other income and expenses Interest expense ........................................................................ Income before income tax ............................................................... Income tax expense ........................................................................ Net Income .....................................................................................

$921,000 $ 60,750

559,050 8,400 567,450 628,200 108,900 519,300 401,700 $271,350 11,250 282,600 119,100 15,600 103,500 24,000 $ 79,500

(Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale)

*PROBLEM 5-17A (CONTINUED) b. (continued) ACTIVE ATHLETIC WEAR INC. Statement of Changes in Equity Year Ended December 31, 2024 Common Shares Balance, January 1 Issued common shares Net income Dividends declared Balance, December 31

$ 75,000 37,500 000 0000 $112,500

Retained Earnings $102,900 79,500 (12,000) $170,400

Total Equity $177,900 37,500 79,500 (12,000) $282,900

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

ACTIVE ATHLETIC WEAR INC. Statement of Financial Position December 31, 2024 Assets Current assets Cash ............................................................................................................ Accounts receivable ................................................................................... Inventory ...................................................................................................... Prepaid insurance ...................................................................................... Total current assets ............................................................................ Property, plant, and equipment Land..................................................................... $112,500 Buildings .............................................................. $285,000 Less: Accumulated depreciation .......................... 77,700 207,300 Equipment ........................................................... $165,000 Less: Accumulated depreciation .......................... 64,350 100,650 Total property, plant, and equipment ......... Total assets ...............................................................................................

$ 25,500 66,300 108,900 3,600 204,300

420,450 $624,750

*PROBLEM 5.17A (CONTINUED) b. (continued) Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ..................................................................... Refund liability .......................................................................... Salaries payable ....................................................................... Property tax payable ................................................................. Deferred revenue ...................................................................... Current portion of mortgage payable ........................................ Total current liabilities ..................................................... Non-current liabilities Mortgage payable ($187,500 – $18,750) ................................. Total liabilities .................................................................. Shareholders‘ equity Common shares .................................................... $112,500 Retained earnings ................................................. 170,400 Total shareholders‘ equity................................................ Total liabilities and shareholders‘ equity ....................................

$ 123,250 6,200 5,250 7,200 12,450 18,750 173,100 168,750 341,850

282,900 $624,750

LO 6 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.1B a.

A company‘s operating cycle is the average time it takes to go from cash to cash in producing revenues. The operating cycle for a merchandising company covers the period of time between when you purchase your inventory, to when you sell it, and to when you eventually collect the accounts receivable from a sale. The Fashion Palace is having problems paying its bills because the period of time between sales and collection of accounts receivable is lengthened because many customers take more than one month to pay. The company‘s inventory is contributing to the problem because some items have been in stock for a long period of time, which means a long operating cycle for those items.

The Fashion Palace should consider switching to a perpetual inventory system where detailed records of each inventory purchase and sale are maintained. This system continuously—perpetually—shows the quantity and cost of the inventory purchased, sold, and on hand. This system will help the company see which inventory items are out-of-stock, which items are taking a long time to sell, and provide management with the total inventory on hand each month to prepare its monthly financial statements, eliminating the need for a monthly count. The company will still need to perform at least one annual inventory count to ensure its accounting records agree with the physical inventory count.

For control reasons, a physical inventory count must always be taken at least one a year, and ideally more often under the perpetual inventory system. By using a perpetual inventory system, a company knows what inventory should be on hand. Performing a physical count and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock.

Data analytics could assist Rebecca in determining the sales trends of those products that are the most popular with customers that often cause stock-outs and those products that are not selling well and may need to be written down. Seasonal trends might be detected using data analytics along with statistics of which price point is most popular. With the information in hand, Rebecca can buy products more efficiently and possibly at a lower cost. Reduced stock-outs will lead to increased sales.

LO 1,4 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5.2B a. b. July

Travel Warehouse Ltd. is a wholesaler. Its suppliers are suitcase manufacturers and its customers are stores. 2

Inventory (75 × $60) .......................................... Accounts Payable ...................................

4,500

Accounts Payable ............................................. Inventory (4 × $60) .................................

240

Accounts Receivable (55 × $90) ....................... Refund Liability ($4,950 x 4%)................ Sales ......................................................

4,950

Cost of Goods Sold ........................................... Estimated Inventory Returns ($2,750 x 4%) ...... Inventory (55 × $50) ...............................

2,640 110

Refund Liability.................................................. Accounts Receivable (3 × $90) ..............

270

Inventory ........................................................... Estimated Inventory Returns (3 × $50) ...

150

Accounts Receivable (3 × $100) ....................... Refund Liability ($300 x 4%)................... Sales ......................................................

300

Cost of Goods Sold ........................................... Estimated Inventory Returns ($180 x 4%)......... Inventory (3 × $60) .................................

173 7

Accounts Payable ($4,500 – $240) ................... Inventory ($4,260 × 2%) ......................... Cash .......................................................

4,260

Accounts Receivable (25 × $100) ..................... Refund Liability ($2,500 x 4%)................ Sales ......................................................

2,500

4,500

240

198 4,752

2,750

270

150

12 288

180

85 4,175

100 2,400

PROBLEM 5.2B (CONTINUED) b. (continued) July

Cost of Goods Sold ........................................... Estimated Inventory Returns ($1,500 x 4%) ...... Inventory (25 × $60) ...............................

1,440 60

Inventory (70 × $62) .......................................... Accounts Payable ...................................

4,340

Refund Liability.................................................. Accounts Receivable (5 × $100).............

500

Cost of Goods Sold (5 x $60) ............................ Estimated Inventory Returns ..................

300

Cash ............................................................... Accounts Receivable ($4,950 – $270 + $300) ........................

4,980

Cash ............................................................... Accounts Receivable ($2,500 – $500)....

2,000

1,500

4,340

500

300

4,980

2,000

c. July

1* 2 7 16

July 31 Bal. *(60 × $50) d. July

Inventory 3,000 4,500 150 4,340

July 3 6 9 11 13

240 2,750 180 85 1,500

7,235

Cost of Goods Sold .................................................. Inventory ($7,235 - $7,210) ..............................

LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.3B a. Oct.

Inventory ........................................................................... Accounts Payable ...................................................

86,000

Inventory ........................................................................... Cash .......................................................................

1,400

Accounts Payable ............................................................. Inventory.................................................................

4,000

Supplies ............................................................................ Cash .......................................................................

2,800

Accounts Receivable......................................................... Refund Liability ($140,000 x 5%)............................ Sales ......................................................................

140,000

Cost of Goods Sold ........................................................... Estimated Inventory Returns ($83,400 x 5%) .................... Inventory ($86,000 + $1,400 – $4,000) ..................

79,230 4,170

Freight Out ........................................................................ Cash .......................................................................

2,300

Equipment ......................................................................... Accounts Payable ...................................................

62,000

Refund Liability.................................................................. Accounts Receivable ..............................................

3,500

Cost of Goods Sold ........................................................... Estimated Inventory Returns ..................................

2,185

Inventory ........................................................................... Cash .......................................................................

36,300

Cash ............................................................................... Accounts Receivable ($140,000 – $3,500) .............

136,500

86,000

1,400

4,000

2,800

7,000 133,000

83,400

2,300

62,000

3,500

2,185

36,300

136,500

PROBLEM 5.3B (CONTINUED) a. (continued) Oct.

Accounts Receivable......................................................... Refund Liability ($30,000 x 5%).............................. Sales ......................................................................

30,000

Cost of Goods Sold ........................................................... Estimated Inventory Returns ($18,000 x 5%) .................... Inventory.................................................................

17,100 900

1,500 28,500

18,000

No entry necessary.

Accounts Payable ($86,000 – $4,000) .............................. Cash .......................................................................

82,000

Refund Liability.................................................................. Accounts Receivable ..............................................

1,500

Inventory ........................................................................... Estimated Inventory Returns ..................................

900

82,000

1,500

900

b. and c. Oct. 8 Oct. 12 Oct. 28 Total

Sales $133,000 28,500 $161,500

Cost of Goods Sold $79,230 2,185 17,100 $98,515

Gross profit

As a %

$62,985

39.0%

LO 2,3,4,5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 5.4B a. April

Inventory ................................................................. Accounts Payable ...........................................

5,800

Inventory ................................................................. Cash ...............................................................

160

Accounts Payable.................................................... Inventory ........................................................

100

Supplies .................................................................. Cash ...............................................................

1,130

Accounts Payable ($5,800 – $100) ........................ Inventory ($5,700 × 2%) ................................. Cash ($5,700 – $114) ....................................

5,700

Inventory ................................................................. Cash ...............................................................

1,560

Inventory ................................................................. Cash ...............................................................

115

Cash ....................................................................... Inventory.........................................................

110

Accounts Receivable ............................................... Refund Liability ($11,000 x 5%)...................... Sales ..............................................................

11,000

Cost of Goods Sold ................................................. Estimated Inventory Returns ($6,600 x 5%) ............ Inventory.........................................................

6,270 330

5,800

160

100

1,130

114 5,586

1,560

115

110

550 10,450

6,600

PROBLEM 5.4B (CONTINUED) a. (continued) April

Refund Liability ....................................................... Accounts Receivable ......................................

400

Inventory .................................................................. Estimated Inventory Returns ..........................

240

400

240

Equipment ............................................................... 11,700 Accounts Payable ........................................... Accounts Receivable ............................................... Refund Liability ($9,800 x 5%) ........................ Sales ...............................................................

9,800

Cost of Goods Sold.................................................. Estimated Inventory Returns ($5,880 x 5%) ............ Inventory .........................................................

5,586 294

Cash ........................................................................ Accounts Receivable ......................................

9,800

11,700

490 9,310

5,880

9,800

PROBLEM 5.4B (CONTINUED) b. Apr. 1 Bal. Apr. 18 Apr. 27

Apr. 30 Bal.

Apr. 20 Apr. 27

Cash 16,400 Apr. 3 110 Apr. 9 9,800 Apr. 11 Apr. 13 Apr. 16 17,759

Accounts Receivable 11,000 Apr. 21 9,800 Apr. 27

Apr. 30 Bal.

400 9,800

10,600

Inventory Apr. 1 Bal. 16,200 Apr. 5 Apr. 2 5,800 Apr. 11 Apr. 3 160 Apr. 18 Apr. 13 1,560 Apr. 20 Apr. 16 115 Apr. 25 Apr. 21 240 Apr. 30 Bal. 11,271 Estimated Inventory Returns Apr. 20 330 Apr. 21 Apr. 25 294 Apr. 30 Bal. 384

Apr. 9 Apr. 30 Bal.

160 1,130 5,586 1,560 115

Supplies 1,130 1,130

100 114 110 6,600 5,880

240

Equipment Apr. 23 11,700 Apr. 30 Bal. 11,700

Apr. 5 Apr. 11

Apr. 21

Accounts Payable 100 Apr. 2 5,700 Apr. 23 Apr. 30 Bal.

5,800 11,700 11,700

Refund Liability 400 Apr. 20 Apr. 25 Apr. 30 Bal

550 490 640

Common Shares Apr. 1 Bal. Apr. 30 Bal.

20,000 20,000

Retained Earnings Apr. 1 Bal. Apr. 30 Bal.

12,600 12,600

Sales Apr. 20 Apr. 25 Apr. 30 Bal.

10,450 9,310 19,760

Cost of Goods Sold Apr. 20 6,270 Apr. 25 5,586 Apr. 30 Bal. 11,856

PROBLEM 5.4B (CONTINUED) c.

GRAND SLAM TENNIS SHOP LTD. Trial Balance April 30, 2024 Debit Cash ................................................................................. $ 17,759 Accounts receivable .......................................................... 10,600 Inventory ........................................................................... 11,271 Estimated inventory returns .............................................. 384 Supplies ............................................................................ 1,130 Equipment......................................................................... 11,700 Accounts payable ............................................................. Refund liability .................................................................. Common shares ............................................................... Retained earnings ............................................................. Sales ................................................................................. Cost of goods sold ............................................................ 11,856 $64,700

Credit

$ 11,700 640 20,000 12,600 19,760 0 0000 $64,700

(Total debit account balances = Total credit account balances) LO 2,3 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.5B a. Apr.

Inventory .................................................................. Accounts Payable ...........................................

8,900

Inventory .................................................................. Cash ...............................................................

225 225

Accounts Receivable ............................................... 11,600 Refund Liability ($11,600 x 4%) ...................... Sales ...............................................................

464 11,136

Cost of Goods Sold.................................................. Estimated Inventory Returns ($7,540 x 4%) ............ Inventory .........................................................

7,238 302 7,540

Freight Out ............................................................... Cash ...............................................................

290

Refund Liability ........................................................ Accounts Receivable ......................................

350

Inventory .................................................................. Estimated Inventory Returns...........................

230

Inventory .................................................................. Accounts Payable ...........................................

4,200

No entry necessary

Accounts Payable .................................................... Inventory .........................................................

8,900

Cash

290

350

230

4,200

300 300 11,250

Accounts Receivable ($11,600 – $350) ..........

11,250

PROBLEM 5.5B (CONTINUED) a. (continued) Apr.

Accounts Payable .................................................... Inventory ($8,900 × 1%) ................................. Cash ...............................................................

8,900

Accounts Payable ($4,200 – $300)………… Cash ...............................................................

3,900

Cash ........................................................................ Refund Liability ($6,400 x 4%) ........................ Sales...............................................................

6,400

Cost of Goods Sold.................................................. Estimated Inventory Returns ($5,200 x 4%) ............ Inventory .........................................................

4,992 208

Refund Liability ........................................................ Cash ...............................................................

225

Cost of Goods Sold.................................................. Estimated Inventory Returns

180

Inventory .................................................................. Cash ...............................................................

6,100

Cash ........................................................................ Inventory .........................................................

500

89 8,811

3,900

256 6,144

5,200

225

180

6,100

500

PROBLEM 5.5B (CONTINUED) b. Cash Apr. 1 Bal. 4,000 Apr. 3 Apr. 14 11,250 Apr. 9 Apr. 23 6,400 Apr. 17 Apr. 30 500 Apr. 20 Apr. 24 Apr. 27 Apr. 30 Bal. 2,599

225 290 8,811 3,900 225 6,100

Accounts Receivable Apr. 1 Bal. 3,500 Apr. 10 Apr. 5 11,600 Apr. 14 Apr. 30 Bal. 3,500

350 11,250

Apr. 1 Bal. Apr. 2 Apr. 3 Apr. 10 Apr. 11 Apr. 27 Apr. 30 Bal.

Inventory 2,500 Apr. 5 8,900 Apr. 13 225 Apr. 17 230 4,200 Apr. 23 6,100 Apr. 30 8,526

Estimated Inventory Returns Apr. 5 302 Apr. 10 Apr. 23 208 Apr 24 Apr. 30 Bal. 100

Apr. 13 Apr. 17 Apr. 20

Apr. 10 Apr. 24

Accounts Payable 300 Apr. 2 8,900 Apr. 11 3,900 Apr. 30 Bal. Refund Liability 350Apr. 5 225Apr. 23 Apr. 30 Bal.

7,540 300 89 5,200 500

Common Shares Apr. 1 Bal. Apr. 30 Bal.

5,000 5,000

Retained Earnings Apr. 1 Bal. Apr. 30 Bal.

5,000 5,000

Sales Apr. 5 Apr. 23 Apr. 30 Bal.

Apr. 9 Apr. 30 Bal.

Freight Out 290 290

Apr. 5 Apr. 23 Apr. 24 Apr. 30 Bal.

Cost of Goods Sold 7,238 4,992 180 12,410

11,136 6,144 17,280

230 180

8,900 4,200 0

464 256 145

PROBLEM 5.5B (CONTINUED) c. NISSON DISTRIBUTING LTD. Statement of Income Month Ended April 30, 2024

Sales ...................................................................... Cost of goods sold ................................................... Gross profit ..............................................................

$17,280 12,410 $ 4,870

d. NISSON DISTRIBUTING LTD. Statement of Financial Position (Partial) April 30, 2024

Assets Cash..................................................................................... Accounts receivable ............................................................. Inventory .............................................................................. Estimated inventory returns ................................................. Total current assets .......................................................

$ 2,599 3,500 8,526 100 $14,725

LO 2,3,4 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.6B a. Allocate the transaction price in proportion of the stand-alone selling prices:

Computers (30 x $1,600) Printers (2 x $1,000) Total

Stand-alone Selling price $48,000 ($48,000 ÷ $50,000 = 96%) 2,000 ($2,000 ÷ $50,000 = 4%) $50,000

Computers Printers Total

Allocated Selling price $43,200 ($45,000 x 96%) 1,800 ($45,000 x 4%) $45,000

The amount of revenue that can be recognized in August when 2 printers and 28 computers were delivered: Computers (28/30 x $43,200) Printers Total sales

$40,320 1,800 $42,120

Cost of goods sold: Computers (28 x $1,250) Printers (2 x $720) Total cost of goods sold

$35,000 1,440 $36,440

b. Aug. 22 Accounts Receivable ............................... Sales ..................................................

42,120

22 Cost of Goods Sold.................................. Inventory.............................................

36,440

Sept. 6 Accounts Receivable (2/30 x $43,200) .... Sales ..................................................

2,880

6 Cost of Goods Sold (2 X $1,250) ............. Inventory.............................................

2,500

28 Cash ........................................................ Accounts Receivable ..........................

45,000

42,120

36,440

2,880

2,500

45,000

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.7B a. Allocate the transaction price in proportion of the stand-alone selling prices:

Commuter (6 x $420,000) Mini (2 x $180,000) Total

Stand-alone Selling price $2,520,000 ($2,520,000 ÷ $2,880,000 = 87.5) 360,000 ($360,000 ÷ $2,880,000 = 12.5%) $2,880,000

Commuter buses Mini-buses Total

Allocated Selling price $2,327,500 ($2,660,000 x 87.5%) 332,500 ($2,660,000 x 87.5%) $2,660,000

The amount of revenue that can be recognized in August when half the order is delivered is $1,330,000 Commuter ($2,327,500 x 50%) Mini-buses ($332,500 x 50%) Total sales

$1,163,750 166,250 $1,330,000

Cost of goods sold: Commuter (3 x $355,000) Mini-buses (1 x $152,000) Total cost of goods sold

$1,065,000 152,000 $1,217,000

b. Aug. 15 Accounts Receivable ........................... Sales ..............................................

1,330,000

15 Cost of Goods Sold.............................. Inventory.........................................

1,217,000

28 Cash .................................................... Accounts Receivable ...................... Deferred Revenue ..........................

2,000,000

1,330,000

1,217,000

1,330,000 670,000

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.8B a.

BRIGUS WHOLESALE LTD. Statement of Income (Single-step) Year Ended November 30, 2024

Revenues Sales ........................................................................................ Interest income ....................................................................... Expenses Cost of goods sold .................................................................. Administrative expenses ......................................................... Selling expenses ..................................................................... Interest expense ..................................................................... Income before income tax .......................................................... Income tax expense ................................................................... Net income .................................................................................

$2,210,600 2,800 $1,387,200 366,000 286,000 12,300

$2,213,400

2,051,500 161,900 32,400 $ 129,500

PROBLEM 5.8B (CONTINUED) b.

BRIGUS WHOLESALE LTD. Statement of Income (Multiple-step) Year Ended November 30, 2024

Sales ..................................................................................... Cost of goods sold .................................................................. Gross profit ............................................................................. Operating expenses Administrative expenses .............................................. Selling expenses .......................................................... Total operating expenses........................................ Income from operations .......................................................... Other income and expenses Interest income ................................................................. Interest expense ................................................................ Income before income tax ...................................................... Income tax expense ............................................................... Net income .............................................................................

$2,210,600 1,387,200 823,400 $366,000 286,000 652,000 171,400 ($2,800) 12,300

9,500 161,900 32,400 $ 129,500

(Revenues –Cost of goods sold – Operating expenses = Income from operations) (Income from operations + Other income – Other expenses = Income before income taxes) c.

Both statements of income result in the same amount of net income. The multiple-step statement of income provides the user with more information than does the single-step statement of income. The multiple-step statement of income provides information on gross profit and income from operations which is not included on the single-step statement of income.

Brigus is classifying its expenses by their function. They are reported according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling).

LO 4 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.9B a. Nov. 30

Insurance Expense ($1,800 × 4/12) ................................... Prepaid Insurance ......................................................

600

Supplies Expense .............................................................. Supplies ($1,650 – $950) ...........................................

700

Depreciation Expense ........................................................ Accumulated Depreciation—Equipment ....................

5,360

Salaries Expense ............................................................... Salaries Payable ........................................................

1,210

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

175

Deferred Revenue .............................................................. Sales..........................................................................

2,400

Cost of Goods Sold ............................................................ Inventory ....................................................................

1,560

Income Tax Expense ......................................................... Income Tax Payable ..................................................

1,100

600

700

5,360

1,210

175

2,400

1,560

Cost of Goods Sold .............................................................. 940 Inventory .................................................................... ($27,500 – $1,560 = $25,940; $25,940 – $25,000 = $940 shortage)

1,100

940

PROBLEM 5.9B (CONTINUED) b. Nov. 30 Nov. 30 Bal.

Cash 22,000 22,000

Accounts Payable Nov. 30 32,100 Nov. 30 Bal. 32,100

Accounts Receivable Nov. 30 30,600 Nov. 30 Bal. 30,600

Refund Liability Nov. 30 Nov. 30 Bal. 1,560 940

Nov. 30 Bal.

Inventory 27,500 Nov. 30 Nov. 30 25,000

Nov. 30 Nov. 30 Bal.

Supplies 1,650 Nov. 30 950

700

Prepaid Insurance Nov. 30 1,800 Nov. 30 Nov. 30 Bal. 1,200

600

Nov. 30

Long-term Investments Nov. 30 37,000 Nov. 30 Bal. 37,000 Equipment Nov. 30 26,800 Nov. 30 Bal. 26,800 Accumulated Depreciation— Equipment Nov. 30 10,720 Nov. 30 5,360 Nov. 30 Bal. 16,080

2,300 2,300

Salaries Payable Nov. 30 1,210 Nov. 30 Bal. 1,210 Interest Payable Nov. 30 175 Nov. 30 Bal.

Nov. 30

175

Income Tax Payable Nov. 30 Nov. 30 Bal.

1,100 1,100

Deferred Revenue 2,400 Nov. 30 Nov. 30 Bal.

3,000 600

Bank Loan Payable Nov. 30 Nov. 30 Bal.

35,000 35,000

Common Shares Nov. 30 Nov. 30 Bal.

16,400 16,400

Retained Earnings Nov. 30 Nov. 30 Bal.

30,000 30,000

PROBLEM 5.9B (CONTINUED) Dividends Declared Nov. 30 10,000 Nov. 30 Bal. 10,000 Sales Nov. 30 239,380 Nov. 30 2,400 Nov. 30 Bal. 241,780

Cost of Goods Sold Nov. 30 157,000 Nov. 30 1,560 Nov. 30 940 Nov. 30 Bal. 159,500 Salaries Expense Nov. 30 32,600 Nov. 30 1,210 Nov. 30 Bal. 33,810

Depreciation Expense Nov. 30 5,360 Nov.30 Bal. 5,360

Nov. 30 Nov. 30 Bal.

Rent Expense 13,850 13,850

Advertising Expense Nov. 30 2,100 Nov. 30 Bal. 2,100

Nov. 30 Nov. 30 Bal.

Supplies Expense 700 700

Insurance Expense Nov. 30 600 Nov. 30 Bal. 600 Interest Expense Nov. 30 4,000 Nov. 30 175 Nov. 30 Bal. 4,175 Income Tax Expense Nov. 30 2,000 Nov. 30 1,100 Nov. 30 Bal. 3,100

PROBLEM 5.9B (CONTINUED) c. FASHION CENTRE LTD. Adjusted Trial Balance November 30, 2024 Debit Cash ........................................................................... $ 22,000 Accounts receivable .................................................... 30,600 Inventory ..................................................................... 25,000 Supplies ...................................................................... 950 Prepaid insurance ....................................................... 1,200 Long-term investments ............................................... 37,000 Equipment................................................................... 26,800 Accumulated depreciation—equipment ...................... Accounts payable ....................................................... Refund liability ............................................................ Salaries payable ......................................................... Interest payable .......................................................... Income tax payable ..................................................... Deferred revenue ................................................................. Bank loan payable ...................................................... Common shares ......................................................... Retained earnings ....................................................... Dividends declared ..................................................... 10,000 Sales ........................................................................... Cost of goods sold ............................................................... 159,500 Salaries expense ........................................................ 33,810 Rent expense....................................................................... 13,850 Depreciation expense .......................................................... 5,360 Supplies expense ................................................................ 700 Insurance expense ..................................................... 600 Interest expense ......................................................... 4,175 Advertising expense ............................................................ 2,100 Income tax expense .................................................... 3,100 Totals ............................................................................ $376,745 (Total debit account balances = Total credit account balances)

Credit

$ 16,080 32,100 2,300 1,210 175 1,100 600 35,000 16,400 30,000 241,780

0000 000 $376,745

PROBLEM 5.9B (CONTINUED) d. FASHION CENTRE LTD. Statement of Income Year Ended November 30, 2024

Sales ........................................................................................... Cost of goods sold .............................................................................. Gross profit .......................................................................................... Operating expenses Salaries expense ..................................................... $33,810 Rent expense ............................................................ 13,850 Depreciation expense ............................................... 5,360 Advertising expense .................................................. 2,100 Supplies expense ...................................................... 700 Insurance expense ................................................... 600 Total operating expenses ................................................... Income from operations ....................................................................... Other income and expenses Interest expense ......................................................................... Income before income tax ................................................................... Income tax expense ............................................................................ Net income ..........................................................................................

$241,780 159,500 82,280

56,420 25,860 4,175 21,685 3,100 $ 18,585

(Revenues – Cost of goods sold – Operating expenses = Income from operations) (Income from operations + Other income – Other expenses = Income before income tax)

PROBLEM 5.9B (CONTINUED) d. (continued) FASHION CENTRE LTD. Statement of Changes in Equity Year Ended November 30, 2024 Common Shares Balance, December 1, 2023 Issued common shares Net income Dividends declared Balance, November 30, 2024

Retained Earnings

$ 11,400 5,000 _______ $ 16,400

$30,000 18,585 (10,000) $ 38,585

Total Equity $41,400 5,000 18,585 (10,000) $ 54,985

FASHION CENTRE LTD. Statement of Financial Position November 30, 2024

Assets Current assets Cash .................................................................................. $22,000 Accounts receivable .......................................................... 30,600 Inventory ............................................................................. 25,000 Supplies .............................................................................. 950 Prepaid insurance .............................................................. 1,200 Total current assets ................................................... $ 79,750 Long-term investments ................................................................ .......................... 37,000 Property, plant, and equipment Equipment .......................................................................... $26,800 Less: Accumulated depreciation ......................................... 16,080 Total property, plant, and equipment ......................... 10,720 Total assets ........................................................................ $127,470

PROBLEM 5.9B (CONTINUED) d. (continued) Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ............................................................... Refund liability .................................................................... Salaries payable ................................................................. Interest payable .................................................................. Income tax payable ............................................................ Deferred revenue ................................................................ Current portion of bank loan payable .................................. Total current liabilities ............................................... Non-current liabilities Bank loan payable* ............................................................. Total liabilities ............................................................ Shareholders‘ equity Common shares ...................................................... ...... $16,400 Retained earnings ................................................... ........... 38,585 Total shareholders‘ equity ............................... ....................... Total liabilities and shareholders‘ equity .................. .......................

$ 32,100 2,300 1,210 175 1,100 600 5,000 42,485 30,000 72,485

54,985 $127,470

*($35,000 – $5,000) LO 4 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.10B a.

Gross profit margin

$823,400 ÷ $2,210,600 = 37.2%

Profit margin

$129,500 ÷ $2,210,600 = 5.9%

Existing balances Increase sales ($2,210,600 × 10%) Increase in gross profit Increase in operating expenses Increase in income tax expense Revised amounts

Revised gross profit margin Revised profit margin

Net Sales

Gross Profit

Net Income

$2,210,600

$823,400

$129,500

60,000

60,000 (32,000) (4,000)

$883,400

$153,500

$883,400 ÷ $2,431,660 =

36.3%

221,060

$2,431,660

$153,500 ÷ $2,431,660 =

6.3%

While the gross profit margin decreases slightly, the profit margin increases from 5.9% to 6.3%. The plan has increased net income, so it has merit. LO 4,5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 5.11B a. [1] [8]

Sales = $400,000 (given) Accounts receivable = Sales × 20% = $400,000 × 20% = $80,000

b. [2]

Cost of goods sold

[9]

Inventory

[10] Accounts payable

c. [3]

Gross profit

[4] [5]

Operating expenses Income before income taxes

d. [6]

Income tax expense

[7]

Net income

[11] Income tax payable e. Gross profit margin Profit margin

= 80% × inventory purchased = 80% × $200,000 = $160,000 = 20% × inventory purchased = 20% × $200,000 = $40,000 or purchases less cost of goods sold = $200,000 less $160,000 = $40,000 = 25% × inventory purchased = 25% × $200,000 = $50,000 = Sales – Cost of goods sold = $400,000 – $160,000 = $240,000 = $140,000 (given) = Gross profit – Operating expenses = $240,000 – $140,000 = $100,000 = Income before income taxes × 30% = $100,000 × 30% = $30,000 = Income before income taxes – Income tax expense = $100,000 – $30,000 = $70,000 = given as equal to income tax expense = $30,000 = $240,000 ÷ $400,000 = 60.0% = $70,000 ÷ $400,000 = 17.5%

PROBLEM 5.11B (CONTINUED) e.

Although Tsang Inc. may sell its product at the same price as other companies in the industry, its cost of goods sold percentage may be higher compared with other companies in the industry. Because the business is new, it might not yet enjoy the economies of scale and have strong relationships with suppliers that allow them to buy at competitive prices. Tsang may be unable to negotiate lower purchase prices for merchandise and therefore experiences lower gross profit margins compared to its competitors. Similarly, other competitors are likely larger businesses that enjoy cost savings through economies of scale. Tsang is a new business and does not enjoy this advantage and experiences higher operating costs yielding a lower profit margin.

LO 4,5 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.12B a.

Current ratio

Gross profit margin Profit margin b.

[in Cdn. thousands] 2021

2020

2019

$1,075,289 ÷ $1,199,744

$982,025 ÷ $820,739

$702,402 ÷ $602,196

= 0.9:1

= 1.2:1

($2,512,670 – $1,404,446) $2,512,670

($2,220,180 – $1,236,258) ($2,283,411 – $1,284,826) $2,220,180 $2,283,411

= 44.1%

= 44.3%

= 43.7%

$207,158 ÷ $2,512,670

$163,250 ÷ $2,220,180

$106,929 ÷ $2,283,411

= 8.2%

= 7.4%

= 4.7%

Leon‘s Furniture‘s current ratio stayed the same as 2019 in 2020 and then decreased (deteriorated) from 2020 to 2021. Leon‘s Furniture‘s gross profit margin improved in 2020 and then deteriorated slightly in 2021. On the other hand, the company‘s profit margin constantly improved from 2019 to 2021.

c. 2021 Industry Average Current ratio Gross profit margin Profit margin

2.1:1 35.9% 2.1%

2021 Leon‘s Furniture Ltd. 0.9:1 44.1% 8.2%

Leon‘s Furniture‘s 2021 current ratio is less than half of the industry average. With regards to its gross profit margin, this ratio is indicating that the company is performing much better than other companies in the industry. Its 2021 profit margin is almost four times that of the average company in the industry. LO 5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*PROBLEM 5.13B a. July

2 3 6

7 9

16 17 20

Purchases (75 × $60) ............................................. Accounts Payable ..........................................

4,500

Accounts Payable (4 × $60).................................. Purchase Returns and Allowances ...............

240

Accounts Receivable (55 × $90) ............................. Refund Liability ($4,950 x 4%) ................... Sales ..............................................................

4,950

Refund Liability ....................................................... Accounts Receivable (3 × $90) ......................

270

Accounts Receivable (3 × $100) ............................. Refund Liability ($300 x 4%) ...................... Sales ..............................................................

300

Accounts Payable ($4,500 – $240) ........................ Purchase Discounts ($4,260 × 2%) ............. Cash ($4,260 – $85) ....................................

4,260

Accounts Receivable (25 × $100)........................... Refund Liability ($2,500 x 4%)..................... Sales ...........................................................

2,500

Purchases (70 × $62) ............................................. Accounts Payable ........................................

4,340

Refund Liability ....................................................... Accounts Receivable (5 × $100)..................

500

Cash .................................................................... Accounts Receivable ($4,950 – $270 + $300) ..............................

4,980

Cash .................................................................... Accounts Receivable ($2,500 – $500).........

2,000

4,500 240 198 4,752 270 12 288 85 4,175 100 2,400

4,340 500

4,980 2,000

*PROBLEM 5.13B (CONTINUED) b.

The advantages of the periodic inventory system are that it is simpler and cheaper (in terms of equipment and systems) compared to a perpetual inventory system. There are fewer accounting entries and cash registers do not need to be able to read bar codes to apply the appropriate cost, as is required in the perpetual inventory system. However, a perpetual inventory system enables management to monitor purchases and sales to make the optimum use of the money available for stocking inventory. Fewer stock-outs are experienced when using the perpetual system as reductions in inventory levels can be quickly identified and restocking done, possibly automatically, before the business runs out of inventory. With the perpetual system, cost of goods sold can be reported at any time and consequently, timely reporting of results can be achieved. Perpetual systems allow management to quantify the cost of goods lost to theft. When customers make inquiries concerning the availability of stock from a merchant, a quick reply can be obtained and provided when a perpetual inventory system is used. Finally, fewer inventory counts are required, saving salary costs and minimizing lost sales from having to close the business for inventory counts.

LO 1,6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 5.14B a. Oct.

Purchases............................................................................. Accounts Payable ........................................................

86,000

Freight In .............................................................................. Cash ............................................................................

1,400

Accounts Payable ................................................................. Purchase Returns and Allowances ..............................

4,000

Supplies ................................................................................ Cash ............................................................................

2,800

Accounts Receivable ............................................................ Refund Liability ($140,000 x 5%) ................................. Sales............................................................................

140,000

Freight Out............................................................................ Cash ............................................................................

2,300

Equipment ............................................................................ Accounts Payable ........................................................

62,000

Refund Liability ..................................................................... Accounts Receivable ...................................................

3,500

Purchases............................................................................. Cash ............................................................................

36,300

Cash ..................................................................................... Accounts Receivable ($140,000 – $3,500) .................

136,500

Accounts Receivable ............................................................ Refund Liability ($30,000 x 5%) .................................. Sales ...........................................................................

30,000

86,000

1,400

4,000

2,800

7,000 133,000

2,300

62,000

3,500

36,300

136,500

1,500 28,500

*PROBLEM 5.14B (CONTINUED) a. (continued) Oct.

No entry necessary.

Accounts Payable ($86,000 – $4,000) .................................. Cash............................................................................

82,000

Refund Liability ..................................................................... Accounts Receivable...................................................

1,500

Accounts Payable ($86,000 – $4,000) ........................... Purchase Discounts ($82,000 × 1%) ................... Cash ($82,000 – $820) ........................................

82,000

b. Oct.

82,000

1,500

820 81,180

The cost of missing this purchase discount is the amount recorded as a purchase discount when the payment was made within the discount period ($820). Expressing this in terms of an annual interest rate, it would be the equivalent of paying 24.6% ($820 ÷ $81,180 × 365/15) for the use of the money for 15 days. LO 6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*PROBLEM 5.15B a. Apr.

Purchases .................................................................. Accounts Payable ..............................................

5,800

Freight In .................................................................... Cash ..................................................................

160

Accounts Payable ....................................................... Purchase Returns and Allowances ....................

100

Supplies...................................................................... Cash ..................................................................

1,130

Accounts Payable ($5,800 – $100) ............................ Purchase Discounts ($5,700× 2%) .................... Cash ($5,700 – $114) ........................................

5,700

Purchases .................................................................. Cash ..................................................................

1,560

Freight In .................................................................... Cash ..................................................................

115

Cash .......................................................................... Purchase Returns and Allowances ....................

110

Accounts Receivable .................................................. Refund Liability ($11,000 x 5%) ......................... Sales .................................................................

11,000

Refund Liability .......................................................... Accounts Receivable ........................................

400

5,800

160

100

1,130

114 5,586

1,560

115

110

550 10,450

400

*PROBLEM 5.15B (CONTINUED) a. (continued) Apr. 23

Equipment ................................................................. Accounts Payable .............................................

11,700

Accounts Receivable ................................................. Refund Liability ($9,800 x 5%) .......................... Sales .................................................................

9,800

Cash .......................................................................... Accounts Receivable ........................................

9,800

11,700

490 9,310

9,800

PROBLEM 5.15B (CONTINUED) b.

Apr. 1 Bal. Apr. 18 Apr. 27

Apr. 30 Bal.

Apr. 20 Apr. 25

Cash 16,400 Apr. 3 110 Apr. 9 9,800 Apr. 11 Apr. 13 Apr. 16 17,759

Accounts Receivable 11,000 Apr. 21 9,800 Apr. 27

Apr. 30 Bal.

160 1,130 5,586 1,560 115

Apr. 21

400 9,800

Supplies 1,130 1,130

Equipment Apr. 23 11,700 Apr. 30 Bal. 11,700

Apr. 5 Apr. 11

550 490 640

Common Shares Apr. 1 Bal. Apr. 30 Bal.

20,000 20,000

Retained Earnings Apr. 1 Bal. Apr. 30 Bal.

12,600 12,600

Sales Apr. 20 Apr. 25 Apr. 30 Bal.

10,450 9,310 19,760

10,600

Inventory Apr. 1 Bal. 16,200 Apr. 30 Bal. 16,200

Apr. 9 Apr. 30 Bal.

Refund Liability 400 Apr. 20 Apr. 25 Apr. 30 Bal

Accounts Payable 100 Apr. 2 5,800 5,700 Apr. 23 11,700 Apr. 30 Bal. 11,700

Apr. 2 Apr. 13 Apr. 30 Bal.

Purchases 5,800 1,560 7,360

Purchases Returns and Allowances Apr. 5 100 Apr. 18 110 Apr. 30 Bal 210

*PROBLEM 5.15B (CONTINUED) b. (continued) Purchase Discounts Apr. 11 Apr. 30 Bal.

Apr. 3 Apr. 16 Apr. 30 Bal.

114 114

Freight In 160 115 275

c. GRAND SLAM TENNIS SHOP LTD. Trial Balance April 30, 2024

Cash....................................................................................... Accounts receivable ............................................................... Inventory ................................................................................ Supplies ................................................................................. Equipment .............................................................................. Refund Liability ...................................................................... Accounts payable ................................................................... Common shares..................................................................... Retained earnings .................................................................. Sales ...................................................................................... Purchases .............................................................................. Purchase returns and allowances .......................................... Purchase discounts ................................................................ Freight in ................................................................................

Debit $ 17,759 10,600 16,200 1,130 11,700

Credit

$ 640 11,700 20,000 12,600 19,760 7,360

275 $65,024

210 114 00 000 $65,024

(Total debit account balances = Total credit account balances)

*PROBLEM 5.15B (CONTINUED) d.

Apr. 30

11,571 11,940* 210 114 16,200 7,360 275

*Cost of goods sold = Beginning inventory + Purchases – Purchase discounts – Purchase returns and allowances + Freight in – Ending inventory Cost of goods sold = $16,200 + $7,360 – $114 – $210 + $275 – $11,571 = $11,940 LO 6 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 5.16B a. SEVERN LIMITED Statement of Income (Partial) Year Ended June 30, 2024

Sales ................................................................................. Cost of goods sold Inventory, July 1, 2023 .................................................. $ 520,000 Purchases .................................................. $6,280,000 Less: Purchase returns and allowances .... . 240,000 Net purchases ............................................ .. 6,040,000 Add: Freight in .......................................... 80,000 Cost of goods purchased .............................................. 6,120,000 Cost of goods available for sale .................................... 6,640,000 Inventory, June 30, 2024 .............................................. 600,000 Cost of goods sold ................................................ Gross profit .......................................................................

$7,700,000

6,040,000 $1,660,000

(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased) b. June 30

Inventory (ending) .................................................... Cost of Goods Sold .................................................. Purchase Returns and Allowances .......................... Inventory (beginning) .......................................... Purchases ........................................................... Freight In.............................................................

600,000 6,040,000 240,000 520,000 6,280,000 80,000

*PROBLEM 5.16B (CONTINUED) c. Gross profit margin: $1,660,000 $7,700,000

= 21.6%

Severn‘s gross profit margin of 21.6% is less than the industry average of 26%. This indicates that Severn is making less gross profit per sales dollar than the industry average. LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*PROBLEM 5.17B a. Nov. 30

37,350 667,455 3,315 16,000 34,360 684,700 5,060

b. THE GOODY SHOP LTD. Statement of Income Year Ended November 30, 2024

Sales ............................................................................................... Cost of goods sold Inventory, December 1, 2023 .................................................... Purchases .......................................................... $684,700 Less: Purchase discounts ................................. 16,000 Purchase returns and allowances .............. 3,315 Net purchases ...................................................... 665,385 Add: Freight in ...................................................... 5,060 Cost of goods purchased .......................................................... Cost of goods available for sale ................................................ Inventory, November 30, 2024 .................................................. Cost of goods sold .............................................................. Gross profit ...................................................................................... Operating expenses Administrative expenses ............................................................ Selling expenses....................................................................... Total operating expenses ................................................... Income from operations ................................................................... Other income and expenses Interest expense ....................................................................... Income before income tax .............................................................. Income tax expense ....................................................................... Net income .....................................................................................

$964,000 $ 34,360

670,445 704,805 37,350 667,455 296,545 $230,100 8,200 238,300 58,245 11,315 46,930 10,000 $ 36,930

(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)

*PROBLEM 5.17B (CONTINUED) b. (Continued) THE GOODY SHOP LTD. Statement of Changes in Equity Year Ended November 30, 2024 Common Shares Balance, December 1, 2023 Issued common shares Net income Dividends declared Balance, November 30, 2024

$ 1,000 25,000 000000 $26,000

Retained Earnings

Total Equity

$ 82,800

$ 83,800 25,000 36,930 (5,000) $140,730

36,930 (5,000) $114,730

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings) THE GOODY SHOP LTD. Statement of Financial Position November 30, 2024 Assets Current assets Cash ...................................................................................................... Accounts receivable ............................................................................. Inventory ................................................................................................ Prepaid insurance .................................................................................. Total current assets ...................................................................... Property, plant, and equipment Land.................................................................................. $ 85,000 Buildings ..................................................... $175,000 Less: Accumulated depreciation ................. 61,200 113,800 Equipment .................................................. $57,000 Less: Accumulated depreciation ................. 19,880 ...... 37,120 Total property, plant, and equipment ........................................... Total assets ...........................................................................................

$ 8,500 13,770 37,350 4,500 64,120

235,920 $300,040

*PROBLEM 5.17B (CONTINUED) b. (Continued) Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ............................................................................ Refund liability ................................................................................. Deferred revenue ............................................................................. Salaries payable .............................................................................. Property tax payable ........................................................................ Income tax payable ......................................................................... Current portion of mortgage payable ............................................... Total current liabilities ............................................................ Non-current liabilities Mortgage payable ($84,800 – $5,300) ........................................... Total liabilities ......................................................................... Shareholders‘ equity Common shares ........................................................ $ 26,000 Retained earnings ..................................................... 114,730 Total shareholders‘ equity ....................................................... Total liabilities and shareholders‘ equity ..........................................

$ 32,310 21,200 3,000 8,500 3,500 6,000 5,300 79,810 79,500 159,310

140,730 $300,040

LO 6 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

ACR5.1

ACCOUNTING CYCLE REVIEW

a. Date

Account Titles

March 1

Cash ................................................................ Accounts Receivable ..............................

125,000

Accounts Payable ............................................ Inventory ................................................ Cash ($200,000 – $4,000) ......................

200,000

Inventory .......................................................... Accounts Payable ...................................

300,000

Cash ................................................................ Sales .......................................................

285,000

Cost of Goods Sold .......................................... Inventory .................................................

200,000

Accounts Payable ............................................ Inventory .................................................

25,000

Debit

125,000

4,000 196,000

300,000

285,000

200,000

25,000

No entry necessary

Accounts Receivable ....................................... Refund Liability ($200,000 x 12%) .......... Sales .......................................................

200,000

Cost of Goods Sold .......................................... Estimated Inventory Returns ($140,000 x 12%) Inventory .................................................

123,200 16,800

Freight Out....................................................... Cash .......................................................

5,000

Credit

24,000 176,000

140,000

5,000

ACR5.1 (CONTINUED) a. (continued) Date

Account Titles

March 12

Cash ................................................................ Deferred Revenue ..................................

12,500

Refund Liability ................................................ Accounts Receivable ..............................

20,000

Inventory .......................................................... Estimated Inventory Returns ...................

14,000

Accounts Payable ($300,000 – $25,000) ......... Inventory ($275,000 × 2%) ..................... Cash ($300,000 – $25,000 – $5,500)

275,000

Salaries Expense ............................................. Cash .......................................................

45,000

Cash ............................................................... Sales......................................................

255,000

Cost of Goods Sold ........................................ Inventory ................................................

179,000

Salaries Expense ............................................ Cash ......................................................

50,000

Cash ($200,000 – $20,000) ........................... Accounts Receivable…………………….

180,000

Debit

Credit

12,500

20,000

14,000

5,500 269,500

45,000

255,000

179,000

50,000

180,000

ACR5.1 (CONTINUED) a. (continued), d. Date

Account Titles

March 30

Rent Expense ................................................. Cash ......................................................

5,000

Utilities Expense ............................................. Accounts Payable ..................................

10,000

Salaries Expense ............................................ Salaries Payable ....................................

10,000

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

9,000

Depreciation Expense ..................................... Accumulated Depreciation—Equipment ($145,000 ÷ 10 years = $14,500)

14,500

Income Tax Expense ...................................... Income Tax Payable ..............................

50,000

Debit

Credit

5,000

10,000

9,000

14,500

50,000

ACR5.1 (CONTINUED) b., d., and g. CE = Closing entry Cash

Supplies Feb. 29 Bal.

7,500

Mar. 31 Bal.

7,500

Feb.

29 Bal.

65,000

Mar.

125,000 Mar.

196,000

285,000

5,000

12,500

269,500

255,000

45,000

Feb. 29

Bal.

5,000

180,000

50,000

Mar. 31

Bal.

5,000

Mar.

31 Bal. 352,000 Accounts Receivable

Prepaid Rent

Equipment Feb. 29 Bal.

145,000

Mar. 31 Bal.

145,000

Accumulated Depreciation —Equipment

Feb. 29 Bal. 350,000 Mar.

200,000 Mar.

125,000

20,000

180,000

Mar. 31 Bal. 225,000

Feb.

29 Bal.

29,000

Mar.

14,500

Mar.

31 Bal.

43,500

Accounts Payable Inventory

Feb.

Feb. 29 Bal. 2,750,000 Mar.

Mar.

200,000 Mar.

300,000

300,000 Mar.

4,000

25,000

10,000

14,000

200,000

275,000

25,000

140,000

5,500

179,000

Mar. 31 Bal. 2,510,500

Mar. 31

16,800 Mar. 13 Bal.

2,800

Mar.

31 Bal. 1,360,000

Refund Liability Mar. 13

20,000 Mar. Mar.

Estimated Inventory Returns Mar

29 Bal. 1,550,000

24,000

31 Bal.

4,000

Salaries Payable 14,000

Mar. 31

10,000

Mar. 31 Bal.

10,000

ACR5.1 (CONTINUED) b., d., and g. (continued) Sales

Interest Payable Mar.

9,000

Feb. 29 Bal. 5,307,400

Mar.

31 Bal.

9,000

Mar.

Deferred Revenue Feb.

29 Bal.

35,000

Mar.

12,500

Mar.

31 Bal.

47,500

285,000

176,000

255,000

Mar. 31 Bal. 6,023,400 Mar. 31 CE

6,023,400 Mar. 31 Bal.

Bank Loan Payable

Cost of Goods Sold

Feb.

29 Bal. 450,000

Feb. 29 Bal. 3,843,900

Mar.

31 Bal. 450,000

Mar.

Income Tax Payable Mar.

50,000

Mar.

Bal. 50,000

200,000

123,200

179,000

Mar. 31 Bal. 4,346,100 Mar. 31 CE 4,346,100 Mar. 31

Common Shares Feb.

29 Bal.

200,000

Mar.

31 Bal.

200,000

Bal.

Retained Earnings Mar. 31 CE

50,000

Feb. 29 Bal.

550,500

Mar. 31 CE

573,300

Mar. 31 Bal. 1,073,800 Dividends Declared Feb. 29 Bal.

50,000

Mar. 31 Bal.

50,000 Mar. 31 CE

Mar. 31 Bal.

50,000

ACR5.1 (CONTINUED)

Mar. 31

Bal.

b., d., and g. (continued) Advertising Expense Feb. 29 Bal.

75,000

Mar. 31 Bal.

75,000 Mar. 31 CE

Mar. 31

Bal.

75,000

0 Freight Out

Feb. 29 Bal. 180,000 Mar.

5,000

Mar. 31 Bal. 185,000 Mar. 31 CE Mar. 31

Bal.

185,000

0 Depreciation Expense

Feb. 29 Bal.

Mar. 31

14,500

Mar. 31 Bal.

14,500 Mar. 31 CE

Mar. 31

Bal.

14,500

0 Interest Expense

Feb. 29 Bal.

27,000

Mar. 31

9,000

Mar. 31 Bal.

36,000 Mar. 31 CE

Mar. 31

Bal.

36,000

0 Office Expense

Feb. 29 Bal.

26,000

Mar. 31 Bal.

26,000 Mar. 31 CE

26,000

Mar. 31 CE 465,000 Mar. 31

Bal.

Rent Expense

Travel Expense

Feb. 29 Bal.

55,000

Feb. 29

Bal.

12,500

Mar. 30

5,000

Mar. 31

Bal.

12,500

Mar. 31 Bal.

60,000

Mar. 31 CE Mar. 31 CE 60,000 Mar. 31

Mar. 31

Bal.

12,500

0 Utilities Expense Salaries Expense

Feb. 29

Bal. 360,000

Mar. 31

Mar. 16

45,000

Mar. 31

50,000

10,000

Mar. 31

Bal. 465,000

Bal.

20,000 10,000

Bal.

30,000 Mar. 31 CE

Mar. 31

Bal.

30,000

ACR5.1 (CONTINUED) b., d., and g. (continued) Income Tax Expense Feb. 29 Bal.

150,000

Mar. 31

50,000

Mar. 31 Bal.

200,000 Mar. 31 CE

Mar. 31

Bal.

200,000

0 Income Summary

Mar. 31 CE

5,450,100 Mar. 31 CE

CE Mar. 31

6,023,400

573,300 Bal.

ACR5.1 (CONTINUED) c. HERITAGE FURNITURE LIMITED Trial Balance March 31, 2024

Cash Accounts receivable Inventory Estimated inventory returns Supplies Prepaid rent Equipment Accumulated depreciation—equipment Accounts payable Refund liability Deferred revenue Bank loan payable—non-current Common shares Retained earnings Dividends declared Sales Advertising expense Cost of goods sold Freight out Office expense Rent expense Salaries expense Travel expense Utilities expense Interest expense Income tax expense

Debit $ 352,000 225,000 2,510,500 2,800 7,500 5,000 145,000

Credit

$ 29,000 1,350,000 4,000 47,500 450,000 200,000 550,500 50,000 6,023,400 75,000 4,346,100 185,000 26,000 60,000 455,000 12,500 20,000 27,000 150,000 $8,654,400

000000v 0 $8,654,400

(Total debit account balances = Total credit account balances)

ACR5.1 (CONTINUED) e.

HERITAGE FURNITURE LIMITED Adjusted Trial Balance March 31, 2024 Debit Cash $ 352,000 Accounts receivable 225,000 Inventory 2,510,500 Estimated inventory returns 2,800 Supplies 7,500 Prepaid rent 5,000 Equipment 145,000 Accumulated depreciation—equipment Accounts payable Salaries payable Refund liability Interest payable Deferred revenue Bank loan payable Income tax payable Common shares Retained earnings Dividends declared 50,000 Sales Cost of goods sold 4,346,100 Advertising expense 75,000 Freight out 185,000 Depreciation expense 14,500 Office expense 26,000 Rent expense 60,000 Salaries expense 465,000 Travel expense 12,500 Utilities expense 30,000 Interest expense 36,000 Income tax expense 200,000 $8,747,900 (Total debit account balances = Total credit account balances)

Credit

$ 43,500 1,360,000 10,000 4,000 9,000 47,500 450,000 50,000 200,000 550,500 6,023,400

000000v 0 $8,747,900

ACR5.1 (CONTINUED) f. HERITAGE FURNITURE LIMITED Statement of Income Year Ended March 31, 2024

Sales Cost of goods sold Gross profit Operating expenses Salaries expense Freight out Advertising expense Rent expense Utilities expense Office expense Depreciation expense Travel expense Total operating expenses Income from operations Other income and expenses Interest expense Income before income tax Income tax expense Net income

$6,023,400 4,346,100 1,677,300 $465,000 185,000 75,000 60,000 30,000 26,000 14,500 12,500 868,000 809,300 36,000 773,300 200,000 $ 573,300

(Revenues – Cost of goods sold – Operating expenses = Income from operations) (Income from operations + Other income – Other expenses = Income before income taxes)

ACR5.1 (CONTINUED) f. (continued) HERITAGE FURNITURE LIMITED Statement of Changes in Equity Year Ended March 31, 2024 Common Shares Balance, April 1, 2023 Issued common shares Net income Dividends declared Balance, March 31, 2024

$199,000 1,000 00 00000 $200,000

Retained Earnings

Total Equity

$ 550,500

$ 749,500 1,000

573,300 (50,000) $1,073,800

573,300 (50,000) $1,273,800

(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

ACR5.1 (CONTINUED) f. (continued) HERITAGE FURNITURE LIMITED Statement of Financial Position March 31, 2024 Assets Current assets Cash Accounts receivable Inventory Estimated inventory returns Supplies Prepaid rent Property, plant and equipment Equipment Less: Accumulated depreciation Total assets

$ 352,000 225,000 2,510,500 2,800 7,500 5,000 $145,000 43,500

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable Refund liability Salaries payable Interest payable Deferred revenue Income tax payable Current portion of bank loan payable Total current liabilities Non-current liabilities* Bank loan payable Total liabilities Shareholders‘ equity Common shares $ 200,000 Retained earnings 1,073,800 Total liabilities and shareholders‘ equity *($450,000 - $45,000 current)

$3,102,800

101,500 $3,204,300

$1,360,000 4,000 10,000 9,000 47,500 50,000 45,000 1,525,500 405,000 1,930,500

1,273,800 $3,204,300

ACR5.1 (CONTINUED) g. Date

Account Titles

Debit

March 31

Sales .............................................................. Income Summary ..................................

6,023,400

31 Income Summary ............................................. Advertising Expense ................................ Cost of Goods Sold .................................. Freight out ................................................ Depreciation Expense .............................. Interest Expense ...................................... Office Expense......................................... Rent Expense .......................................... Salaries Expense ..................................... Travel Expense ........................................ Utilities Expense ...................................... Income Tax Expense ...............................

5,450,100

31 Income Summary ............................................. Retained Earnings ..................................

573,300

31 Retained Earnings ........................................... Dividends Declared ..................................

50,000

Credit

6,023,400

75,000 4,346,100 185,000 14,500 36,000 26,000 60,000 465,000 12,500 30,000 200,000

573,300

50,000

ACR5.1 (CONTINUED) h. HERITAGE FURNITURE LIMITED Post-Closing Trial Balance March 31, 2024

Cash Accounts receivable Inventory Estimated inventory returns Supplies Prepaid rent Equipment Accumulated depreciation—equipment Accounts payable Refund liability Salaries payable Interest payable Deferred revenue Bank loan payable Income tax payable Common shares Retained earnings

Debit $ 352,000 225,000 2,510,500 2,800 7,500 5,000 145,000

000000000 $3,247,800

Credit

$ 43,500 1,360,000 4,000 10,000 9,000 47,500 450,000 50,000 200,000 1,073,800 $3,247,800

(Total debit account balances = Total credit account balances) LO 2,3,4 BT: AP Difficulty: M Time: 90 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT5.1

FINANCIAL REPORTING CASE

The North West Company is a merchandising company because it buys products and resells them to the public.

The North West Company classifies its operating expenses by function since captions include titles like ―selling, operating and administrative expenses.‖

Other non-operating expenses reported include interest expense totalling $13,058,000 for the fiscal year ended January 31, 2022.

d. and e. ($ in thousands)

2022

2021

Gross profit margin

$737,751 $2,248,796

= 32.8%

$774,553 $2,359,239

32.8%

Profit margin

$157,451 $2,248,796

= 7.0%

$143,560 $2,359,239

6.1%

The company‘s gross profit decreased 4.8% [($737,751 - $774,553) ÷ $774,553] and the gross profit margin stayed the same. Profit margin, on the other hand increased significantly. We can conclude that North West had decreased operating expenses and interest expenses as a percentage of sales in 2022.

LO 1,4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT5.2 a.

FINANCIAL REPORTING CASE The North West Company (in millions)

1 Percentage 1. . change in sales

($2,

. – $2, $2,

)

Sobeys (in millions) ($

– $2 , $2 ,

= (4.7)% 2.

Gross profit margin

($2,

. – $1,5 $2,

)

= 6.7% )

= 32.8%

(

, $

- $2 , ,

= 25.4%

Of the two companies, Sobeys was the only one with an increase in sales. In fiscal 2021, Sobeys‘ gross profit was 25.5% ($7,199 ’ $28,268). Sobeys‘ gross profit margin stayed essentially the same even with the 6.7% increase in sales. North West was able to retain the same gross profit margin of 32.8% [($774,553 ÷ $2,359,239) in 2021] in spite of the decrease in sales. We can conclude that North West is doing well managing its purchasing and pricing policies.

Sobeys experienced an increase in sales of 6.7% but had a decreased gross margin percentage of .1% (25.4% - 25.5%). Gross profit margin was $7,199.3 ($28,268.3 – $21,069.0) or 25.4% in 2021 and $7,659.7 ($30,162.4 – $22,502.7) or 25.4% in 2022. This could have been caused by mismanagement of inventory, lower selling prices, or purchasing price constraints.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

)

CT5.3

FINANCIAL REPORTING CASE

The main difference between these two statements of income is that Happy Coffee presents its expense items by function (such as general and administrative expenses) while Country Coffee presents its expenses by nature of the expense item. Under IFRS, Happy Coffee is required to also disclose the total depreciation expense and salaries and benefits expense in the notes to the financial statements.

Under IFRS both formats of expense presentation, by nature or by function, are acceptable. ASPE does not have a requirement on how to report expenses. Expenses under ASPE can be classified in any manner that would be useful to the key stakeholders. The method that classifies expenses by function can require a higher degree of judgement since expenses have to be allocated to each of the functional categories (depending on how many functional categories are present). In the case of Happy Coffee, there are three categories—cost of goods sold, selling expenses, and administrative expenses. This method provides better information to the reader despite the requirement for increased judgement.

The difference in format could make it difficult to compare expense items. For example, expense items as a percentage of sales would not be comparable. However, Country Coffee can still easily compare the key profitability measures of gross profit margin and profit margin. These profitability ratios are not dependent on the expense classifications.

No, comparability of the gross profit margin and profit margin will not be impacted. The definitions of gross profit and net income do not change when preparing the statements of income with a different format.

Country Coffee can change the presentation of its statement of income and begin classifying its expenses by function. This would be an acceptable presentation under ASPE. Under IFRS, if a company chooses to report its expenses by function it must still disclose total depreciation and salaries and benefit expense in the note disclosures. Country Coffee could use this additional information from the notes of Happy Coffee for improved comparability.

LO 4,5 BT: E Difficulty: C Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT5.4

ETHICS CASE

The CEO asked for three inappropriate adjustments to be made to the financial statements. By recording a purchase return as an increase in sales revenue, the sales revenue is now overstated and cost of goods sold is also overstated. By recording freight-in relating to inventory that has now been sold as an operating expense, it overstates operating expense while understating cost of goods sold. Finally by including the refund liability as sales revenue, it overstates sales and understates current liabilities. All of these adjustments were designed to boost gross profit in order to increase the bonus of the CEO. If we reverse the adjustments made, we get:

Sales Cost of goods sold Gross profit Operating expenses Income from operations Income tax expense Net income Gross profit margin: $51,000 ÷ $113,000 Gross profit margin: $40,000 ÷ $100,000

2024 Draft Adjustments 2024 Revised $(7,000) $113,000 (6,000) $100,000 5,000 62,000 (7,000) 60,000 51,000 (11,000) 40,000 21,000 (5,000) 16,000 30,000 0 24,000 9,000 0 9,000 $ 21,000 $ 0 $ 15,000 45.1% 40.0%

When we calculate the gross profit margin using the revised amounts, we can see that it has not risen by more than 3% compared to the prior year of 40% ($32,000 ÷ $80,000) and because of this, the CEO will not eligible for his bonus.

CT5.4 (CONTINUED) b.

The profit margin in 2024 is 15.0% ($15,000 ÷ $100,000) which is lower than that of the prior year of 21% ($16,800 ÷ $80,000). However, in the first draft of the statement of income, the profit margin was 18.6% ($21,000 ÷ $113,000), which is higher than the 15.0% determined using the correct amounts. This is because sales and net income were overstated.

Harm was done to the users of the financial statements. Assuming no corrections were made, the statement of income would have been adjusted for the bonus given to the CEO. Many of the elements except for income tax expense reported in the statement are false and misleading. Users of the financial statements would not have obtained a true reflection of the performance trends of Peshawar Inc. and may have made inappropriate decisions based on misleading financial statements. Furthermore, the CEO would have been awarded a bonus that he did not deserve, thereby taking assets away from the company and its shareholders.

LO 2,3,5 BT: E Difficulty: C Time: 40 min. AACSB: Analytic and Ethics CPA: cpa-t001, cpa-e001, cpat005 CM: Reporting, Ethics, and Finance

CT5.5

ETHICS CASE

Rita Pelzer, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking unearned purchase discounts. Her dilemma is either to follow her boss‘s unethical instructions or offend her boss and maybe lose the job she just assumed.

The stakeholders (affected parties) are: Rita Pelzer, the assistant controller Jamie Caterino, the controller (he looks good to superiors because of increased income) Zaz Stores Ltd., the company benefited Creditors of Zaz Stores Ltd. (suppliers harmed) Canada Post employees (those blamed harmed)

Ethically Rita should not continue the practice started by Jamie. She has several choices in that she could: 1.

Tell the controller (her boss) that she will attempt to take every allowable purchase discount by preparing and mailing cheques within the discount period—the ethical thing to do. This will offend her boss and may jeopardize her continued employment.

Comply with Jamie‘s directions and continue the unethical practice of taking unearned purchase discounts.

Go over her boss‘s head and take the chance of receiving just and reasonable treatment from an officer superior to Jamie. The company may not condone this practice. Rita definitely has a choice, but probably not without consequences. To continue the practice is definitely unethical. If Rita submits to this request, she may be asked to perform other unethical tasks. If Rita stands her ground and refuses to participate in this unethical practice, she probably won‘t be asked to do other unethical things—if she isn‘t fired. Maybe nobody has ever challenged Jamie‘s unethical behaviour and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.

LO 2 BT: C Difficulty: M Time: 30 min. AACSB: Ethics CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT5.6

DATA ANALYTICS CASE

The immediate effect of estimating sales returns and allowances at the rate of 4% from a historical rate of 5.5% is to increase sales and reducing the balance in the account Refund Liability in the current liabilities. Over time as the 4% actual rate of returns is experienced, it will better match the estimate that was originally accrued at the time of the sale. The balance of the account Refund Liability on the statement of financial position will better represent the expected amount that will be used up when sales returns and allowances occur from prior sales. LO 3 BT: C Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT5.7

DATA ANALYTICS CASE

a. The flavour that generates the highest pross profit (margin) per unit is coconut spice flavour because it‘s margin per unit is $8.24 which is the highest of the five product flavours. (Refer to the first graph‘s data) b. The flavour that generates the highest total gross profit is honey oat of $1,436,400 as shown in the second graph. c. The amount of the gross profit (margin) that would be earned by selling the premium pumpkin spice flavour would be: Sales (160,000 units x $16.99) = Cost (160,000 x $8.48) Gross profit (margin)

$2,718,400 1,356,800 $1,361,600

Compare this result with the gross profit (margin) of the maple sea salt flavour (which has the lowest gross profit (margin) of the current two premium flavours: Gross profit (margin) Pumpkin spice flavour (above) $1,361,600 Gross profit (margin) Maple sea salt flavour (second graph) 1,317,120 Additional gross profit (margin) to Naturis $ 44,480 d. The regular flavour product which produced the lowest total gross profit (margin) is apple spice. The addition gross profit (margin) that would be earned from replacing apple spice with pumpkin spice flavour is as follows: Gross profit (margin) Pumpkin spice flavour (above) Gross profit (margin) Apple spice flavour (second graph) Additional gross profit (margin) to Naturis

$1,361,600 1,181,920 $ 179,680

LO 1, 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT5.8 a. July

SERIAL CASE

Cost of Goods Sold ............................................... 1,620 Inventory ...................................................... ($18,000 physical count – $19,620 perpetual record = $1,620

1,620

shortage)

CT5.8 (CONTINUED) b. ANTHONY BUSINESS COMPANY LTD. Adjusted Trial Balance July 31, 2023 Debit Cash........................................................................ Accounts receivable ................................................ Inventory ................................................................. Supplies .................................................................. Prepaid insurance ................................................... Land ........................................................................ Buildings ................................................................. Accumulated depreciation—buildings ..................... Equipment ............................................................... Accumulated depreciation—equipment................... Vehicles .................................................................. Accumulated depreciation—vehicles ...................... Accounts payable .................................................... Deferred revenue .................................................... Salaries payable...................................................... Interest payable....................................................... Income tax payable ................................................. Bank loan payable................................................... Mortgage payable ................................................... Common shares ...................................................... Retained earnings ................................................... Rent income ............................................................ Service revenue ...................................................... Sales ....................................................................... Cost of goods sold .................................................. Salaries expense..................................................... Office expense ........................................................ Utilities expense ...................................................... Advertising expense ................................................ Insurance expense .................................................. Property tax expense .............................................. Interest expense...................................................... Income tax expense ................................................ Totals ...............................................................

Credit

30,757 24,260 18,000 17,620 5,000 100,000 165,000 $ 143,000 44,520 21,070 52,500 4,200 8,890 1,200 800 50 5,500 22,500 53,200 300 176,084 500 56,350 13,080 9,200 28,946 1,550 1,202 913 500 495 446 5,815 $506,724

000 0000 $506,724

(Total debit account balances = Total credit account balances)

CT5.8 (CONTINUED) c. ANTHONY BUSINESS COMPANY LTD. Statement of Income Month Ended July 31, 2023 Sales.................................................................................................... Cost of goods sold .............................................................................. Gross profit .......................................................................................... 3,880 Service revenue ................................................................................... Operating expenses Salaries expense ...................................................... $28,946 Office expense .......................................................... 1,550 Utilities expense........................................................ 1,202 Advertising expense .................................................. 913 Insurance expense .................................................... 500 Property tax expense ................................................ 495 Total operating expenses ................................................... Income from operations ....................................................................... Other income and expenses Rent income .............................................................. $500 Interest expense ...................................................... 446 Income before income tax ................................................................... Income tax expense ............................................................................ Net income ..........................................................................................

9,200

56,350 60,230

33,606 26,624

54 26,678 5,815 $ 20,863

(Income from operations + Other income – Other expenses = Income before income taxes)

ANTHONY BUSINESS COMPANY LTD. Statement of Changes in Equity Month Ended July 31, 2023 Common Shares Balance, July 1, 2023 Net income Balance, July 31, 2023

$300 ____ $300

Retained Earnings

Total Equity

$176,084 20,863 $196,947

$176,384 20,863 $197,247

Note to instructors: Although ABC would most likely prepare a statement of retained earnings rather than a statement of changes in equity since it has been assumed that it

is using ASPE, the statement of retained earnings is not explained in detail until Ch. 11, which is why we chose to require a statement of changes in equity here instead.

CT5.8 (CONTINUED) c. (continued) ANTHONY BUSINESS COMPANY LTD. Statement of Financial Position July 31, 2023 Assets Current assets Cash ........................................................................................................ $30,757 Accounts receivable ............................................................................... 24,260 Inventory .................................................................................................. 18,000 Supplies ................................................................................................... 17,620 Prepaid insurance .................................................................................... 5,000 Total current assets ...................................................................... 95,637 Property, plant, and equipment Land .................................................................. $100,000 Buildings ............................................................ $165,000 Less: Accumulated depreciation ........................ 143,000 22,000 Equipment ......................................................... $44,520 Less: Accumulated depreciation ........................ 21,070 23,450 Vehicles ............................................................. $52,500 Less: Accumulated depreciation ........................ 4,200 48,300 Total property, plant, and equipment ............................................ 193,750 Total assets ..................................................................................................... $289,387 Liabilities and Shareholders‘ Equity Current liabilities Accounts payable .................................................................................... $ 8,890 Deferred revenue ..................................................................................... 1,200 Salaries payable ...................................................................................... 800 Interest payable ....................................................................................... 50 Income tax payable ................................................................................. 5,500 Current portion of bank loan payable ....................................................... 7,500 Current portion of mortgage payable ....................................................... 5,000 Total current liabilities ................................................................... 28,940 Non-current liabilities Bank loan payable ($22,500 – $7,500) ................................................... 15,000 Mortgage payable ($53,200 – $5,000) .................................................... 48,200 Total liabilities ................................................................................ 92,140 Shareholders‘ equity Common shares ....................................................................... $ 300 Retained earnings..................................................................... 196,947 Total shareholders‘ equity .............................................................. 197,247 Total liabilities and shareholders‘ equity .......................................................... $289,387

CT5-8 (CONTINUED) d. 1. ABC Current ratio

$95,637 = 3.3:1 $28,940

Gross profit margin

$3,880 = 29.7% $13,080

Profit margin

$20,863 = 30.0% ($13,080 + $56,350)

ABC‘s current ratio and profit margin are much higher than those of its competitor, while its gross profit margin is much lower. 2.

We must recall that ABC is a small, family company while its major competitor is a larger, publicly-traded company. They likely have different product lines, cost structures, and other differences affecting its financial results.

LO 2,4 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

Legal Notice

CHAPTER 6 REPORTING AND ANALYZING INVENTORY LEARNING OBJECTIVES 1. Describe the steps in determining inventory quantities. 2. Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system. 3. Explain the effects on the financial statements of choosing each of the inventory cost formulas. 4. Identify the effects of inventory errors on the financial statements. 5. Demonstrate the presentation and analysis of inventory. 6.* Apply the FIFO and average cost inventory cost formulas under a periodic inventory system (Appendix 6A).

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO 1.

BT Item LO C

BT Item LO BT Item LO Questions C

15.

16.

17.

BT Item LO

29.

2,6

22.

23.

30.

2,6

24.

31.

25.

26.

2,6

17.

2,6

10.

2 2 2

18.

19.

27.

28.

2,6

11.

12.

13.

20.

14.

21.

Brief Exercises 1.

13.

10.

14.

2 3

11.

15.

2,6

12.

16.

2,6

Exercises 1.

2,3

13.

3,5

10.

14.

3,6

2,3

11.

15.

2,3

12.

16.

2,6

Problems: Set A and B 1.

1,2,4

13.

2,5

10.

14.

5,6

2,3

4,5

11.

15.

1,2,6

2,4

4,5

12.

16.

1,2,6

Accounting Cycle Review 1.

Cases 1.

3,5

1,2,3,6

2,3

4,5

1,2

10.

2,3

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

Taking a physical inventory involves counting, weighing or measuring each kind of inventory on hand. Retailers, such as hardware stores, generally have thousands of different items to count. This is normally done when the store is closed to minimize errors due to the movement of merchandise. Tom will probably count items and mark the quantity, description, and inventory number on pre-numbered inventory tags (unless the company has more advanced technology that can read bar codes on inventory products – we will assume that they do not). He should only include items in the inventory that are in saleable condition. Ideally, strong internal control should be exerted over the physical inventory count. For example, Tom should not have responsibility for the custody or record-keeping for the inventory. He should also count in teams of two, or there should be a second counter checking the accuracy of the count. Adjustments may also have to be made to the physical inventory count for any goods in transit. For example, inventory purchased FOB shipping point that is still in transit will have to be included in inventory. Inventory that has been shipped by Kikujiro to customers FOB destination and not received by the customer before year-end will also have to be included in the count. Finally, any of Kikujiro‘s inventory held by other retailers on consignment will have to be included in the count as well.

LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

In a consignment agreement, the consignor is the business that owns the goods, and the consignee is the business that will sell the goods, without having to purchase and own the goods before they are sold. The consignee will sell the goods for the consignor for a fee or a percentage of the sales price. Only the owner of goods, the consignor, includes the goods in its inventory even though the goods are physically located on the consignee‘s premises.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

The goods will be included in Janine Ltd.‘s (the seller‘s) inventory if the terms of sale are FOB destination.

(b)

The goods will be included in Fastrak Corporation‘s (the buyer‘s) inventory if the terms of sale are FOB shipping point.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

Include: the inventory items belong to Kingsway as Kingsway is the consignor.

(b)

Include: the inventory items belong to Kingsway while in transit because the terms are FOB shipping point.

(c)

Exclude: the customer has purchased the inventory items and legal ownership has passed to the customer.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Three control activities a company will use when managing inventory include:  Physical safeguards - storing high value inventory in secure areas, preventing access to inventory, using security cameras in storage areas, using technology to track and locate inventory, and insuring inventory from damage and theft  Review and reconciliation - counting inventory frequently and reconciling the inventory on hand to inventory in the accounting records.  Segregation of accounting duties from custody of assets - ensuring that staff who can record journal entries cannot gain access to inventory - this prevents staff from stealing inventory and hiding the theft by recording the theft as shrinkage. Any three procedures taken from the list below should be considered when taking a physical count of inventory:  Ensuring all items are stored properly to allow ease of counting  Using count techniques that are not subject to error such as the use of scanning devices that will not count an item twice  Ensuring items received and shipped out on the count date are properly included or excluded from the count results  Identifying consignment inventory on the premises that are owned by others to ensure it is not included in the count  Identifying inventory owned by the company held elsewhere on consignment to ensure it is included in count results  Adjusting inventory at the end of the count to ensure that the inventory account balance equals the inventory on hand that was just counted the difference is usually accounted for as theft or spoilage (shrinkage) if a shortage exists

LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

When the company assigned duties to John which involved counting the inventory and adjusting the accounting records, it violated the main principle of internal control which is the segregation of duties. The responsibility to count inventory and the responsibility to adjust the accounting records should be given to different individuals in the organization. Failure to do so will weaken internal controls. John currently has the opportunity to cover up shortages of inventory by submitting falsified inventory balances, which will then be reported in the inventory records used for financial statements.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The accounting records need to be updated for the spoilage or shrinkage that has occurred. A reduction of $400 will be recorded as a credit to the Inventory account and a corresponding debit will be recorded to the Cost of Goods Sold account.

LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

The unit cost of an inventory item is needed for the entry to record the cost of goods sold and remove the cost of the items sold from inventory. Because units of the same inventory item are typically purchased at different prices, it is necessary to determine which unit costs to use in the calculation of the cost of the goods sold. Different cost formulas can be used to calculate cost of goods sold and to allocate costs to inventory.

(b)

When using the perpetual system, an entry to record the cost of goods sold and remove the cost of the items sold from inventory is recorded at the same time as the sales transaction. The information from the perpetual system is updated, using the cost formula adopted by the business. The cost formula is also used in the detailed perpetual records for every increase in inventory caused by purchases, freight in, etc. transactions.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

(b)

The specific identification formula tracks the physical flow of individual inventory items, matching the cost of the actual item sold against the revenue from that item. The FIFO inventory cost formula assumes the first inventory purchased is the first inventory sold. The most recent purchases are assumed to remain in ending inventory. The average cost formula assumes that all goods available for sale are indistinguishable or homogeneous. An example of inventory where the specific identification would be appropriate would be for goods that are not ordinarily interchangeable, such as automobiles with unique vehicle identification numbers. Inventory such as groceries could be accounted for using the FIFO cost formula as older items are normally sold first. Inventory such as hardware could be accounted for using an average cost formula.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

(a)

Average cost or FIFO can be used if the goods available for sale are identical. Specific identification cannot be used if the goods are not specifically identifiable.

(b)

FIFO assumes that the first goods purchased are the first to be sold.

(c)

Specific identification matches the actual physical flow of merchandise.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

A new weighted average unit cost must be calculated after each purchase because a new cost amount is added to the ―cost pool‖. This changes the total dollars in the cost pool and the quantity of units on hand in the cost pool. A sale withdraws units and total dollars from the cost pool at the weighted average cost. This does not affect the weighted average cost of the remaining units. That is, the weighted average cost of the remaining units is unchanged after a sale.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

A company should consider: 

Whether the goods are interchangeable or not, or whether they are produced or segregated for specific projects;



Whether the formula corresponds most closely to the physical flow of goods;



Whether the formula reports inventory on the statement of financial position at a cost that is close to the inventory‘s most recent cost; and



Whether the formula is used for other inventories with a similar nature and usage.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

Average cost produces the better statement of income valuation because the cost of goods sold is determined using more recent inventory prices. This cost formula better matches current costs with current revenues. FIFO produces the better valuation on the statement of financial position because the ending inventory is determined using the most recent prices. Since the normal intent is to replace the inventory after it is sold, the most recent prices are more relevant for decision-making.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

(a) (1)

No effect – cash is not affected by the choice of inventory cost formulas.

(2) In a period of declining prices, FIFO will produce a lower ending inventory as inventory is determined using the most recent (lower) prices. Average cost will produce a higher ending inventory as ending inventory incorporates the higher older prices. (3) The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of goods sold will be higher under FIFO and lower under the average cost formula. (4) Because of the effect on the cost of goods sold as outlined in (3), net income will be lower under FIFO and higher under average cost. (5) The impact on retained earnings will be the same as the impact on net income and ending inventory—lower in a period of declining prices using FIFO and higher using average cost. (b) (1)

No effect – cash is not affected by the choice of inventory cost formulas.

(2) In a period of rising prices, Average cost will produce a lower ending inventory as ending inventory incorporates the lower older prices. FIFO will produce a higher ending inventory as ending inventory is determined using the most recent (higher) prices. (3) The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of goods sold will be higher under average cost and lower under the FIFO formula. (4) Because of the effect on the cost of goods sold as outlined in (3), net income will be lower under average cost and higher under FIFO. (5) The impact on retained earnings will be the same as the impact on net income and ending inventory—lower in a period of rising prices using average cost and higher using FIFO. LO 3 BT: C Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

In times of rising prices due to inflation, the use of FIFO will have the consistent effect of reporting the most recent (highest) purchase prices in inventory, and lowest, oldest (lowest) purchase prices in cost of goods sold. The net income will therefore be higher than it would be if the average cost formula had been used. Because the company has the policy of paying all of its income as dividends, it is not retaining any of the additional income to replace the inventory and continue its operations at the same level. Because of rising prices, new inventory will at higher prices which will require more cash. In addition, the trend of rising prices will eventually reverse and have an adverse effect on income and dividends.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

The error should be corrected as it will change the amounts presented on the financial statements. The error will impact cost of goods sold, gross profit and net income (ignoring the impact of income taxes). On the statement of financial position, inventory will be misstated, as will retained earnings. If not corrected, the ending inventory error will carry over to the following year where it will have the opposite effect on cost of goods sold, gross profit and net income. An ending inventory error will affect the statemen of income in two consecutive years, but in opposite directions. This information may impact a user‘s decision.

LO 4 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

(a)

(b) (c)

(d)

(e)

(f)

Mila Ltd.‘s 2024 income before tax will be understated by $43,000. This is because an understatement of ending inventory will result in an overstatement of cost of goods sold. If cost of goods sold is overstated, then income before tax will be understated. 2024 retained earnings will be understated by $43,000 because net income is understated (see (1) above). 2024 total shareholders‘ equity will be understated by $43,000 because the retained earnings balance is understated (see (b) above). 2025 net income will be overstated $43,000. This is because beginning inventory is understated by $43,000, which will result in an understatement of cost of goods sold (recognizing that 2024 ending inventory is 2025 beginning inventory). If cost of goods sold is understated, then income before tax will be overstated. 2025 retained earnings will be correct because the understatement in net income in 2024 and overstatement in 2025 will cancel each other. 2025 total shareholders‘ equity will be correct because the retained earnings balance is correct.

LO 4 BT: C Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

18.

(a)

At the end of the fiscal year, before the inventory is adjusted to the inventory count, Shediac‘s assets (Inventory) would be overstated and its liabilities would be overstated (Accounts Payable). There would be no effect on shareholders‘ equity.

(b)

Since the merchandise is not on hand at the time of the inventory count, the shipment from Bathurst would not be counted. This in turn would cause the inventory count to be lower than the perpetual inventory record. Normally when such a discrepancy arises, the Inventory account will be adjusted downward with a credit to reflect the amount of merchandise actually on hand. The corresponding debit in this adjusting entry would be to Cost of Goods Sold. The summary effect of the initial error and the count adjustment would be an overstatement in Cost of Goods Sold and Accounts Payable. Because Cost of Goods Sold is overstated, gross profit and net income are understated as well as Retained Earnings. At the end of Shediac‘s current year, after the adjustment is made for the results of the inventory count, the overall impact on the accounting equation is no effect on assets, an overstatement of liabilities (Accounts Payable), and an understatement of shareholders‘ equity (Retained Earnings).

LO 4 BT: C Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

(a)

Cost refers to the original cost of inventory as determined by using specific identification, FIFO, or average cost formulas. Net realizable value is the selling price less any costs required to make the goods ready for sale.

(b)

The lower of cost and net realizable value rule should be applied at the end of the accounting period, before financial statements are prepared.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

(a)

Cost of Goods Sold is debited when recording a decline in inventory value under the lower of cost and net realizable value rule and the asset account Inventory is credited.

(b)

These declines are usually considered part of the risk associated with carrying inventory and part of the costs of carrying a variety and quantity of goods on hand. The inventory should not be presented on the statement of financial position at a value that exceeds the expected benefits from its sale, so the net realizable value becomes the more relevant measure.

(c)

Should the net realizable value increase beyond the cost price of the inventory, there would not be a journal entry required. Inventory should not be presented on the statement of financial position at an amount greater than cost. Failure to do so would violate the cost principle.

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

An increase in the days in inventory ratio from one year to the next would be seen as a deterioration in the company‘s efficiency in managing inventory. It means that the inventory is being held for a longer period, which increases the risk of spoilage and obsolescence.

LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting

22.

(a)

An inventory turnover ratio that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory shortages may also cause customer ill will and result in lost future sales.

(b)

If the inventory turnover is too low, it may indicate that the company is having difficulty selling its inventory, and the inventory may become obsolete.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005. CM: Reporting and Finance

23.

Inventory must be valued at the lower of cost and net realizable value. Data that would provide feedback concerning negligible sales of a certain product line would lead management to investigate whether the realizable value of that product line fell below the carrying amount cost. Should that investigation reveal it to be the case, the inventory must be written down to net realizable value.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting

24.

Data analytics provides timely feedback on which products are moving quickly and would require replenishment more quickly than planned. Stock outs of product can therefore be avoided. Slow moving inventory would be given the opposite treatment. Plans for the purchase of these items might be cancelled altogether, avoiding the situation where left over stock must be written down to its net realizable value.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting

25.

Data analytics provides timely feedback on which products are moving quickly and which ones are not. Since inventory must be valued at the lower of cost and net realizable value, write-downs for inventory can be avoided by reducing or eliminating purchases of slow-moving items. Write-downs in inventory are charged to cost of goods sold and therefore reduce gross profit.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting

*26.

Periodic and perpetual inventory systems differ in the accounting treatment for inventories. Under a perpetual inventory system, inventory records are updated for every purchase and sale transaction. The cost of goods sold is recorded each time a sale is made. Under a periodic system, the inventory is only updated at the end of the period when a physical inventory count is performed. Inventory purchases throughout the year are debited to a Purchases account in a periodic inventory system rather than an Inventory account. When a sale is recorded in a periodic inventory system, no entry is made to record the cost of the sale. Cost of goods sold is calculated separately, after the physical inventory count is performed.

LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*27.

Ending inventory is known from the physical inventory count. The total amount of inventory available for sale needs to be determined first in order to determine what inventory has been sold (goods available for sale – ending inventory = cost of goods sold). Goods sold are not tracked separately in a periodic inventory system.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*28.

In both systems, the first (oldest) costs are the costs assigned to the goods sold. No matter what system is used, the cost of goods sold will always consist of the oldest units and newest units are assumed to be on hand.

LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*29.

A new (moving) average cost per unit is calculated after each inventory purchase when using the perpetual system. This can be done because the perpetual system tracks each sale and records the cost of goods sold at the time of each sale, reducing the perpetual inventory record for the average cost immediately before the sale. Under the periodic system, the cost of goods sold is not calculated and recorded at the time of each sale. Consequently, the periodic inventory record is not reduced at the time of the sale. Rather, the ending inventory is adjusted at the end of the accounting period using the amount arrived at by a physical count. When using the periodic system, the average cost of units sold and remaining in inventory is arrived at by dividing the dollar value of all goods available for sale during the period by the total number of units available during the accounting period.

LO 2,6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

*30.

In a perpetual system, the average cost per item is recalculated every time a purchase transaction takes place. In a periodic system, the average cost is determined based on the total goods available for sale during the period. If there are cost changes during the period, the average cost per item will differ between a perpetual and periodic inventory system.

LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*31.

We record an adjusting entry at the end of each accounting period to transfer purchases into the Cost of Goods Sold account and adjust the Inventory account to its current balance based on the inventory count. The Purchases account is reduced to zero as a result of this adjustment.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6.1 a.

Ownership of the goods belongs to the consignor (Helgeson). Thus, these goods should be included in Helgeson‘s inventory.

Goods held on consignment belong to the other company and should not be included in Helgeson‘s inventory.

The goods in transit belong to Helgeson because ownership does not transfer until the customer receives the goods. They should be included in Helgeson‘s inventory.

The goods purchased belong to the buyer, Helgeson as the terms of shipment are FOB shipping point. Title transferred to Helgeson as soon as the goods were shipped, so even though they have not been received, they should be included in Helgeson‘s inventory.

The goods in transit belong to the customer as the terms of shipment are FOB shipping point. They should not be included in Helgeson‘s inventory because title transferred to the customer as soon as the goods were shipped.

The goods in transit should not be included in the inventory count because ownership by Helgeson does not occur until the goods reach the buyer.

(Legal title determines if an item should be included in inventory) LO 1 BT: K Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.2 $95,000 (7,500) (1,000) 5,000

Count Held on consignment Sold August 28 shipment plus freight, FOB shipping point ($4,750 + $250) $91,500 Correct inventory cost LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.3 a.

Cost of Goods Available for Sale 3 electric pianos @ $600 = $1,800 2 electric pianos @ $475 = 950 $2,750 Ending Inventory (a) Specific Identification

2 pianos @ $600 = $1,200 1 piano @ $475 = 475 $1,675

Cost of Goods Sold $2,750 – $1,675 = $1,075 (Proof: 1 piano @ $600 + 1 piano @ $475 = $1,075)

If management wished higher net income, it could have sold two pianos from the last shipment that had a lower cost. If it wished lower net income, it could have sold two of the first pianos purchased.

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.4 [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18]

$450  30 = $15 15 (from April 1) $18 (from April 1) 30 (from April 6) $15 (from April 6) (15 @ $18) + (30 @ $15) = $720 $18 (from April 1) $15 (from April 6) (15 @ $18) + (10 @ $15) = $420 15 + 30 – 15 – 10 = 20 $15 20 @ $15 = $300 $144 ÷ $12 = 12 20 $15 12 $12 (20 @ $15) + (12 @ $12) = $444

LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.5 [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13]

$200 ($6,000  30) 45 (15 + 30) $8,700 ($2,700 + $6,000) $193.3333 ($8,700 (from [3]) ÷ 45 (from [2])) rounded to $193.33 $193.33 (from [4]) 25 x $193.3333 = $4,833.3333 rounded to $4,833.33 45 (from [2]) – 25 sold = 20 $8,700.00 (from [3]) – $4,833.33 (from [6]) = $3,866.6667 rounded to $3,867 $3,866.67 (from [8])  20 (from [7]) = $193.3333 rounded to equal [4]. Notice how the average cost does not change after a sale. $2,460  $205 = 12 20 (from [7]) + 12 (from [10]) = 32 $3,866.67 (from [8]) + $2,460.00 = $6,326.67 $6,326.67 (from [12])  32 (from [11]) = $197.708 rounded to $197.71

LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.6 a.

FIFO cost formula

Date Description Aug. 2 3

Purchases

Purchase

250 $ 70

Purchase

500

Cost of Goods Sold

$ 17,500

100

50,000

10 Sale 15

Purchase

900

120

$175,500

250 250 500

$ 70 70 100

$ 17,500 17,500 50,000

100 100 120 100 120

45,000 45,500 108,000 12,500 108,000

250 50

$70 100

$22,500

325

100

32,500

450 450 900 125 900

$55,000

1,025

108,000

25 Sale 1,650

Ending Inventory

625

$120,500

Check: $55,000 + $120,500 = $175,500 b.

Average cost formula

Date Description

Purchases

Cost of Goods Sold

Ending Inventory

Aug. 2 Purchase

250 $ 70.00

$17,500.00

250 $ 70.00

3 Purchase

500 100.00

50,000.00

750

90.00

67,500.00

450

90.00

40,500.00

1,350

110.00

148,500.00

325 110.00 35,750.00 1,025

110.00

112,750.00

10 Sale 15 Purchase

300 $90.00 $27,000.00 900 120.00 108,000.00

25 Sale 1,650

$175,500.00 625

$62,750.00 1,025

$ 17,500.00

$112,750.00

Check: $62,750 + $112,750 = $175,500 c.

Gross profit:

Sales (300 x $150) + (325 x $180) Cost of goods sold Gross profit

FIFO $103,500 55,000 $48,500

Average Cost $103,500 62,750 $40,750

LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.7 a.

Average cost. The ending inventory is valued at the average of the cost of the product, including earlier costs. Since this cost formula yields a higher ending inventory than FIFO when prices are falling, the result will not be closer to replacement cost. This result is achieved with the FIFO cost formula.

FIFO. The cost of goods is valued using the earlier, higher costs. Since the revenue reflects current lower prices, the FIFO cost formula does not match current costs against revenue when prices are falling. This result is better achieved by the average cost formula.

One of the guidelines that management should consider is choosing an inventory cost formula that corresponds as closely to the physical flow of goods as possible. A cost formula that provides an ending inventory cost close to the inventory‘s recent cost is also preferable.

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.8 Account Cost of goods sold Net income Cash Accounts receivable Inventory Accounts payable Retained earnings

Effect of Decision L H NE NE H NE H

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.9 Total assets in the statement of financial position will be overstated by the amount that ending inventory is overstated, $25,000. When the purchase of inventory was recorded, an account payable would have been created, so total liabilities will also be overstated by $25,000 (assuming the ―supplier‖ was not paid). Shareholders‘ equity will not be affected. LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.10 When items are not counted, an adjustment would be made to lower the balance in the Inventory account to reflect the difference between the amount counted (which is lower) and the amount recorded in the account. This would be done by crediting Inventory. The offsetting debit would be to Cost of Goods Sold, thereby overstating this account and reducing net income. In the following year, assuming these goods are sold, their cost is zero so cost of goods sold would be understated and net income overstated. Assuming there are no errors when counting inventory at the end of next year, this net income overstatement when combined with the previous year‘s net income understatement, would cancel each other out and make retained earnings correctly stated at the end of next year. These effects are summarized below.

Assets Liabilities Shareholders‘ equity

Current Year Understated $7,000 No impact Understated $7,000

Next Year No impact No impact No impact

LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.11 a. Inventory Categories NRV

Cost LCNRV $326,000 $326,000 224,000 168,700 285,000 221,020

Desktops Tablets and readers Laptops

$347,000 168,700 221,020

Accessories and parts

97,400

94,300

$834,120

$929,300

$810,020

Total valuation

The lower of cost and net realizable value is $810,020. b. Cost of Goods Sold Inventory $834,120 – $810,020 = $24,100

24,100 24,100

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.12 a. Cost of Goods Sold Inventory $54,700 – $52,500 = $2,200

2,200 2,200

b. $54,700 LO 5 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 6.13 a. Inventory Turnover (2021) Days in Inventory (2021)

Inventory Turnover (2020) Days in Inventory (2020)

$10,101.6 = 4.3 times ($2,408.6 + $2,312.9) ’ 2 365 = 85 days 4.3

$9,260.4 = 4.1 times ($2,312.9 + $2,212.9) ’ 2 365 = 89 days 4.1

The inventory management improved in 2021 as evidenced by the decrease in number of days in inventory from 89 days in 2020 to 85 days in 2021. This was corroborated by the increasing inventory turnover. This improvement signifies that it took less time to sell the inventory in 2021.

. LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

*BRIEF EXERCISE 6.14 Beginning inventory Purchases (370 @ $9) + (700 @ $12) + (800 @ $11) Goods available for sale Ending inventory Goods sold a.

Units 0

Dollars $ 0

1,870 1,870 (600) 1,270

20,530 $20,530

FIFO Ending inventory: (600 units @ $11) = $6,600 Cost of goods sold = Goods available for sale – ending inventory $20,530 – $6,600 = $ 13,930 Proof: Cost of goods sold = (370 × $9) + (700 × $12) + (200 x $11) = $ 13,930

Average cost Note: Unrounded numbers have been used in the average cost calculations, although the numbers have been rounded to the nearest cent for presentation purposes. Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation. Weighted average cost = $20,530 ÷ 1,870 = $10.98 Ending inventory: 600 × $10.98 = $ 6,587.17 Cost of goods sold = Goods available for sale – ending inventory $20,530 – $ 6,587.17 = $ 13,942.83 Proof: Cost of goods sold = 1,270 × ($20,530 ÷ 1,870) = $ 13,942.83

LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 6.15 a.

Ending Inventory: (1,300 × $45.00) + (200 × $50.00) = $68,500 Cost of goods sold = Goods available for sale – ending inventory $216,000 – $68,500 = $147,500 Proof: Cost of goods sold = (1,500 × $45.00) + (1,600 × $50.00) = $147,500

No, the answer under a perpetual system would be the same, since the first goods purchased are assumed to be the first goods sold.

LO 2,6 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 6.16 a. Jan.

FIFO Perpetual 3

Accounts Receivable ............................................ Sales (700 × $12).........................................

8,400

Cost of Goods Sold (700 × $5) ............................. Inventory ......................................................

3,500

Inventory (1,000 × $6) .......................................... Accounts Payable ........................................

6,000

Cash ..................................................................... Sales (800 x $11) .........................................

8,800

Cost of Goods Sold [(200 × $5) + (600 × $6)] ...... Inventory ......................................................

4,600

8,400

3,500

6,000

8,800

4,600

b. FIFO Periodic Jan.

Accounts Receivable ............................................. Sales ............................................................

8,400

Purchases ............................................................. Accounts Payable .........................................

6,000

Cash ...................................................................... Sales .............................................................

8,800

Inventory (ending) ................................................. Cost of Goods Sold1 .............................................. Purchases ..................................................... Inventory (beginning) ....................................

2,400 8,100

Cost of goods sold1: Beginning inventory (900 x $5) ........................................ Purchases ...................................................................... Goods available for sale .................................................. Less ending inventory (400 x $6) ..................................... Cost of goods sold ...........................................................

8,400

6,000

8,800

6,000 4,500

$4,500 6,000 10,500 2,400 $8,100

LO 2,6 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 6.1 1.

Do not include – Shippers Ltd. does not own items held on consignment. These goods will be recorded in the owner‘s inventory.

Include in inventory – Shipping terms FOB destination means that Shippers Ltd. owns the items until they reach the customer.

Include in inventory – Shippers Ltd. still owns the items as they were only shipped on consignment.

Do not include in inventory. The freight costs relate to a sale that will be recorded in the following fiscal year and are usually recorded in Freight Out. In this case, in order to match the freight costs with the related sale, the freight costs should not be recorded until the following month.

Do not include in inventory – The shipping terms are FOB destination point so ownership has not transferred to the buyer. Shippers Ltd. should not record anything until the goods arrive.

Include in inventory – Shipping terms FOB shipping point means that ownership transferred at the time of shipping and therefore, Shippers Ltd. owns the goods in transit and should record the purchase to Inventory.

Do not include in inventory. The shipping terms are FOB shipping point, so Shippers Ltd. no longer owns the goods. They will be recorded in Cost of Goods Sold on the statement of income.

(Legal title determines if an item should be included in inventory.) LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 6.2 a. Ending inventoryphysical count ............................................................ 1. Add to inventory. Title remains with Novotna until purchaser receives goods ..................................................................................... 2. Add to inventory. Title passed to Novotna when goods were shipped . 3. Add to inventory. Title passed to Novotna when goods were shipped . 4. No effect. Title passes to purchaser upon shipment when terms are FOB shipping point .............................................................................. 5. Add to inventory. Novotna owns the goods out on consignment ......... 6. Deduct from inventory. Obsolete inventory should be written off to cost of goods sold. ............................................................................... Correct inventory ......................................................................................

$285,000 35,000 95,000 28,000 0 30,500 (15,000) $458,500

(Legal title determines if an item should be included in inventory)

Since inventory is usually the largest current asset on a company‘s statement of financial position, errors can have a significant impact. In deciding to grant a short-term bank loan, the bank will be looking at Novotna‘s liquidity by calculating the current ratio as well as the inventory turnover and days sales in inventory. Any error in the inventory count will affect these ratios. In addition, the errors will also affect Novotna‘s profitability by impacting the cost of goods sold on the statement of income.

LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.3 a.

Three major types of internal control over inventory include:  Physical safeguards - storing high value inventory in secure areas, preventing access to inventory, using security cameras in storage areas, using technology to track and locate inventory, and insuring inventory from damage and theft  Review and reconciliation - counting inventory frequently and reconciling the inventory on hand to inventory in the accounting records.  Segregation of accounting duties from custody of assets - ensuring that staff who can record journal entries cannot gain access to inventory - this prevents staff from stealing inventory and hiding the theft by recording the theft as shrinkage.

Weaknesses in internal control over inventory include:  Physical safeguards - Access to the warehouse is not restricted as employees can enter at night to tinker with their cars. This leaves the opportunity for employees to remove car parts from the inventory for personal use or for resale. Higher priced merchandise is usually subject to more restrictive physical safeguards to prevent damage and theft. Review and reconciliation – Inventory items of one type are stored  in different location is in the warehouse allowing for a duplication or missed inventory at the time of the inventory count. In addition, the company should restrict the removal of damaged inventory from the accounting records to ensure only legitimately damaged items are removed. Write-offs of damaged goods should be reviewed and approved by management.  Segregation of accounting duties from custody of assets - The inventory count is performed by warehouse employees who have access to the perpetual inventory record. In addition, damaged inventory is identified by all staff and removed from the accounting records. This is a breach of proper division of duties, allowing a warehouse employee to cover up a theft by misreporting the inventory count or adjusting the perpetual inventory record for a shortage or a perceived damage to cover up the theft.

The most likely cause of the decrease in gross profit margin is the theft of car parts by the warehouse employees and possible errors made in the inventory count.

LO 1 BT: C Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.4 a.

The company would identify, by serial number, the items remaining in inventory. The sum of the cost of the items remaining in inventory would become the ending inventory balance. Then, the company would identify the cost of the items sold, again by using serial numbers to determine the cost of each item sold. The total cost of items sold would become the cost of goods sold.

It could choose to sell specific units purchased at specific costs if it wished to impact net income selectively. If it wished to minimize net income it would choose to sell the units purchased at higher costs–in which case the cost of goods sold would be $4,300 ($2,400 + $1,900) and gross profit would be $900 [($2,600 x 2) – $4,300]. If it wished to maximize net income it would choose to sell the units purchased at lower costs; in which case the cost of goods sold would be $3,580 ($1,900 + $1,680) and gross profit would be $1,620 [($2,600 x 2) – $3,580].

Discount Electronics should consider the nature of the inventory items. The specific identification system is best suited to inventory items are clearly identified from each other and that are not ordinarily interchangeable, or to products that are produced and segregated for specific projects. The specific identification system produces the most accurate measure of ending inventory and matching of cost of goods sold to sales. It is however more time-consuming and expensive to apply. If the inventory items are interchangeable, Discount Electronics would not be able to use specific identification and would have to use either the FIFO or average cost flow formulas.

LO 2,3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.5 a. Date Description

Purchases

Cost of Goods Sold Ending Inventory

Apr. 1 Beg. inventory

50 $210 100 225 $33,000 50 $210 25 225 $ 16,125

3 Sale 10 Purchase

75 75 200

225 225 275

16,875

25 25 300

275 275 290

6,875 93,875

57,625 125

290

36,250

200 $275 $ 55,000 75 175

17 Sale 24 Purchase

300

290

25 175 500

65,000

87,000

30 Sale 30 Balance

225 275

275 290

$142,000 525

$138,750 125

71,875

290 $36,250

Check: $138,750 + $36,250 = $175,000 ($33,000 + $142,000) b. Sales Apr. 3

Units 75

Sales Price/Unit $400

Total $ 30,000

250

400

100,000

200

400

80,000 $210,000

Gross profit = $210,000 – $138,750 = $71,250 Gross profit margin = $71,250  $210,000 = 33.9%

EXERCISE 6.5 (CONTINUED) c.

The gross profit is higher than if the average cost formula had been used in a perpetual inventory system because cost of goods sold is lower under FIFO in a period of rising prices than it would be using the average cost formula. Under FIFO, ending inventory is higher, cost of goods sold is lower and gross profit is higher.

LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.6 a.

Date

Note: Unrounded numbers have been used in the average cost calculations, although the numbers have been rounded to the nearest cent for presentation purposes. Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation. Purchases

Descripti on

Cost of Goods Sold

June 1 Beginning 6 Purchase

500 $125.00 $ 62,500.00 1,200 $127.00 $152,400.00

10 Sale

1,000

14 Purchase

Ending Inventory

1,800

128.00

‗230,400.00

16 Sale

1,600

26 Purchase

1,000

30 Balance

4,000

129.00

$126.41 $126,411.76

127.56

204,088.47

129,000.00 $511,800.00 2,600

1,700

126.41

214,900.00

700

126.41

88,488.24

2,500

127.56

318,888.24

900

127.56

114,799.77

1,900

128.31

243,799.77

$330,500.23 1,900

$243,799.77

Check: $330,500.23 + $243,799.77 = $574,300 ($62,500 + $511,800) b.

Sales = (1,000 @ $200) + (1,600 @ $205) = $528,000 Gross profit = $528,000 – $330,500 = $197,500 Gross profit margin = $197,500  $528,000 = 37.4%

The gross profit is lower than it would be using the FIFO cost formula because the cost of the product being purchased is rising.

LO 2 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6-7 a. (1) FIFO Date Purchases Cost of Goods Sold June 1 Beginning inventory 12 2,300 @ $6 = $13,800 15 16 23 27 Total

Balance 1,500 @ $5 = $ 7,500 1,500 @ $5 2,300 @ $6 = 21,300

1,500 @ $5 1,000 @ $6 = $13,500 1,300 @ $6 = 7,800 4,500 @ $7 = 31,500 1,300 @ $6 4,500 @ $7 = 39,300 1,500 @ $8 = 12,000 1,300 @ $6 4,500 @ $7 1,500 @ $8 = 51,300 1,300 @ $6 100 @ $7 4,400 @ $7 = 38,600 1,500 @ $8 = 12,700 $57,300 $52,100 $12,700

Check: $52,100 + $12,700 = $64,800 ($7,500 + $57,300) a. (2) Average cost Note: Unrounded numbers have been used in the average cost calculations, although the numbers have been rounded to the nearest cent for presentation purposes. Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation. Date June 1 12 15 16 23 27 Total

Purchases Beginning inventory 2,300 @ $6 = $13,800.00

Cost of Goods Sold

2,500 @ $5.61 = $14,013.16 4,500 @ $7 = 31,500.00 1,500 @ $8 = 12,000.00 $57,300.00

5,700 @ $6.96 = 39,655.48 $53,668.64

Balance 1,500 @ $5.00 = $ 7,500.00 3,800 @ $5.61 = 21,300.00 1,300 @ $5.61 = 7,286.84 5,800 @ $6.69 = 38,786.84 7,300 @ $6.96 = 50,786.84 1,600 @ $6.96 = 11,131.36 $11,131.36

Check: $53,668.64 + $11,131.36 = $64,800 ($7,500 + $57,300)

EXERCISE 6.7 (CONTINUED) b. Sales (2,500 x $12) + (5,700 x $15) Cost of goods sold Gross profit

(1) FIFO $115,500.00 52,100.00 $ 63,400.00

(2) Average Cost $115,500.00 53,668.64 $ 61,831.36

The average cost formula results in a higher cost of goods sold because the cost of inventory is rising.

The FIFO cost formula results in a higher net income because it produces the lower cost of goods sold when prices are rising, as the lower costs from earlier units are assigned to cost of goods sold, while the higher costs are assigned to ending inventory.

The FIFO cost formula results in a higher ending inventory because the cost of inventory is rising and the higher unit prices are used to determine ending inventory.

Both cost formulas result in the same pre-tax cash flow. The cost formulas do not change the pre-tax cash flows of a company.

LO 2,3 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.8 a.

Date Oct. 2 15

FIFO cost formula Purchases Units Cost Total 9,000 $12 $108,000 15,000 14 210,000

Date Oct. 2 15 29

Cost of Goods Sold Units Cost Total

9,000 13,000

$12 14

$290,000

Balance Units Cost Total 9,000 $12 $108,000 9,000 12 15,000 14 318,000 2,000

28,000

Average cost formula

Units 9,000 15,000

Purchases Cost Total $12 $108,000 14 210,000

Cost of Goods Sold Units Cost Total

22,000

$13.25

$291,500

Units 9,000 24,000 2,000

Balance Cost Total $12.00 $108,000 13.25 318,000 13.25 26,500

Sales Cost of goods sold (from above) Gross profit Operating expenses Income before income tax Income tax expense (30%) Net income

FIFO $525,000 290,000 235,000 200,000 35,000 10,500 $ 24,500

Average Cost $525,000 291,500 233,500 200,000 33,500 10,050 $ 23,450

EXERCISE 6.8 (CONTINUED) d.

(1)

Currently, as shown in (a) above, FIFO results in a higher net income than the average cost formula. This is anticipated when costs are rising, as is the case above. If instead costs fall, the use of the FIFO cost formula will result in a lower net income compared to the average cost formula. The cost of goods sold will then be composed of higher costs than the average cost formula and this will generate lower net incomes.

(2)

If costs remain stable, the two cost formulas will produce the same net incomes.

LO 2,3 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.9 a.

Corrected inventory 2023 = $30,000 – $2,000 + $3,000 = $31,000 2024 = $37,000 Corrected cost of goods sold 2023 = $154,000 - $3,000 = $151,000 2024 = $168,000 + $3,000 = $171,000

(1) and (2) Cost of goods sold and income before income tax: The inventory errors for 2023 will cause the cost of goods sold to be overstated by $3,000, which will cause net income and retained earnings to be understated by the same amount. Since the errors were not discovered or corrected in 2023, when they reverse in 2024, cost of goods sold will be understated and net income will be overstated by $3,000. Over the two years the error will reverse and therefore the retained earnings balance will be correct at the end of 2024 (with respect to these particular errors). (3)

The inventory error for 2023 will cause the inventory—an asset account—to be understated by $1,000. The inventory for 2024 is correct.

(4)

Recording the purchase in 2023 will cause liabilities to be overstated by $2,000 in 2023. Liabilities are not affected in 2024.

(5)

As explained above in (1) and (2), retained earnings is understated by $3,000 in 2023. 2023 2024

A U$1,000 NE

= = =

L O$2,000 NE

+ + +

SE U$3,000 NE

c. Errors should be corrected as soon as they are discovered so that users have a more accurate account of inventory on hand, gross profit and net income. Although the $2,000 error does not affect statement of income accounts, it distorts the statement of financial position amounts and ratios, such as the current ratio since both inventory and accounts payable are overstated. LO 4 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.10 a. Sales ........................................................................... Cost of goods sold (see 1 and 2) ................................ Gross profit ..............................................................

2024 $265,000 213,000 $ 52,000

2023 $250,000 186,000 $ 64,000

(1) $194,000 – $8,000 = $186,000 (2) $205,000 + $8,000 = $213,000 b.

The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference

$56,000 + $60,000 = $64,000 + $52,000 =

$116,000 116,000 $ 0

Gross profit margin 2024 2023 Before correction $60,000 ÷ $265,000

$56,000 ÷ $250,000

= 22.6% = 22.4% After correction $52,000 ÷ $265,000 = 19.6%

$64,000 ÷ $250,000 = 25.6%

LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.11 NRV/Unit

Total NRV

a. Cameras: Sony Canon Light Meters: Gossen Sekonic Total

Units Cost/Unit

b. Dec. 31

Cost of Goods Sold ($4,670 – $4,560) ............................... Inventory ....................................................................

110

Cost of Goods Sold (2  $150) ........................................... Inventory ....................................................................

300

Dec. 31

Total Cost

a. LCNRV

4 8

$175 150

$ 700 1,200

$160 152

$ 640 1,216

$ 640 1,200

12 10

135 115

1,620 1,150 $4,670

139 110

1,668 1,100 $4,624

1,620 1,100 $4,560 110

300

d. A -$410

= =

L NE

+ +

SE -$410

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 6.12 a. Inventory Turnover (2021):

$1,982,361 = 2.7 times ($744,358 + $727,992)’2

Days in Inventory (2021):

365 = 135 days 2.7

Gross Profit Margin (2021):

($2,922,570 - $1,982,361) = 32.2 $2,922,570

Inventory Turnover (2020):

$1,732,217 = 1.9 times ($727,992 + $1,052,052)’2

Days in Inventory (2020):

365 = 192 days 1.9

Gross Profit Margin (2020):

($1,981,276 - $1,732,217) = 12.6% $1,981,276

In 2021, Gildan Activewear experienced an improvement in liquidity and profitability. The liquidity has been improved due to the decrease in time required to turn over its inventory, from 192 days to 135 days. The company experienced improvement in its profitability due to an increase in its gross profit margin from 12.6% to 32.2%.

LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

EXERCISE 6.13 a. Inventory turnover (FIFO)

$750,000 = 3.4 times $222,500

Inventory turnover (Average Cost)

$735,000 = 3.2 times $227,500

b. Current ratio (FIFO)

($450,000 + $222,500) = 1.92 times $350,000

Current ratio (Average Cost)

($450,000 + $227,500) = 1.94 times $350,000

The FIFO cost formula appears to show a slightly better turnover ratio because it has a lower ending inventory. The current ratios are slightly different at 1.92 for FIFO and 1.94 for average cost. The two cost formulas will generally yield the same overall assessment of liquidity when combining the inventory turnover ratio and the current ratio. The trend analysis for the inventory turnover and the current ratio produced by either formula will be the same since the formulas involve allocating the same costs. In reality, there is no economic difference between the two formulas and any differences in ratios are artificial ones caused solely by the different cost formulas. Consequently, there is no real difference in liquidity.

If Kingswood failed to record a purchase of inventory at year-end and did not include the inventory purchased in its year end inventory count, average inventory would be understated and cost of goods sold would not be affected. In calculating the inventory turnover ratio, this omission would cause the inventory turnover ratio to be higher than it would be if the error had not been made.

LO 3,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005. CM: Reporting and Finance

*EXERCISE 6.14 a., b. (1) FIFO Beginning inventory ($2,000 ×$20) ........................................ Purchases Oct. 9 (5,000 × $21) ..................................................... $105,000 Oct. 12 (4,000 × $20.50) .............................................. 82,000 Oct. 25 (4,000 × $20.80) .............................................. 83,200 Cost of goods available for sale (15,000 units) ....................... Less: Ending inventory (4,000 × $20.80) ............................... Cost of goods sold (11,000 units) ...........................................

$ 40,000

270,200 310,200 83,200 $ 227,000

a., b. (2) Average cost Beginning inventory ($2,000 ×$20) ........................................ Purchases Oct. 9 (5,000 × $21) ..................................................... $105,000 Oct. 12 (4,000 × $20.50) .............................................. 82,000 Oct. 25 (4,000 × $20.80) .............................................. 83,200 Cost of goods available for sale (15,000 units) ....................... Less: Ending inventory (4,000 × $20.68*) .............................. Cost of goods sold (11,000 units) ...........................................

$ 40,000

270,200 310,200 82,720 $ 227,480

*$310,200 ÷ 15,000 units = $20.68/unit

FIFO would result in a slightly higher gross profit, since its cost of goods sold is lower.

d. Oct. 31 Inventory (ending) ............................................................ 83,200 Cost of Goods Sold .......................................................... 227,000 Inventory (beginning) ............................................. Purchases .............................................................

40,000 270,200

LO 3,6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 6-15 a. (1)

FIFO

Beginning inventory (1,500 × $5) ..................................................... Purchases June 12 (2,300 × $6) .................................................................... June 16 (4,500 × $7) .................................................................... June 23 (1,500 × $8) .................................................................... Cost of goods available for sale (9,800 units) .................................. Less: Ending inventory [(1,500 × $8) + (100 × $7)] .......................... Cost of goods sold (8,200 units) ...................................................... (2)

$ 7,500 $13,800 31,500 12,000

57,300 64,800 12,700 $52,100

Average cost

Note: Unrounded numbers have been used in the average cost calculation, although the numbers have been rounded to the nearest cent for presentation purposes. Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation. Cost of Goods Total Units Weighted Average 

Available for Sale Available for Sale

= Unit Cost $64,800 9,800

$6.612245 Ending inventory = 1,600 × $6.612245 = $10,579.59 Cost of goods sold = $64,800.00 – $10,579.59 = $54,220.41 Proof: (9,800 – 1,600) × ($64,800 ÷ 9,800) = $54.220.41 b.

The average unit cost is not $6.50 because the average unit cost is not a simple straight average but is a weighted average based on the number of units purchased at each price.

(1)

FIFO – The perpetual system will give the same ending inventory and cost of goods sold as the periodic system.

(2)

Average cost – The perpetual system will have a different ending inventory and cost of goods sold because the cost of goods sold is

calculated based on the weighted average at the time of each sale under the perpetual system. LO 6 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 6.16 a.

(1)

Date

FIFO Purchases

Nov. 1

Sales

Beginning inventory

(30 @ $295) = $8,850

5 25 @ $300 = $7,500

(30 @ $295) + (25 @ $300) = $16,350 (30 @ $295) + (12 @ $300) = $12,450

19 40 @ $305 = $12,200

Balance

(13 @ $300) = $3,900

(13 @ $300) + (40 @ $305) = $16,100 (13 @ $300) + (37 @ $305) = $15,185

25 30 @ $310 = $9,300

(3 @ $305) = $915

(3 @ $305) + (30 @ $310) = $10,215

Cost of Goods Sold: $12,450 + $15,185 = $27,635 Ending Inventory: $10,215 Check: $27,635 + $10,215 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)

*EXERCISE 6.16 (CONTINUED) a.

(2)

Average cost

Purchases

Nov. 1

Sales

Beginning inventory

30 @ $295 = $8,850.00

5 25 @ $300 = $7,500 12

55 @ $297.27 = $16,350.00 42 @ $297.27 = $12,485.45

19 40 @ $305 = $12,200 22

Balance

13 @ $297.27 = $3,864.55 53 @ $303.10 = $16,064.55

50 @ $303.10 = $15,155.23

25 30 @ $310 = $9,300

3 @ $303.10 = $909.31 33 @ $309.37 = $10,209.31

Cost of Goods Sold: $12,485.45 + $15,155.24 = $27,640.69 Ending Inventory: $10,209.31 Check: $27,640.69 + $10,209.31 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)

EXERCISE 6.16 (CONTINUED) b. FIFO Beginning inventory (30 × $295) ........................................................ Purchases Nov. 5 (25 × $300) ......................................................................... Nov. 19 (40 × $305) ....................................................................... Nov. 25 (30 × $310) ....................................................................... Cost of goods available for sale (125 units) ....................................... Less: Ending inventory (3 × $305) + (30 × $310) .............................. Cost of goods sold ............................................................................. AVERAGE COST Cost of goods available for sale (125 units) ....................................... Less: Ending inventory (33 × $302.801)............................................. Cost of goods sold ............................................................................. 1

$ 8,850 $ 7,500 12,200 9,300

29,000 37,850 10,215 $27,635

$37,850.00 9,992.40 $27,857.60

$37,850 ÷ 125 = $302.80

LO 2,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 6.17 a.

Nov. 5 Inventory Accounts Payable 12 Cash Sales 12 Cost of Goods Sold Inventory 19 Inventory Accounts Payable 22 Cash Sales 22 Cost of Goods Sold Inventory 25 Inventory Accounts Payable

(1) FIFO Dr. Cr. 7,500 7,500 19,320 19,320 12,450 12,450 12,200 12,200 23,500 23,500 15,185 15,185 9,300 9,300

(2) Average Cost Dr. Cr. 7,500.00 7,500.00 19,320.00 19,320.00 12,485.45 12,485.45 12,200.00 12,200.00 23,500.00 23,500.00 15,155.23 15,155.23 9,300.00 9,300.00

(1) FIFO Dr. Cr. 7,500 7,500 19,320 19,320 12,200 12,200 23,500 23,500 9,300 9,300 10,215 27,635 29,000 8,850

(2) Average Cost Dr. Cr. 7,500.00 7,500.00 19,320.00 19,320.00 12,200.00 12,200.00 23,500.00 23,500.00 9,300.00 9,300.00 9,992.40 27,857.60 29,000.00 8,850.00

Nov. 5 Purchases Accounts Payable 12 Cash Sales 19 Purchases Accounts Payable 22 Cash Sales 25 Purchases Accounts Payable 30 Inventory (ending) Cost of Goods Sold Purchases Inventory (beginning)

LO 2,6 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 6.1A a. Aug. 15

Include $1,650 in inventory as it is owned by Kapuskasing.

Aug. 19

Kapuskasing owns the goods once they are shipped on August 29. Include inventory of $1,825 ($1,735 + $90). The purchase should be recorded to Inventory and Accounts Payable.

Aug. 22

Title of the goods does not transfer to Kapuskasing until September 3. Exclude this amount from the August 31 inventory as the inventory belongs to the supplier. This item would not be recorded.

Aug. 23

The sale will be recorded on August 23. The goods (cost, $1,180) should be excluded from Kapuskasing‘s inventory at the end of August and recorded to Cost of Goods Sold. The inventory belongs to the customer.

Aug. 26.

Exclude the items from Kapuskasing‘s inventory. Temiskaming Manufacturers Ltd. still owns the inventory. This item would not be recorded.

Aug. 27.

Title to the goods does not transfer to the customer until September 4. Include the $4,000 in ending inventory as it is owned by Kapuskasing.

Aug. 29.

The unsold consignment inventory should be included in Kapuskasing‘s inventory. Include $6,000 ($8,000 – $2,000) in inventory which belongs to Kapuskasing. The portion of inventory that was sold would be recorded to Cost of Goods Sold.

Aug. 30

The inventory has been sold to the customer, so the customer has ownership. Exclude the inventory and record $2,265 to Cost of Goods Sold. Since the inventory is shipped FOB shipping point, the customer is responsible to pay for the freight and this amount is not recorded in Kapuskasing‘s records.

(Legal title determines if an item should be included in inventory)

PROBLEM 6.1A (CONTINUED) b. The revised ending inventory is: Unadjusted inventory Adjustments Aug. 15 Aug. 19 Aug. 27 Aug. 29 Adjusted inventory

$127,000 $ 1,650 1,825 4,000 6,000

13,475 $140,475

LO 1 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.2A a. Cost of Goods Sold

Model

VIN #

Cost/ Unit $

Focus Mustang 18 Mustang F-150 Flex Escape

C81362 G62313 G71891 F1921 X3892 E21202

24,000 29,000 28,000 29,000 31,000 29,000

Apr. 8

Ending Inventory Sales price/ Unit $ 26,000 32,000 33,000 32,500 34,000 32,000

VIN #

Cost/ Unit $

1 F-150 F1883 12 Mustang G71811 Flex X4214 Flex X4212 23 Focus C81528 Escape E28268

25,000 30,000 31,000 30,000 27,000 30,000

Model Apr.

170,000 189,500

173,000

= $189,500 – $170,000 = $19,500

Gross profit

The specific identification formula is likely the most appropriate formula for Dean‘s Sales Ltd. because the vehicles are large dollar value items that are specifically identifiable by vehicle identification number.

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.3A a.

(1)

Date

FIFO

Description

May 1 Purchase

Purchases 1,400 $25

$35,000

7 Sale

600

14 Purchase

800

21,600

16 Purchase

900

31,500

800 400

Sale Purchase

500

400 900 200 3,600

$25

$35,000

800 800 800 800 800 900 400 900 400 900 500

$25 25 27 25 27 35 27 35 27 35 28

$20,000

47,900

300

8,400

$93,700

300

$28

$ 8,400

$25 $ 15,000

25 27

$102,100 3300

27 35 28

Ending Inventory 1,400

30,800

14,000

Sale

31 Balance

Cost of Goods Sold

41,600

73,100 42,300

56,300

Check: $93,700 + $8,400 = $102,100

PROBLEM 6.3A (CONTINUED) a. (2) Average cost Note: Unrounded numbers have been used in the average cost calculations, although the numbers have been rounded to the nearest cent for presentation purposes. Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation. Date Description

Purchases

May 1 Purchase

1,400 $25 $35,000.00

7 Sale

Cost of Goods Sold

600 $25.00 $15,000.00

Ending Inventory 1,400

$25.00

$35,000.00

800

25.00

20,000.00

14 Purchase

800

21,600.00

1,600

26.00

41,600.00

16 Purchase

900

31,500.00

2,500

29.24

73,100.00

29.24 35,088.00 1,300

29.24

38,012.00

1,800

28.90

52,012.00

28.90

8,668.67

17 Sale

1,200

27 Purchase

500

27 Sale 31 Balance

3,600

14,000.00 1,500

28.90 43,343.33

300

$102,100.00 3,300

$93,431.33

300

$8,668.67

Check: $93,431.33 + $8,668.67 = $102,100.00 b.

The average cost formula produces a slightly higher gross profit and net income as it results in cost of goods sold being lower.

The cost formula that Clear Vision needs to follow in the current year must be consistent with the formula applied in prior years. The choice of cost formula is an accounting principle and cannot be changed simply for the purpose of reporting higher gross profits. When choosing which cost formula to use, Clear Vision should consider the physical flow of its goods, the amount to be reported on the statement of financial position, and the nature and use of its goods. Any difference in gross profit and net income between FIFO and average cost is temporary as the methods simply allocate the purchases to different periods. Total cost of goods sold under both methods, over time, would be the same. Average cost produces a higher ending inventory during periods of decreasing prices.

The cash flows are the same no matter which cost formula is used.

LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.4A a. Date Description

Purchases

Cost of Goods Sold Ending Inventory

Beg. Apr. 1 inventoInventory 6 Purchase

$45 $ 675 30 5

9 Sale 14 Purchase

10 15 20

30 Total

$1,725

800

20 Sale 28 Purchase

50 45

45 40

1,050

700 $2,175

$2,775

$50

$1,500

30 15

50 45

2,175

10 10 20

45 45 40

5 5 20

40 40 35

200

$ 900

450 1,250

900

Check: $2,775 + $900 = $3,675 ($1,500 + $2,175) b. April 9

Accounts Receivable (35 × $80)................. Sales ..................................................

2,800

Cost of Goods Sold ................................... Inventory ............................................

1,725

Accounts Receivable (25 × $80)................. Sales ..................................................

2,000

Cost of Goods Sold ................................... Inventory ............................................

1,050

2,800

1,725

2,000

It needs to consider whether the change will result in more relevant and reliable presentation in the financial statements. This may only occur if the physical flow, or nature and use of the inventory changes.

1,050

PROBLEM 6.4A (CONTINUED) d.

I would expect the ending inventory under the average cost formula to be higher when prices are falling as the inventory will be valued at an average cost. Under FIFO, ending inventory would be lower when prices are falling as the inventory will be valued at the last (and lowest) price. Cost of goods sold under the average cost formula would be lower.

LO 2,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.5A a.

Date Description

Purchases

Cost of Goods Sold Ending Inventory

Apr. 1 Beg. Inventory 6 Purchase

30 $50.00 $1,500.00 15 $45 $ 675.00

9 Sale

35 $48.33 $1,691.67

14 Purchase

800.00

20 Sale

28 Purchase

30 Balance

42.78 1,069.44

700.00 $2,175.00

$2,761.11

48.33 2,175.00

48.33

42.78 1,283.33

42.78

213.89

36.56

913.89

483.33

$ 913.89

Check: $2,761.11 + $913.89 = $3,675.00 ($1,500.00 + $2,175.00)

b. Cost of Goods Sold .......................................................... 36.56 Inventory (1 × $36.56) ........................................... c.

36.56

Three accounts would be affected—Inventory, Cost of Goods Sold, and Retained Earnings. The Inventory account would be overstated by $36.56. This would result in the statement of financial position sub-totals of current assets and total assets also being overstated. The Cost of Goods Sold account would be understated by $36.56. This would lead to the statement of income sub-totals of gross profit and net income being overstated by $36.56. The Retained Earnings account would also be overstated by $36.56.

LO 2,3 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.6A a. April

No entry

Inventory (110 × $90) ............................................ Cash .............................................................

9,900.00

Cash (130 × $95)................................................... Sales .............................................................

12,350.00

Cost of Goods Sold (130 × $86.88*)...................... Inventory .......................................................

11,293.75

Inventory (120 × $70) ........................................... Cash .............................................................

8,400.00

Cash (120 × $70)................................................... Sales .............................................................

8,400.00

Cost of Goods Sold (120 × $73.38*)...................... Inventory .......................................................

8,805.00

Inventory (20 × $60) .............................................. Cash .............................................................

1,200.00

9,990.00

12,350.00

11,293.75

8,400.00

8,805.00 1,200.00

* These numbers have been rounded to the nearest cent for presentation purposes, but not for calculation purposes. See detailed calculations in part (b).

PROBLEM 6.6A (CONTINUED) b.

Date Description

Purchases

Cost of Goods Sold

Ending Inventory

Apr. 1 Beginning 6 Purchase

50 $80.00 $ 4,000.00 110 $90 $ 9,900

8 Sale 15 Purchase

Balance

86.88 13,900.00

86.88

150

73.38 11,006.25

73.38

2,201.25

68.03

3,401.25

130 $86.88 $11,293.75 120

8,400

20 Sale 27 Purchase

160

120 20 250

73.38

8,805.00

1,200 $19,500 250

$20,098.75

2,606.25

$ 3,401.25

Check: $20,098.75 + $3,401.25 = $23,500 ($4,000 + $19,500)

Ending inventory should be valued at $2,500 (50 x $50) which is the lower of cost and net realizable value. Cost = $3,401.25 (50 units @ 68.025) NRV = $2,500.00 (50 units @ $50)

Cost of Goods Sold ($3,401.25 - $2,500.00)...................... Inventory................................................................

901.25

LO 2,5 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

901.25

PROBLEM 6.7A

a. b. c. d. e. f. g.

Cash Cost of goods sold Net income Retained earnings Ending inventory Gross profit margin ratio Inventory turnover ratio

2024 No effect Overstated Understated No effect No effect Understated Understated*

2023 No effect Understated Overstated Overstated Overstated Overstated Understated

*Although the cost of goods sold is overstated in 2024, this is not as significant (in percentage terms) as the overstatement in average inventory, which is the denominator in the inventory turnover ratio, so this ratio remains understated in 2024. LO 4,5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.8A a.

Cost of Goods Sold .............................................................. Inventory................................................................

5,000

Inventory .............................................................................. Accounts Payable ..................................................

15,000

5,000

15,000

(INCORRECT) KMETA INC. Statement of Income

Year

Ended

July

Sales Cost of goods sold Gross profit Operating expenses Income before income tax

2024 $340,000 233,000 107,000 68,000 $ 39,000

2023 $320,000 220,000 100,000 64,000 $ 36,000

2022 $300,000 209,000 91,000 64,000 $ 27,000

Statement of financial position: Inventory Accounts payable

$40,000 21,000

$40,000 9,000

$24,000 19,000

(CORRECT) KMETA INC. Statement of Income

Year

Ended

July

Sales Cost of goods sold Gross profit Operating expenses Income before income tax

2024 $340,000 228,0004 112,000 68,000 $ 44,000

2023 $320,000 225,0001 95,000 64,000 $ 31,000

2022 $300,000 209,000 91,000 64,000 $ 27,000

Statement of financial position: Inventory Accounts payable

$40,000 21,000

$50,0002 24,0003

$24,000 19,000

1 2

$220,000 + $5,000 + $0* = $225,000 $40,000 - $5,000 + $15,000 = $50,000

3 4

$9,000 + $15,000 = $24,000 $233,000 - $5,000 + $0** = $228,000

PROBLEM 6.8A (CONTINUED) b. (Continued) * - Purchases understated by $15,000 and ending inventory understated by $15,000, so nil effect on cost of goods sold. ** - Purchases overstated by $15,000 and beginning inventory understated by $15,000, so nil effect on cost of goods sold. c.

Retained earnings before correction = $27,000 + $36,000 + $39,000 = $102,000 Retained earnings after correction = $27,000 + $31,000 + $44,000 = $102,000 The retained earnings balance at the end of 2024 is unaffected and remains at $102,000 because by that time, all errors have been corrected.

Inventory turnover (INCORRECT)

Inventory turnover (2024)

$233,000 = 5.8 times ($40,000 + $40,000) ’ 2

Inventory turnover (2023)

$220,000 = 6.9 times ($40,000 + $24,000) ’ 2

(CORRECT) Inventory turnover (2024)

$228,000 = 5.1 times ($40,000 + $50,000) ’ 2

Inventory turnover (2023)

$225,000 = 6.1 times ($50,000 + $24,000) ’ 2

LO 4,5 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 6.9A a.

Type of Bean

Quantity

Forastero Criollo

6,000 bags 16,000 bags

June 30

Unit Cost

Total Cost

NRV

Total NRV

LCNRV

$12.10 4.25

$72,600 68,000 $140,600

$11.50 4.50

$69,000 72,000 $141,000

$69,000 68,000 $137,000

Cost of Goods Sold ($140,600 – $137,000) ....... Inventory .....................................................

3,600

Amazonia‘s operations involve the sale of coffee beans. The users of the financial information are aware of the volatility of the cost of the beans due to weather conditions in the countries where the beans are grown. Users expect and appreciate the lower of cost and net realizable value (LCNRV) requirement in accounting because they know that inventory and income are not overstated. Adjustments Amazonia would need to make by applying the item-by-item approach of the LCNRV would not be minor in amount. The item-by-item approach is always the more conservative method (that is, lower inventory amount reported) because net realizable values above cost are never included in the calculations. Under these circumstances, Amazonia should apply the LCNRV rule on an item-by-item basis for coffee beans. One argument in support of both types of coffee beans being considered as part of one inventory grouping is that the accounting values that are reported under LCNRV on an item-by-item basis are not neutral and unbiased measures of income and inventory. Recognizing net realizable values only when they are lower than cost, is an inconsistent treatment that can lead to distortions in reported net income. Another argument can be made on the basis of the cost versus benefit constraint of accounting. Although not appropriate in this case due to the type of inventory, the costs incurred in arriving at the net realizable value on an item-by-item basis may far outweigh the benefit derived by applying LCNRV on an item-by-item basis.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

3,600

PROBLEM 6.10A a.

(1) (2) (3)

October 31 November 30 December 31

Total Cost $8,085,0001 6,150,0002 8,340,0003

Total NRV $7,350,0004 7,380,0005 7,645,0006

LCNRV $7,350,000 6,150,000 7,645,000

14,700 x $550 = $8,085,000 12,300 x $500 = $6,150,000 3 13,900 x $600 = $8,340,000 4 14,700 x $500 = $7,350,000 5 12,300 x $600 = $7,380,000 6 13,900 x $550 = $7,645,000 2

b. (1) October 31

Cost of Goods Sold ..................................... Inventory ........................................... ($8,085,000 – $7,350,000 = $735,000)

(2) November 30

735,000 735,000

No entry

(3) December 31

Cost of Goods Sold ............................... Inventory ........................................... ($8,340,000 – $7,645,000 = $695,000)

695,000 695,000

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.11A a. (in USD millions) Inventory Turnover

Days In Inventory

Current Ratio

2021

$15,357 = 4.6 times ($3,414 + $3,266)’2

365 = 79 days 4.6 times

$22,545 = 1.1 : 1 19,950

2020

$13,433 = 4.0 times ($3,266 + $3,379)’2

365 = 4.0 times

$19,240 = 1.3 : 1 $14,601

days

Coca-Cola‘s current ratio deteriorated in 2021 and is slightly ahead the industry average of 0.9:1. This ratio indicates that the company has slightly more current assets to cover its current liabilities compared to other companies in the industry. Coca-Cola‘s inventory turnover improved but continues to be significantly worse than the rest of the industry. The industry ratios have shown a decline from 2020 to 2021 for the current ratio and the inventory ratios. Coca-Cola‘s ratios have shown the same trend. b.

Coca-Cola has different types of inventory that likely have different physical flows of inventory. For example, beverages likely flow on a FIFO basis (especially for beverages with ―best before‖ dates). Other components of inventory including raw materials such as sugar may be accounted for on an average basis.

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 6.12A a.

Wendy‘s has a current ratio that exceeds the industry average and therefore enjoys greater liquidity. Wendy‘s has a higher current ratio and inventory turnover ratio than McDonald‘s, so it may be more liquid than McDonald‘s. Both companies have higher inventory turnover than the industry. Since inventory is kept at very low levels and is not a large component of current assets, an inventory turnover ratio higher than the industry means that less inventory is kept on hand and therefore decreases current assets and the current ratio.

Both companies‘ gross profit margins are lower than the industry average, with Wendy‘s having the better ratio of the two companies. McDonald‘s has a much higher profit margin compared to Wendy‘s.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 6.13A a.

Cost of Goods Available For Sale Date Jan. 1 Mar. 15 July 20 Sept. 4 Dec. 2

(1)

Explanation Beginning inventory Purchase Purchase Purchase Purchase Total

Units 250 700 500 450 100 2,000

Unit Cost $160 150 145 135 125

Total Cost $ 40,000 105,000 72,500 60,750 12,500 $290,750

FIFO

Step 1: Ending Inventory Date Units Unit Cost Sept. 4 100 $135 Dec. 2 100 125 200

Step 2: Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

Total Cost $13,500 12,500 $26,000

$290,750 26,000 $264,750

Proof: Cost of Goods Sold Unit Total Units Cost Cost 250 $160 $ 40,000 700 150 105,000 500 145 72,500 350 135 47,250 1,800$264,750

*PROBLEM 6.13A (CONTINUED) b.

(2)

Average Cost

Step 1: Ending Inventory Weighted Average Units Unit Cost 200 $145.38* =

Total Cost $29,075.00

*$290,750  2,000 = $145.38 (rounded)

Step 2: Cost of Goods Sold Cost of goods available for sale Less: Ending inventory (200 x $145.38 rounding) Cost of goods sold

$290,750 29,075 $261,675

Proof: Cost of goods sold 1,800 × ($290,750 ÷ 2,000) = $261,675 LO 6 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 6.14A a. KANE LTD. Partial Statements of Income

Sales (1,800 × $200) ....................................... Cost of goods sold Beginning inventory ................................. Cost of goods purchased ........................ Cost of goods available for sale .............. Ending inventory ..................................... Cost of goods sold .................................. Gross profit ......................................................

FIFO

Average Cost

$360,000

40,000 250,750 290,750 26,000 264,750 95,250

40,000 250,750 290,750 29,075 261,675 98,325

b. KANE LTD. Partial Statements of Financial Position

FIFO Assets Current assets Inventory

Average Cost

$26,000 ........................ $29,075

FIFO uses the most recent inventory prices to value the ending inventory. Since prices are declining, FIFO results in the lower cost for ending inventory. FIFO results in the higher cost of goods sold, lower gross profit, and lower net income because FIFO values the cost of goods sold at the older, higher prices.

LO 5,6 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 6.15A a.

(1)

Periodic Inventory System COST OF GOODS AVAILABLE FOR SALE

Date Aug. 1 4 18 28

Explanation Beginning inventory Purchases Purchases Purchases Total

Units 50 180 70 40 340

Unit Cost $90 92 94 95

Total Cost $ 4,500 16,560 6,580 3,800 $31,440

Units Sold = 160 + 100 = 260 Units in Ending inventory = 340 – 260 = 80 Step 1: Ending Inventory Unit Total Units Cost Cost 40 $95 $3,800 40 94 3,760 80 $7,560

Step 2: Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$31,440 7,560 $23,880

Proof: Cost of Goods Sold

Units 50 180 30 260

Unit Cost $90 92 94

Total Cost $ 4,500 16,560 2,820 $23,880

*PROBLEM 6.15A (Continued) a.

(2)

Perpetual Inventory System

Date Description

Purchases

Cost of Goods Sold

Aug 1 Beginning inventory 4 Purchases

180 $92 $16,560 50 110

10 Sales 18 Purchases

70 94

25 Sales 40 95

31 Balance

290

50 50 180

$90 $ 4,500 90 92 21,060

70 70 70

92 92 94

40 40 40

94 94 95

$90 92 $14,620

6,580 70 30

28 Purchases

Ending Inventory

92 94

9,260

3,800 $26,940 260

$23,880

6,440 13,020 3,760 7,560

, $ 7,560

Check: $23,880 + $7,560 = $31,440 ($4,500 + $26,940) b. Cost of goods sold Ending inventory Cost of goods available for sale

Perpetual $23,880 7,560 $31,440

Periodic $23,880 7,560 $31,440

The results under FIFO in a perpetual system are the same as in a periodic system. Under both inventory systems, the first costs in inventory are the ones assigned to the cost of goods sold. c.

The price per unit information for the sales transactions is not relevant in determining cost of goods sold or the cost of ending inventory as it is the price used per unit in arriving at sales. Cost of goods available for sale Ending inventory (40 x $94) + (40 x $95) Cost of goods sold Inventory (ending) ............................................................... Cost of Goods Sold ............................................................. Purchases ............................................................. Inventory (beginning) .............................................

$31,440 7,560 $23,880 7,560 23,880 26,940 4,500

LO 2,6 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 6.16A a.

(1)

Perpetual Inventory System

Purchases

Cost of Goods Sold

Nov. 1 Beginning inventory 4 Purchases

500 $42 $21,000

11 Sales 16 Purchases

450 750

33,000

20 Sales

800

27 Purchases

600

30 Balance

1,850

$41.67 $18,750.00

43.61

34,888.89

27,600 $81,600 1,250

$53,638.89

Ending Inventory

100 $40.00

$ 4,000.00

600 41.67

25,000.00

150 41.67

6,250.00

900 43.61

39,250.00

100 43.61

4,361.11

700 45.66

31,961.11

700

$31,961.11

Check: $53,638.89 + $31,961.11 = $85,600 ($4,000 + $81,600)

*PROBLEM 6.16A (CONTINUED) a.

(2)

Periodic Inventory System COST OF GOODS AVAILABLE FOR SALE

Date Nov 1 4 16 27

Explanation Beginning inventory Purchases Purchases Purchases Total

Units 100 500 750 600 1,950

Unit Cost $40 42 44 46

Total Cost $ 4,000 21,000 33,000 27,600 $85,600

Average cost per unit = $85,600  1,950 = $43.90 Units Sold = 450 + 800 = 1,250 Units in Ending inventory = 1,950 – 1,250 = 700 Step 1: Ending Inventory 700 units @ $43.90 = $30,728.21

Step 2: Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$85,600.00 30,728.21 $54,871.79

Proof: Cost of Goods Sold 1,250 × ($85,600 ÷ 1,950) = $54,871.79

PROBLEM 6.16A (CONTINUED) b. Average Cost Periodic

Perpetual

Cost of goods sold

$54,871.79

$53,638.89

Ending inventory Cost of goods available for sale

30,728.21 $85,600.00

31,961.11 $85,600.00

The results are different because the perpetual system recalculates (changes) the average unit cost after each purchase where the average cost is calculated only once, at the end of the period, in the periodic system. c. Perpetual: Nov. 20 Accounts Receivable (800 × $95).......................... Sales .............................................................

Periodic: Nov. 20

76,000.00 76,000.00

Cost of Goods Sold .............................................. Inventory .......................................................

34,888.89

Accounts Receivable (800 × $95).......................... Sales .............................................................

76,000.00

Cost of goods available for sale Ending inventory (700 x $43.90) Cost of goods sold

34,888.89

76,000.00

$85,600.00 30,728.21 $54,871.79

Inventory (ending) ............................................................ Cost of Goods Sold .......................................................... Purchases ............................................................. Inventory (beginning) .............................................

30,728.21 54,871.79 81,600.00 4,000.00

LO 2,6 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.1B a.

The goods on consignment belong to Acadia and should not be included in Banff‘s ending inventory.

$2,650 ($2,500 + $150) should be included in inventory as the goods were shipped FOB shipping point on February 21st.

The goods should not be included in inventory as they were shipped FOB shipping point and shipped before February 28. Title to the goods transfers to the customer at shipping. Banff should have recorded the transaction in the Sales and Accounts Receivable accounts and the corresponding Cost of Goods Sold and Inventory accounts for $2,600. Freight charges of $180 are paid by the customer.

Include $1,100 ($2,200 ÷ 2) in inventory as Banff has title to this inventory.

The amount should not be included in inventory as the goods were shipped FOB destination and not received until March 2. The seller still owns the inventory. No entry is recorded. The seller is responsible for the freight costs.

The sale will be recorded on March 3. The goods should be included in inventory at the end of February at their cost of $1,800. The freight is a selling expense recorded to Freight Out for $100.

Include $2,100 in inventory as it has not been sold.

Inventory should be decreased by $800 to record these goods at lower of cost and net realizable value, which is zero.

(Legal title determines if an item should be included in inventory)

PROBLEM 6.1B (CONTINUED) b.

The revised ending inventory is: Unadjusted inventory Adjustments 2. February 19 4. February 23 6. February 26 7. February 27 8. February 28 Adjusted inventory

$161,000 $ 2,650 1,100 1,800 2,100 (800)

6,850 $167,850

LO 1 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.2B a. Cost of Goods Sold

Ending Inventory

Supplier Kawai

Serial # KG1520

Cost/ Unit $ 900

2,100

Suzuki

SZ5716

1,400

1,600

2,400

Steinway

ST0944

2,500

Steinway ST8411

2,900

4,000

Suzuki

SZ6148

1,900

Suzuki

SZ6132

2,100

3,200

Yamaha

YH6318

1,800

2,800

Yamaha

YH5632

1,900

2,900

14,000

20,400

Aug. 10 18 26

Supplier Suzuki

Serial # SZ5828

Cost/ Sales price/ Unit Unit $ $ 1,900 3,000

Kawai

KG1268

1,800

Yamaha

YH4418

Aug.

Gross profit = $20,400 – $14,000 = $6,400

The specific identification formula is likely the most appropriate formula for the Piano Studio Ltd. because the pianos are large dollar value items that are specifically identifiable by serial number.

6,700

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6-3B a.

(1)

FIFO

Date Description May 1 Purchase 6 Purchase

Purchases 110 $190 $20,900 140

220

30,800 110 $190 90 220 $40,700

11 Sale 14 Purchase

Cost of Goods Sold Ending Inventory

230

18,400 50 50

21 Sale 27 Purchase

31 Balance

380

250

220 230 22,500

12,500 $82,600 300

$63,200

110 110 140

$190 $20,900 190 220 51,700

50 50 80

220 220 230

11,000

30 30 50

230 230 250

6,900

29,400

19,400 $19,400

Check: $63,200 + $19,400 = $82,600

PROBLEM 6.3B (CONTINUED) (2) Average Cost Note: Unrounded numbers have been used in the average cost calculations, although the numbers have been rounded to the nearest cent for presentation purposes. Because of this, some amounts may not appear to multiply exactly because of the rounding in the presentation. Date Description

Purchases

May 1 Purchase

110 $190 $20,900

110 $190.00 $20,900.00

6 Purchase

140 220 30,800

250 206.80 51,700.00

11 Sale 14 Purchase

200 $206.80 $41,360.00 80 230 18,400

21 Sale 27 Purchase

Cost of Goods Sold

Ending Inventory

50 206.80 10,340.00 130 221.08 28,740.00

100

221.08

22,107.69

50 250 12,500

31 Balance 380 $82,600 300 Check: $63,467.69 + $19,132.31 = $82,600

30 221.08

6,632.31

80 239.15 19,132.31 $63,467.69

Family Appliance Mart should select the formula that:  corresponds most closely to the physical flow of goods  results in a cost on the statement of financial position that is close to the inventory‘s most recent cost

Because prices are rising, FIFO produces the higher gross profit and net income.

Because the ending inventory is determined using the most recent prices, the FIFO cost formula produces the higher ending inventory.

Cash flow will be the same under both cost formulas.

$19,132.31

LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.4B a.

FIFO

Date Description April 1 Beg. inventory

28 Purchase

Cost of Goods Sold Ending Inventory 50 $230 $11,500 50 230 35 $240 $ 8,400 35 240 19,900 50 $230 5 240 $12,700 30 240 7,200 30 240 40 245 9,800 40 245 17,000 30 240 20 245 12,100 20 245 4,900 20 245 30 250 7,500 30 250 12,400

30 Balance

105

6 Purchase 9 Sale 14 Purchase 20 Sale

Purchases

$25,700 105

Check: $24,800 + $12,400 = $37,200 ($11,500 + $25,700) b. April 9 Accounts Receivable (55 × $350)............... Sales ..................................................

$24,800

$12,400

19,250 19,250

Cost of Goods Sold .................................... Inventory ............................................

12,700

Accounts Receivable (50 × $360)............... Sales ..................................................

18,000

Cost of Goods Sold ................................... Inventory ............................................

12,100

12,700

18,000

When prices are rising, I would expect that, under the average cost formula, the ending inventory would be lower. Under FIFO, the ending inventory consists of the units purchased recently. Under average cost, ending inventory includes some lower cost from goods purchased earlier. I would expect cost of goods sold to be higher under average cost since the average cost would include the cost of more recently purchased goods. Notice that average cost will give higher cost of goods sold while having ending inventory that is lower than under FIFO.

LO 2,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

12,100

PROBLEM 6.5B a.

Date Description

Purchases

Cost of Goods Sold

April 1 Beg. inventory 6 Purchase

50 $230.00 $11,500.00 35 $240 $ 8,400

9 Sale 14 Purchase

Ending Inventory

55 $234.12 $12,876.47 40

245

9,800

20 Sale

28 Purchase

105

250

240.34

12,016.81

7,500 $25,700 105

$24,893.28

85 234.12

19,900.00

30 234.12

7,023.53

70 240.34

16,823.53

20 240.34

4,806.72

50 246.13

12,306.72

$12,306.72

Check: $24,893.28 + $12,306.72 = $37,200 ($11,500 + $25,700)

PROBLEM 6.5B (CONTINUED) b.

It should write-off the rod: April 30

Cost of Goods Sold........................................... 246.13 Inventory ................................................

246.13

Three accounts would be affected—Inventory, Cost of Goods Sold, and Retained Earnings. The Inventory account would be overstated by $246.13. This would result in the statement of financial position sub-totals of current assets and total assets also being overstated. The Cost of Goods Sold account would be understated by $246.13. This would lead to the statement of income sub-totals of gross profit and net income being overstated by $246.13. The Retained Earnings account would also be overstated by $246.13.

LO 2,3 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.6B a. Oct.

No entry required

Inventory (100 × $130) .......................................... Accounts Payable ........................................

13,000

Accounts Receivable ............................................. Sales (120 × $200)........................................

24,000

Cost of Goods Sold ............................................... Inventory [(60 × $140) + (60 × $130)] ...........

16,200

Inventory (35 × $120) ............................................ Accounts Payable .........................................

4,200

Accounts Receivable ............................................. Sales (60 × $160)..........................................

9,600

Cost of Goods Sold ............................................... Inventory [(40 × $130) + (20 × $120)] ...........

7,600

Inventory (15 × $110) ............................................ Accounts Payable ........................................

1,650

13,000

24,000

16,200

4,200

9,600

7,600

1,650

PROBLEM 6.6B (CONTINUED) b. Date Oct. 31

Ending Inventory Unit Units Cost 15 @ $110 15 @ $120 30*

Total Cost $1,650 1,800 $3,450

*60 + 100 – 120 + 35 – 60 + 15 = 30

The inventory should be valued at $3,240. This is the lower of cost and net realizable value. Cost = $3,450.00 (see (b)) NRV = $3,240.00 (30 @ $108)

Cost of Goods Sold ($3,450 - $3,240)................................ Inventory................................................................

210

LO 2,5 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

210

PROBLEM 6.7B 2024

2023

Cash

No effect

Cost of goods sold

Understated

Overstated

Net income

Overstated

Understated

Retained earnings

No effect

Understated

Ending inventory

No effect

Understated

Gross profit margin ratio

Overstated

Understated

Inventory turnover ratio

Overstated*

Overstated

* Although the cost of goods sold is understated in 2024, this is not as significant (in percentage terms) as the understatement in average inventory, which is the denominator in the inventory turnover ratio, so this ratio remains overstated in 2024. LO 4,5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.8B a.

Inventory ............................................................................. Cost of Goods Sold ...............................................

6,000

Inventory .............................................................................. Accounts Payable ..................................................

5,000

6,000

5,000

(INCORRECT) PELLETIER INC. Statement of Income Year Ended July 31

Sales Cost of goods sold Gross profit Operating expenses Income before income tax

2024 $320,000 187,000 133,000 52,000 $ 81,000

2023 $312,000 203,000 109,000 52,000 $ 57,000

2022 $300,000 170,000 130,000 50,000 $ 80,000

Statement of financial position: Inventory Accounts payable

$37,000 21,000

$24,000 8,000

$37,000 17,000

(CORRECT) PELLETIER INC. Statement of Income Year Ended July 31 Sales Cost of goods sold Gross profit

2024 $320,000 193,0004 127,000

2023 $312,000 197,0001 115,000

2022 $300,000 170,000 130,000

Operating expenses Income before income tax

52,000 $ 75,000

52,000 $ 63,000

50,000 $ 80,000

Statement of financial position: Inventory Accounts payable

$37,000 21,000

$35,0002 13,0003

$37,000 17,000

$203,000 - $6,000 + $0* = $197,000 $24,000 + $6,000 + $5,000 = $35,000 3 $8,000 + $5,000 = $13,000 4 $187,000 + $6,000 + $0** = $193,000 2

PROBLEM 6.8B (CONTINUED) b. (Continued) * Purchases understated by $5,000 and inventory understated by $5,000, so nil effect on cost of goods sold. ** Purchases overstated by $5,000 and beginning inventory understated by $5,000, so nil effect on cost of goods sold. c.

Before correction = $81,000 + $57,000 + $80,000 = $218,000 After correction = $75,000 + $63,000 + $80,000 = $218,000

Inventory turnover (INCORRECT)

Inventory turnover (2024)

$187,000 = 6.1 times ($37,000 + $24,000)’2

Inventory turnover (2023)

$203,000 = 6.7 times ($24,000 + $37,000)’2

(CORRECT) Inventory turnover (2024)

$193,000 = 5.4 times ($37,000 + $35,000)’2

Inventory turnover (2023)

$197,000 = 5.5 times ($35,000 + $37,000)’2

LO 4,5 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 6.9B a.

Product A B C

Quantity 25 30 60

Unit Cost $7 6 11

Net Realizable Total Cost Value $ 175 $7 180 8 660 10 $1,015

Total NRV $ 175 240 600 $1,015

March 31 Cost of Goods Sold ................................................... Inventory ...................................................... ($1,015 - $955 = $60)

Lower of Cost and NRV $175 180 600 $955

60 60

FlinFlon‘s operations involve the sale of products whose prices are sensitive to fluctuations. Users expect and appreciate the lower of cost and net realizable value (LCNRV) requirement in accounting because they know that inventory and income are not overstated. Adjustments FlinFlon would need to make by applying the item-by-item approach of the LCNRV would not be minor in amount. The item-by-item is always the more conservative method (that is, lower inventory amount reported) because net realizable values above cost are never included in the calculations. Under these circumstances, FlinFlon should apply the LCNRV rule on an item-by-item basis for its products. One argument in support of all three types of product being considered as part of one inventory grouping is that the accounting values that are reported under LCNRV on an item-by-item basis are not neutral and unbiased measures of income and inventory. Recognizing net realizable values only when they are lower than cost, is an inconsistent treatment that can lead to distortions in reported net income. Another argument can be made on the basis of the cost versus benefit constraint of accounting. Although not appropriate in this case due to the type of inventory, the costs incurred in arriving at the net realizable value on an item-by-item basis may far outweigh the benefit derived by applying LCNRV on an item-by-item basis.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.10B a.

(1) (2) (3)

March 31 April 30 May 31

Tonnes

Total Cost

Total NRV

LCNRV

30,000

$21,750,0001

$22,200,0004

$21,750,000

25,000 28,000

17,875,0002 20,300,0003

17,750,0005 20,300,0006

17,750,000 20,300,000

30,000 x $725 = $21,750,000 25,000 x $715 = $17,875,000 3 28,000 x $725 = $20,300,000 4 30,000x $740 = $22,200,000 5 25,000 x $710 = $17,750,000 6 28,000 x $725 = $20,300,000 2

b. (1)

March 31 No entry

(2)

April 30

(3)

May 31

Cost of Goods Sold ....................................... Inventory ................................................. ($17,875,000 – $17,750,000 = $125,000)

125,000 125,000

No entry

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 6.11B a. (in USD millions) Inventory Turnover

2021 (

)’

(

)’

2020

Days In Inventory

Current Ratio

= 8.7 times

days

times

ays

PepsiCo‘s current ratio deteriorated in 2021 and is below the industry average of 0.9:1. This ratio indicates that the company has not enough current assets to cover its current liabilities. The decrease in the current ratio follows the trend experienced by the industry and may be due to the same economic factors as experienced by other companies in the same industry. PepsiCo‘s inventory turnover has improved and is higher than the industry average in 2021. This trend is opposite to the industry trend which deteriorated from 2020 to 2021. b.

PepsiCo has different types of inventory that likely have different physical flows. For example, drinks with ―best before dates‖ likely flow first-in, firstout, which make the FIFO inventory cost formula an appropriate choice. Other components of inventory, including raw materials such as sugar, may be accounted for on an average cost basis.

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 6.12B a.

Magna‘s inventory turnover outpaces its industry counterparts while Linamar is below the industry standard in this respect. Linamar also has a weaker current ratio compared to its industry counterparts while Magna is under industry average for this measure of liquidity but not as much as Linamar.

While the gross profit margins are identical between Magna and Linamar, their gross profit margins fall well short of the industry average. This could be due in part to the product mix for each company compared to its industry peers. As for profitability, Linamar does a better job than Magna controlling costs as its profit margin is 5.3% higher than Magna‘s. Linamar is above the industry average for profit margin while Magna is significantly below the industry average.

Since inventory is a large component of current assets, a higher inventory turnover as is the case for Magna would normally decrease its current ratio, which does not appear to be case. Linamar experienced the opposite trend as it has a lower inventory turnover than Magna. Linamar should have a higher current ratio, which does not appear to be the case. One can therefore conclude that other factors in the makeup of the current assets and liabilities offset the normal trend which is that the more inventory is kept on hand, the greater the current ratio.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 6.13B a.

Cost Of Goods Available For Sale Date Jan. Feb. May Aug. Dec.

1 20 5 12 8

(1)

FIFO

Explanation Beginning inventory Purchase Purchase Purchase Purchase Total

Step 1: Ending Inventory Date Units Unit Cost Dec. 8 400 22

Step 2: Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

Units 400 1,200 1,000 1,200 600 4,400

Unit Cost $18 19 21 20 22

Total Cost $ 7,200 22,800 21,000 24,000 13,200 $88,200

Total Cost $ 8,800

$88,200 8,800 $79,400

Proof: Cost of Goods Sold

Units 400 1,200 1,000 1,200 200 4,000

Unit Cost $18 19 21 20 22

Total Cost $ 7,200 22,800 21,000 24,000 4,400 $79,400

*PROBLEM 6.13B (CONTINUED) b.

(2)

Average Cost

Step1: Ending Inventory

Units 400

Weighted Average Unit Cost $20.05* =

Total Cost $8,018.18

*$88,200  4,400 = $20.05 Step 2: Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$88,200.00 8,018.18 $80,181.82

Proof: 4,000 × ($88,200 ÷ 4,400) = $80,181.82 LO 6 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 6.14B a. STEWARD INC. Partial Statements of Income

Sales (4,000 × $40) ......................................... Cost of goods sold Beginning inventory ................................. Cost of goods purchased ........................ Cost of goods available for sale .............. Ending inventory ..................................... Cost of goods sold .................................. Gross profit ......................................................

FIFO

Average Cost

$160,000

7,200 81,000 88,200 8,800 79,400 80,600

7,200 81,000 88,200 8,018 80,182 79,818

b. STEWARD INC. Partial Statements of Financial Position

FIFO Assets Current assets Inventory

Average Cost

$8,800 .......................... $8,018

FIFO uses the latest inventory prices to determine the cost of the ending inventory and, therefore, results in the higher amount for ending inventory in periods of rising prices. FIFO results in the lower cost of goods sold and higher net income because FIFO values the cost of goods sold at the earliest and lower prices.

LO 5,6 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPAL cpa-t001 CM: Reporting

*PROBLEM 6.15B a.

(1)

Perpetual

Date Description

Purchases

Cost of Goods Sold

May 1 Beg. inventory 6 Purchases

14 Purchases

15,000 $2.30 $ 34,500 15,000 2.30 40,000 2.35 128,500

40,000 $2.35 $ 94,000

11 Sales 50,000 2.40

120,000

21 Sales 27 Purchases

40,000 2.45

31 Balance

130,000

98,000

Ending Inventory

15,000 $2.30 15,000 2.35 $ 69,750 25,000 25,000 50,000 25,000 2.35 40,000 2.40 154,750 10,000 10,000 40,000

$312,000 95,000‗

$224,500 50,000

2.35 2.35 2.40 2.40 2.40 2.45

58,750 178,750 24,000 122,000 $122,000

Check: $224,500 + $122,000 = $346,500 ($34,500 + $312,000)

(2)

Periodic

Step 1: Ending Inventory Date Units Unit Cost May 14 10,000 $2.40 May 27 40,000 2.45 50,000

Total Cost $ 24,000 98,000 $122,000

Step 2: Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$346,500 122,000 $224,500

*PROBLEM 6.15B (CONTINUED) a. (continued) Proof: Cost of Goods Sold Unit Total Units Cost Cost 15,000 $2.30 $ 34,500 40,000 2.35 94,000 40,000 2.40 96,000 95,000 $224,500 b.

FIFO Cost of goods sold Ending inventory Cost of goods available for sale

Perpetual $224,500 122,000 $346,500

Periodic $224,500 122,000 $346,500

Both the periodic and perpetual systems result in the same ending inventory and cost of goods sold under the FIFO cost formula because the most recently purchased goods remain in inventory. c.

The price per unit information for the sales transactions is not relevant in determining cost of goods sold or the cost of ending inventory as it is the price used per unit in arriving at sales. Cost of goods available for sale Ending inventory (10,000 x $2.40) + (40,000 x $2.45) Cost of goods sold Inventory (ending) ......................................................... Cost of Goods Sold ....................................................... Purchases ........................................................ Inventory (beginning) ........................................

$346,500 122,000 $224,500 122,000 224,500 312,000 34,500

LO 2,6 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 6.16B a.

Average Cost – Perpetual

Date Description

Purchases

Cost of Goods Sold

Oct. 1 Beg. inventory 9 Purchases

50 $240.00 $12,000.00 125 $260 $32,500

15 Sales 20 Purchases

175

254.29 44,500.00

254.29

265.86 25,257.14

14,622.56

265.86 10,634.59

$52,765.41

$10,634.59

150 $254.29 $38,142.86 70 270 18,900

29 Sales 30 Balance

Ending Inventory

55 195

$51,400 205

265.86

6,357.14

Check: $52,765.41 + $10,634.59 = $63,400 ($12,000 + $51,400)

*PROBLEM 6.16B (CONTINUED) a.

(2)

Average Cost – Periodic

Cost of Goods Available for Sale Date Oct.

Explanation Beginning inventory Purchases Purchases

1 9 20

Total

Ending Inventory Date Oct. 31

Unit Total Units Cost Cost 40 $258.78* $10,351.02

Units 50 125 70 245

Unit Cost $240 260 270

Total Cost $12,000 32,500 18,900 $63,400

Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$63,400.00 10,351.02 $53,048.98

$63,400  245 = $258.78

Proof: Cost of Goods Sold 205 × ($63,400  245) = $53,048.98

b. Average Cost Perpetual Periodic Cost of goods sold

$52,765.41

$53,048.98

Ending inventory Cost of goods available for sale

10,634.59 $63,400.00

10,351.02 $63,400.00

The results for the average cost formula differ depending on whether a perpetual or periodic system is used. This is because, using a perpetual system, the average cost is recalculated (changes) after each purchase. In a periodic system, it is calculated only once, at the end of the period.

*PROBLEM 6.16B (CONTINUED) c. Perpetual: Oct. 29 Accounts Receivable (55 × $350).......................... Sales .............................................................

Periodic: Oct. 29

19,250.00 19,250.00

Cost of Goods Sold .............................................. Inventory .......................................................

14,622.56

Accounts Receivable (55 × $350).......................... Sales .............................................................

19,250.00

Cost of goods available for sale Ending inventory (40 x $258.78) Cost of goods sold

14,622.56

19,250.00

$63,400.00 10,351.02 $53,048.98

Inventory (ending) ............................................................ Cost of Goods Sold .......................................................... Inventory (beginning) ............................................. Purchases .............................................................

10,351.02 53,048.98 12,000.00 51,400.00

LO 2,6 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

ACR6.1 a.

Dec.

ACCOUNTING CYCLE REVIEW

Cash ................................................................. Accounts Receivable.................................

315,000

Rent Expense.................................................... Cash..........................................................

14,000

Accounts Payable ............................................. Cash..........................................................

375,000

315,000 14,000

375,000

Accounts Receivable ......................................... 2,121,000 Sales ......................................................... Cost of Goods Sold (4,200 x $278)*.................. 1,167,600 Inventory ................................................... *Dec. 1 balance ÷ Dec. 1 units = $2,780,000 ÷ 10,000 = $278

15 18 21

Inventory (6,000 x $290) ................................... 1,740,000 Accounts Payable ..................................... Salaries Expense .............................................. Cash..........................................................

1,740,000 125,000

Accounts Receivable ........................................ 4,092,000 Sales .........................................................

Advertising Expense ......................................... Cash..........................................................

1,167,600

125,000

Cost of Goods Sold ........................................... 2,250,400 Inventory (5,800* x $278) + (2,200** x $290) * remaining units (10,000 – 4,200 Dec. 6) ** additional (8,000 – 5,800 = 2,200) 24

2,121,000

4,092,000 2,250,400

32,000

Inventory (5,000x $300) .................................... 1,500,000 Accounts Payable .....................................

32,000 1,500,000

b. Part (b) is combined with part (d).

ACR6.1 (CONTINUED) c. RETRO PRODUCTIONS LIMITED Unadjusted Trial Balance December 31, 2024 Debit Cash Accounts receivable Inventory Supplies Prepaid rent Equipment Accumulated depreciation—equipment Accounts payable Deferred revenue Bank loan payable—non-current Common shares Retained earnings Dividends declared Sales Cost of goods sold Advertising expense Freight out Office expense Rent expense Salaries expense Utilities expense Interest expense Income tax expense

Credit

$ 190,100 7,288,000 2,602,000 39,000 14,000 1,350,000 $ 35,625 4,095,000 96,000 1,240,000 600,000 1,239,275 120,000 22,670,200 12,592,000 437,000 980,000 78,000 168,000 3,607,000 61,000 70,000 380,000 $29,976,100

$29,976,100

ACR6.1 (CONTINUED) d. Adjusting journal entries (AJE) Dec.

31 31

Utilities Expense................................................ Accounts Payable .....................................

6,000

Salaries Expense .............................................. Salaries Payable .......................................

140,000

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

6,200

Depreciation Expense ....................................... Accumulated Depreciation—Equipment.... ($1,350,000 ÷ 8 = $168,750)

168,750

6,000

140,000 6,200

168,750

Cost of Goods Sold ........................................... 6,000 Inventory ($2,602,000* - $2,596,000)........ * Refer to Inventory T account below part (b) and (d) Cost of Goods Sold ........................................... Inventory ...................................................

2,000

Income Tax Expense ........................................ Income Tax Payable .................................

112,000

6,000

2,000

112,000

ACR6.1 (CONTINUED) b. and d. AJE = Adjusting Journal Entry Cash Nov. 30 Bal. 421,100 Dec. 1 14,000 Dec. 1 315,000 Dec. 4 375,000 Dec. 18 125,000 Dec. 24 32,000 Dec. 31 Bal. 190,100

Nov. 30 Bal. Dec. 6 Dec. 21 Dec. 31 Bal.

Nov. 30 Bal. Dec. 15 Dec. 27 Unadj. Bal.

Dec. 31 Bal.

Accounts Receivable 1,390,000 Dec. 1 2,121,000 4,092,000 7,288,000 Inventory 2,780,000 Dec. 6 1,740,000 Dec. 21 1,500,000 2,602,000 Dec. 31 AJE Dec. 31 AJE 2,594,000

Nov. 30 Bal. Dec. 31 Bal.

Supplies 39,000 39,000

Nov. 30 Bal. Dec. 31 Bal.

Prepaid Rent 14,000 14,000

Nov. 30 Bal. Dec. 31 Bal.

Equipment 1,350,000 1,350,000

315,000

1,167,600 2,250,400

6,000 2,000

Accumulated Depreciation-Equipment Nov. 30 Bal. 35,625 Unadj. Bal. 35,625 Dec. 31 AJE 168,750 Dec. 31 Bal. 204,375

Dec. 4

Accounts Payable 375,000 Nov. 30 Bal. Dec. 15 Dec. 27 Unadj. Bal. Dec. 31 AJE Dec. 31 Bal.

1,230,000 1,740,000 1,500,000 4,095,000 6,000 4,101,000

Income Tax Payable Nov. 30 Bal. Unadj. Bal. Dec. 31 AJE Dec. 31 Bal.

0 0 112,000 112,000

Interest Payable Nov. 30 Bal. Unadj. Bal. Dec. 31 AJE Dec. 31 Bal.

0 0 6,200 6,200

Salaries Payable Nov. 30 Bal. Unadj. Bal. Dec. 31 AJE Dec. 31 Bal.

0 0 140,000 140,000

ACR6.1 (CONTINUED) b. and d. (continued)

Nov. 30 Bal. Dec. 31 Bal.

Deferred Revenue Nov. 30 Bal. Dec. 31 Bal.

96,000 96,000

Bank Loan Payable Nov. 30 Bal. Dec. 31 Bal.

1,240,000 1,240,000

Common Shares Nov. 30 Bal. Dec. 31 Bal.

600,000 600,000

Retained Earnings Nov. 30 Bal. Dec. 31 Bal.

1,239,275 1,239,275

Dividends Declared 120,000 120,000 Sales Nov. 30 Bal. Dec. 6 Dec. 21 Dec. 31 Bal.

16,457,200 2,121,000 4,092,000 22,670,200

Nov. 30 Bal. Dec. 6 Dec. 21 Unadj. Bal. Dec. 31AJE Dec. 31AJE Dec. 31 Bal.

Cost of Goods Sold 9,174,000 1,167,600 2,250,400 12,592,000 6,000 2,000 12,600,000

Nov. 30 Bal. Dec. 24 Dec. 31 Bal.

Advertising Expense 405,000 32,000 437,000

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Depreciation Expense 0 0 168,750 168,750

Nov. 30 Bal. Dec. 31 Bal.

Freight Out 980,000 980,000

Nov. 30 Bal. Dec. 31 Bal.

Office Expense 78,000 78,000

Nov. 30 Bal. Dec. 1 Dec. 31 Bal.

Rent Expense 154,000 14,000 168,000

ACR6.1 (CONTINUED) b. and d. (continued)

Nov. 30 Bal. Dec. 18 Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Salaries Expense 3,482,000 125,000 3,607,000 140,000 3,747,000

Utilities Expense 61,000 61,000 6,000 67,000

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Interest Expense 70,000 70,000 6,200 76,200

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Income Tax Expense 380,000 380,000 112,000 492,000

ACR6.1 (CONTINUED) e. RETRO PRODUCTIONS LIMITED Adjusted Trial Balance December 31, 2024 Debit Cash Accounts receivable Inventory Supplies Prepaid rent Equipment Accumulated depreciation—equipment Accounts payable Income tax payable Interest payable Salaries payable Deferred revenue Bank loan payable—non-current Common shares Retained earnings Dividends declared Sales Cost of goods sold Advertising expense Depreciation expense Freight out Office expense Rent expense Salaries expense Utilities expense Interest expense Income tax expense

Credit

$ 190,100 7,288,000 2,594,000 39,000 14,000 1,350,000 $ 204,375 4,101,000 112,000 6,200 140,000 96,000 1,240,000 600,000 1,239,275 120,000 22,670,200 12,600,000 437,000 168,750 980,000 78,000 168,000 3,747,000 67,000 76,200 _ 492,000 $30,409,050

___ $30,409,050

ACR6.1 (CONTINUED) f. (1) RETRO PRODUCTIONS LIMITED Statement of Income Year Ended December 31, 2024 Sales Cost of goods sold Gross profit Operating expenses Salaries expense Freight out Advertising expense Depreciation expense Rent expense Office expense Utilities expense Total operating expenses Income from operations Other expenses Interest expense Income before income tax Income tax expense Net income

$22,670,200 12,600,000 10,070,200 $3,747,000 980,000 437,000 168,750 168,000 78,000 67,000 5,645,750 4,424,450 76,200 4,348,250 492,000 $3,856,250

ACR6.1 (CONTINUED) f. (2) RETRO PRODUCTIONS LIMITED Statement of Changes in Equity Year Ended December 31, 2024

Balance, January 1 Net income 0000 000 Dividends declared Balance, December 31

Common Shares $600,000 0000 000 $600,000

Retained Earnings $1,239,275 3,856,250 (120,000) $4,975,525

Total Equity $1,839,275 3,856,250 (120,000) $5,575,525

ACR6.1 (CONTINUED) f. (3) RETRO PRODUCTIONS LIMITED Statement of Financial Position December 31, 2024 Assets Current assets Cash Accounts receivable Inventory Supplies Prepaid rent Total current assets Property, plant and equipment Equipment $1,350,000 Less: Accumulated depreciation 204,375 Total assets Liabilities and Shareholders‘ Equity Current Liabilities Accounts payable Salaries payable Income tax payable Interest payable Deferred revenue Total current liabilities Bank loan payable Total Liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

190,100 7,288,000 2,594,000 39,000 14,000 10,125,100

1,145,625 $11,270,725

$ 4,101,000 140,000 112,000 6,200 96,000 4,455,200 1,240,000 5,695,200 $ 600,000 4,975,525 5,575,525 $11,270,725

ACR6.1 (CONTINUED) g.

Closing entries (CE) Dec.

Sales ................................................................. Income Summary ...................................

22,670,200

Income Summary .............................................. Cost of Goods Sold ................................... Advertising Expense ................................. Depreciation Expense ............................... Freight Out ................................................ Office Expense .......................................... Rent Expense............................................ Salaries Expense ...................................... Utilities Expense........................................ Interest Expense ....................................... Income Tax Expense ................................

18,813,950

Income Summary .............................................. Retained Earnings.....................................

3,856,250

Retained Earnings............................................. Dividends Declared ...................................

120,000

22,670,200

12,600,000 437,000 168,750 980,000 78,000 168,000 3,747,000 67,000 76,200 492,000

3,856,250

120,000

Sales

ACR6.1 (CONTINUED) CE = Closing Entry

Dec. 31 CE

Nov. 30 Bal. Dec. 31 Bal.

Dec. 31 CE Dec. 31 CE

Retained Earnings Nov. 30 Bal. Dec. 31 Bal. 120,000 Dec. 31 CE Dec. 31 Bal. Dividends Declared 120,000 Dec. 31 CE Income Summary 18,813,950 Dec. 31 CE 3,856,250 Dec. 31 Bal. Dec. 31

Dec. 31 1,239,275 CE 1,239,275 3,856,250 4,975,525

22,670,200

Nov. 30 Bal. Dec. 6 Dec. 21

16,457,200 2,121,000 4,092,000

Dec. 31 Bal. Dec. 31

22,670,200 -

Cost of Goods Sold Nov. 30 Bal. 9,174,000 Dec. 6 1,167,600 120,000 Dec. 21 2,250,400 Unadj. Bal. 12,592,000 Dec. 31AJE 8,000 Dec. 31 Bal. 12,600,000 Dec. 31 CE 12,600,000 22,670,200 3,856,250 Advertising Expense Nov. 30 Bal. 405,000 Dec. 24 Dec. 31 Bal.

32,000 437,000 Dec. 31 CE

437,000

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Depreciation Expense 168,750 168,750 Dec. 31 CE

168,750

Nov. 30 Bal. Dec. 31 Bal.

Freight Out 980,000 980,000 Dec. 31 CE

980,000

Nov. 30 Bal. Dec. 31 Bal.

Office Expense 78,000 78,000 Dec. 31 CE

78,000

Nov. 30 Bal. Dec. 1 Dec. 31 Bal.

Rent Expense 154,000 14,000 168,000 Dec. 31 CE

168,000

ACR6.1 (CONTINUED) Salaries Expense Nov. 30 Bal. Dec. 18 Unadj. Bal. Dec. 31 AJE Dec. 31 Bal.

3,482,000 125,000 3,607,000 140,000 Dec. 31 3,747,00 3,747,000 CE 0 Utilities Expense

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

61,000 61,000 6,000 Dec. 31 67,000 CE

67,000

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Interest Expense 70,000 70,000 6,200 76,200 Dec. 31 CE

76,200

Nov. 30 Bal. Unadj. Bal. Dec. 31AJE Dec. 31 Bal.

Income Tax Expense 380,000 380,000 112,000 492,000 Dec. 31 CE

492,000

ACR6.1 (CONTINUED) h. RETRO PRODUCTIONS LIMITED Post-Closing Trial Balance December 31, 2024 Debit Cash Accounts receivable Inventory Supplies Prepaid rent Equipment Accumulated depreciation—equipment Accounts payable Income tax payable Interest payable Salaries payable Deferred revenue Bank loan payable—non-current Common shares Retained earnings

Credit

$ 190,100 7,288,000 2,594,000 39,000 14,000 1,350,000

__________ $11,475,100

$ 204,375 4,101,000 112,000 6,200 140,000 96,000 1,240,000 600,000 4,975,525 $11,475,100

LO 2 BT: AN Difficulty: M Time: 100 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT6.1

FINANCIAL STATEMENT IMPACT Cost of Goods Sold

Gross Profit

Change from average cost to FIFO when inventory costs are rising

Record the effect of inventory theft Write-down inventory to its net realizable value Change from average cost to FIFO when inventory costs are falling

Event

Inventory

Retained Earnings

Current Ratio

LO 3,5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT6.2

FINANCIAL STATEMENT IMPACT

Event Counting inventory twice at the end of the year and including this error in the count results that are used to adjust inventory to the count results Failing to record or count inventory in transit, purchased with FOB shipping point terms.

Cost of Goods Sold

Gross Profit

Inventory

Accounts Retained Payable Earnings

LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT6.3

FINANCIAL REPORTING CASE

(Note: All amounts are in thousands) a.

Inventories were $247,988 at January 31, 2022 and $226,962 at January 31, 2021.

(As at January 31)

Inventory

2021 $247,988

2020 $226,962

Current assets

403,358

396,860

Inventory as a % of current assets

61.5%

57.2%

Increase $21,026

As a Percentage 9.3%

Inventory has increased between January 31 2021 and 2022. There was also an increase in inventory as a percentage of current assets. c.

When choosing the average cost formula for inventory in the warehouse and FIFO cost formula for food, North West, whose product is interchangeable, considered the following guidelines: 1.

Choose a formula that corresponds as closely as possible to the physical flow of goods.

Report an inventory cost on the statement of financial position that is close to the inventory‘s recent cost.

Use the same formula for all inventories having a similar nature and usage in the company.

Due to the nature of the product sold, particularly the food items, which often have best before dates, North West would normally want to sell the oldest items in inventory first, so using FIFO cost formula for food makes sense. In terms of the other items it sells which include appliances and household items, the average cost formula is the best choice in terms of meeting the above guidelines.

CT6.3 (CONTINUED) d.

As described in note 6, North West wrote down its inventory to net realizable value in both fiscal years ending January 31, 2022 and 2021. The journal entry for fiscal 2022 in thousands of dollars was as follows: Cost of Goods Sold ..................................................... Inventory ........................................................

2,929

The amount of the write down in 2021 of $1,645 thousand was lower than in 2022. e.

As described in note 6, there were no reversals in the 2022 or the 2021 fiscal years of inventory write-downs previously recorded.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance

2,929

CT6.4

FINANCIAL REPORTING CASE

Current ratio

North West (in thousands)

Sobeys (in millions)

$403,358 = 1.4 : 1 $294,490

$3,185.8 = 0.8 : 1 $4,153.3

b. North West (in thousan ds)

Inventory turnover

Days in inventory

Sobeys (in millions)

$1,511,045 ($247,988 + $226,962) ’ 2

$22,502.7 ($1,591.5 + $1,500.1) ’ 2

= 6.4 times

= 14.6 times

365 = 5 days 6.4 times

365 = 25 days 14.6 times

North West has the better current ratio of the two companies but both companies are below the industry average. On the other hand, because Sobey‘s inventory is mostly food, it has an inventory turnover of more than twice that of North West, which also sells non-food merchandise, which moves more slowly. North West also sells much of its food in sites in the far North, so inventory would be in transit longer than would be the case for Sobeys. The industry average falls between these two companies.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT6.5 a.

FINANCIAL ANALYSIS CASE

There are no significant differences in the accounting standards relating to the management of inventory for ASPE and IFRS. Although not discussed in this introductory course, analysts should be aware that there are differences in the standards when accounting for specific types of inventory. Examples of types of inventory which do have differences are construction in progress and biological assets at the point of harvest.

Yes, the use of the two different inventory systems could affect the comparison of the financial statements of each company. For example, when the perpetual inventory system is used, any costs related to inventory shrinkage are identified. The company can then record the shrinkage in cost of goods sold as is normally done but, if the amount is significant, a company could record the shrinkage in a separate account. With the periodic system, these costs are not separately identified and would ultimately be buried in cost of goods sold when the inventory count is performed. The use of the FIFO cost formula, used by Global Lumber, will not result in any financial differences between a periodic and perpetual inventory system. The use of the average cost formula, used by Gibson Lumber, will normally result in different financial results between a periodic and perpetual inventory system because the average unit cost is determined only at the end of a period in the periodic system compared to continually adjusting it in a perpetual inventory system. That said, these differences are likely minor if costs are changing by small amounts.

CT6.5 (CONTINUED) c.

Yes, the use of the different cost formulas would affect the comparison of the financial statements. This effect is greater in periods where inventory costs are changing. Global Lumber measures its inventory using the FIFO cost formula and therefore its inventory is valued at the most current price. Gibson uses the average cost formula and therefore its inventory is valued at the average cost of all inventory purchased or produced during the period. Therefore, in a period of rising (or declining) prices Global Lumber's would be recorded at a higher (or lower) per unit value than that of Gibson.

LO 1,2,3,6 BT: E Difficulty: C Time: 40 min. AACSB: Reflec. Thinking CPA: cpa-t001 CM: Reporting

CT6.6 a.

PROFESSIONAL JUDGEMENT CASE

The cost of goods available for sale in December can be calculated as follows (notice that the goods in transit are not included as title has not yet passed because terms were FOB destination):

December 1 – purchase from DDI Second purchase Third purchase

Doors

Cost

Total

2,600 800 600 4,000

310 240 190

$ 806,000 192,000 114,000 $1,112,000

The cost of ending inventory at the end at December 31 can be calculated as follows: The average cost, or carrying amount, of a door is $1,112,000 ÷ 4,000 = $278 per door. The number of units in ending inventory is the 800 doors counted. The 100 doors in transit should not be included in inventory because title did not pass while in transit. Title passes at destination and the doors have not yet reached their destination. Consequently, ending inventory is 800  $278 = $222,400.

Because there is an error in the ending inventory balance, the Inventory account will have to be adjusted along with a corresponding adjustment to Cost of Goods Sold. The error can be calculated as follows: Inventory balance per Kevin 900 × $310 Inventory correct balance (see above) Difference

$279,000 222,400 $ 56,600

As this will directly affect operating income for the month of December, Kevin‘s bonus should be reduced by $5,660 (10% of $56,600).

CT6.6 (CONTINUED) d.

The error in ending inventory has an impact on the bank loan. The loan limit is 80% of the carrying amount of inventory. Since the correct inventory balance is $222,400 and 80% of this amount is $177,920, that is the maximum loan balance that the bank will now allow. Since the loan outstanding is currently at $200,000, the bank will want ABS to pay down the loan by $22,080 ($200,000 − $177,920). Had Kevin‘s amounts for ending inventory been used, there would have been enough security for the loan.

Kevin‘s actions may be considered unethical for two major reasons. First of all, he apparently increased the number of doors in ending inventory by the 100 doors that were in transit even though title had not passed. Secondly, he did not apply the average cost formula appropriately. It is also interesting to note that the motivation for doing this was probably to maximize his bonus, but it could also have been done to maintain the level of current funding from the bank. One can also wonder why ABS purchased the inventory when it acquired DDI at an average cost per door of $310 when the cost of doors appeared to be falling dramatically.

If the selling price, which is the net realizable value of a door, fell to $240 each, then the carrying amount of $278 each would be higher. Since inventory is valued at the lower of cost or net realizable value, the amount per door should be reduced from $278 to $240 each, representing a write-down of 800  ($278 − $240) = $30,400. Cost of goods sold will be increased by $30,400 and this will decrease gross profit by the same amount. This would further reduce Kevin‘s bonus by $3,040 and would mean that the bank loan balance would also have to be reduced by $24,320 (80%  $30,400).

LO 4,5 BT: E Difficulty: M Time: 45 min. AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001, cpa-e003 CM: Reporting, Ethics, and Comm.

CT6.7 a.

ETHICS CASE

Specific Identification (1) Maximize Gross Profit

(2) Minimize

Gross Profit Sales ................................................................. Cost of goods sold ............................................ Gross profit ....................................................... 1

$561,0001 2 366,100 $194,900

―$561,0001 3 366,800 ―$194,200

Sales = (170  $800) + (500  $850) = $561,000

Goods Available for Sale Date Units Cost Mar. 1 140 $500 3 200 540 10 340 570

Total $ 70,000 108,000 193,800 $371,800

Specific Identification–Maximize gross profit (minimize cost of sales by deciding to sell the handbags purchased at the lowest cost)

Cost of Goods Sold Ending Inventory Date Units Mar. 5 140 30 25 170 330

Cost 0$500 ,,,,540 …540 570

Total $ 70,000 16,200 91,800 188,100 2 $366,100

Date Mar. 25

Units 10

Cost $570

Total $5,700

CT6.7 (CONTINUED) Specific Identification–Minimize gross profit (maximize cost of sales by selling the handbags purchased at the highest cost) Cost of Goods Sold Date Units Mar. 5 170 25 340 30 130

Cost ,,$540 570 540 500

Total $ 91,800 193,800 16,200 65,000 3 $366,800

Date Mar. 1

Ending Inventory Units Cost 10 $500

The stakeholders are the shareholders, customers, and staff of Swag Bags. There is not really anything unethical in selecting which handbag to sell, unless it is done solely on a desire to manipulate profits.

Average Cost Sales ................................................................. Cost of goods sold ............................................ Gross profit .......................................................

March 1 Beginning inventory 3 Purchase 5 Sale 10 Purchase 25 Sale 31 Balance 4

140 200 340 (170) 170 340 510 (500) 10

$561,000 366,255 4 $194,745

$500.00 540.00 523.53 523.53 523.53 570.00 554.51 554.51

$ 70,000 108,000 178,000 (89,000) 89,000 193,800 282,800 (277,255) $ 5,545

Cost of Goods Sold = (170 × $523.53) + (500 × $554.51) = $366,255

Total $5,000

CT6.7 (CONTINUED) d.

Swag Bags should select the average cost method, given that the inventory is homogeneous and not individually distinguishable. The specific identification formula is not a permissible choice for the company, given the type and physical flow of inventory it carried. The average cost formula also has the advantage of not being subject to manipulation.

LO 2,3 BT: AN Difficulty: M Time: 45 min. AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001, cpa-e003 CM: Reporting, Ethics, and Comm.

CT6.8

PROFESSIONAL JUDGEMENT CASE

Internal control measures should be in place to help ensure:  All goods received are placed into inventory and the perpetual record is updated promptly to ensure that items are not taken by the receiving clerk  Put control tags on each inventory item so that customers do not leave the store without paying for them  Have staff watch for suspicious conduct by customers or other staff members  Establish clear policies concerning the handling on inventory and monitor the adherence to these policies by staff members  Have small merchandise in locked display cases that can be accessed only by staff. For larger items such as laptops, use locking devises so that they cannot be stolen

The inventory should be counted more frequently than once a year, particularly for high-end products. Through visual inspection and counting of items on hand when compared to the perpetual record, one can quickly establish if there are issues concerning the accuracy of the perpetual record or if theft and pilferage is occurring. If there is high activity (purchase and/or sale) of a particular product, a sample count of that product can be done as frequently as deemed reasonable and prudent to establish proper internal control over the inventory. Assuming the physical count is less than the balance on the books, the loss would increase the Cost of Goods Sold account on the statement of income and decrease the Inventory account on the statement of financial position. The opposite would be true if there proved to be an overage established by the inventory count. The adjusting entry would affect net income and Retained Earnings.

CT6.8 (CONTINUED) c.

The tablets and laptops are unique and identifiable through their serial number. Specific identification formula of costing inventory is recommended for this type of inventory. Using this formula will better track the items on an individual basis, helping narrow down errors in recording or pinpointing the pilferage of specific inventory items. This formula will also allow for better management of the selling price of items and the tracking of gross profit on the sale of specific items. For items that are of lesser value and interchangeable, such as the cases and bags, FIFO or average cost would be a better choice, as there is no need to have as stringent control over these less expensive items.

LO 1,2 BT: E Difficulty: C Time: 35 min. AACSB: Communication CPA: cpa-t001, cpa-e003 CM: Reporting and Comm.

CT6.9

DATA ANALYSIS CASE

External, non-financial data could include: weather patterns and holidays to detect customer needs to reduce unnecessary inventory and figure out when demand is highest. Analysis of purchasing patterns of online customer purchases can lead to suggestions of related, complementary products to stimulate sales volume. Analysis of the performance of manufacturing components can help predict product breakdowns, so that manufacturers keep the right parts on hand and in the right quantities.

Weather patterns and sea conditions can cause inventory shortages or oversupply, which in turn impact the selling price of inventory. Due to the perishability of seafood products, the forces of supply and demand will dictate what the market is willing to pay for inventory on hand. Consequently, when weather patterns and sea conditions are good for fishing, companies like Clearwater Seafoods would reduce purchases of seafood in order to maximize profits.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Reflec. Thinking CPA: cpa-t001 CM: Reporting

CT6.10

DATA ANALYSIS CASE

Toronto Hoodies – on a per unit basis this is the only product that generates a gross profit per unit that exceeds $30.

Toronto T-shirts – increasing the price of a Toronto hoodie to the comparable price in Montreal, would increase the price from $62 to $65, an increase of $3 per hoodie. Doing the same with a Toronto T-shirt will increase the price from $20 to $28, an increase of $8. Therefore, if we can only increase the price of one item, it should be the T-shirt price. But this decision must also consider volume. Currently Toronto‘s hoodie sales are $62,000 and if each hoodie sells for $62, that store has sold 1,000 hoodies during the year. Its T-shirt sales are $108,000 and at a price of $20 each, this means the store has sold 5,400 T-shirts this year. So, a price increase on a T-shirt will not only increase the per unit gross profit by $8 (compared to $3 for a hoodie), it will also affect the sale of 5,400 units (compared to 1,000 for hoodies).

Toronto T-shirts – By comparing the cost of goods sold to the average inventory we can see that this product has the highest inventory turnover which means that it is most likely to be in short supply or hard to obtain.

Montreal hoodies – this is the opposite situation that we saw in (c) above. Montreal has a large supply of hoodie inventory on hand relative to the cost of goods sold for this product and this may be an indication that this store is carrying more inventory than it needs.

CT6.11

SERIAL CASE

Purchases

Date Units

Cost

Aug. 4

10 $550.00

Cost of Goods Sold Total

6 10

550.00

9 10

550.00

8 20

539.00

7 50

Cost

Total

$550.00

$5,500.00

550.00

2,200.00

550.00

7,700.00

550.00

2,750.00

550.00

8,250.00

550.00

3,850.00

550.00

539.00

14,630.00

3,850.00

539.00

10,780.00

$16,500.00

3,300.00

550.00

4,950.00

550.00

4,400.00

10,780.00

27 Total

Units

5,500.00

27 Nov. 3

Total

5,500.00

28 Oct. 4

Cost

$5,500.00

14 Sept. 1

Units

$27,280.00

550.00

Balance

$10,780.00

CT6.11 (CONTINUED) b. Aug.

4 14

14 25 Sept.

1 28

29 Oct.

4 27

Inventory (10 × $550) ............................................ Accounts Payable .........................................

5,500.00

Cash (6 × $995) .................................................... Sales .............................................................

5,970.00

Cost of Goods Sold (6 × $550) .............................. Inventory .......................................................

3,300.00

Accounts Payable .................................................. Cash .............................................................

5,500.00

Inventory (10 × $550) ........................................... Accounts Payable .........................................

5,500.00

Cash (9 × $995) .................................................... Sales .............................................................

8,955.00

Cost of Goods Sold (9 × $550) .............................. Inventory .......................................................

4,950.00

Accounts Payable .................................................. Cash ............................................................

5,500.00

Inventory (10 × $550) ........................................... Accounts Payable .........................................

5,500.00

Cash (8 × $995)..................................................... Sales .............................................................

7,960.00

Cost of Goods Sold (8 × $550) .............................. Inventory .......................................................

4,400.00

Accounts Payable .................................................. Cash .............................................................

5,550.00

5,500.00 5,970.00

3,300.00 5,500.00 5,500.00 8,955.00 4,950.00 5,500.00 5,500.00 7,960.00 4,400.00 5,550.00

CT6.11 (CONTINUED) b. (continued) Nov.

3 27

Inventory (20 × $539) ........................................... Accounts Payable .........................................

10,780.00

Cash (7 × $995) .................................................... Sales .............................................................

6,965.00

Cost of Goods Sold (7 × $550) .............................. Inventory .......................................................

3,850.00

10,780.00 6,965.00 3,850.00

c. Time Management Software Inventory – Average Cost Purchases Cost of Goods Sold

Balance

Units

Cost

Total

Cost

$550.00

$5,500.00

2023 Date Aug. 4 14 Sept. 1

6 10

550.00

9 10

550.00

8 20

539.00

7 50

3,300.00

550.00

4,950.00

550.00

4,400.00

10,780.00

27 Total

550.00

Total

5,500.00

27 Nov. 3

Cost

5,500.00

28 Oct. 4

Units

$27,280.00

541.85

3,792.95 $16,442.954

Units

Total

$550.00 $5,500.00

550.00

2,200.00

550.00

7,700.00

550.00

2,750.00

550.00

8,250.00

550.00

3,850.00

541.85 14,630.00

541.85

10,837.05

20 541.85

$10,837.05

CT6.11 (CONTINUED) d. Aug.

Sept.

Oct.

Inventory (10 × $550) ............................................ Accounts Payable .........................................

5,550.00

Cash ($995 x 6) ..................................................... Sales .............................................................

5,970.00

Cost of Goods Sold (6 × $550) .............................. Inventory .......................................................

3,300.00

Accounts Payable .................................................. Cash .............................................................

5,500.00

Inventory (10 × $550) ........................................... Accounts Payable .........................................

5,500.00

Cash (9 × $995) .................................................... Sales .............................................................

8,955.00

Cost of Goods Sold (9 × $550) .............................. Inventory .......................................................

4,950.00

Accounts Payable .................................................. Cash .............................................................

5,500.00

Inventory (10 × $550) ........................................... Accounts Payable .........................................

5,500.00

Cash (8 × $995)..................................................... Sales .............................................................

7,960.00

Cost of Goods Sold (8 × $550.00) ......................... Inventory .......................................................

4,400.00

5,550.00

5,970.00

3,300.00

5,500.00

8,955.00

4,950.00

5,500.00

7,960.00

4,400.00

CT6.11 (CONTINUED) d. (continued) Oct.

Nov.

Accounts Payable .................................................. Cash .............................................................

5,500.00

Inventory (20 × $539) ........................................... Accounts Payable .........................................

10,780.00

Cash (7 × $995)..................................................... Sales .............................................................

6,965.00

Cost of Goods Sold (7 × $541.85) ......................... Inventory .......................................................

3,792.95

5,500.00

10,780.00

6,965.00

3,792.95

Sales Cost of goods sold Gross profit

FIFO $29,850 16,500 13,350

Gross profit margin

44.7%

(1)

Average Cost $29,850 16,443 13,407 44.9%

Sales = $5,970 + $8,955 + $7,960 + $6,965 = $29,850

CT6.11 (CONTINUED) f.

Emily should consider:  Whether the goods are interchangeable or not, or whether they are produced or segregated for specific projects;  Whether the formula corresponds most closely to the physical flow of goods;  Whether the formula reports inventory on the statement of financial position at an amount close to the inventory‘s most recent cost; and  Whether the formula is used for other inventories with a similar nature and usage. For Emily, the inventory of time management software consists of goods that are interchangeable. As such, ABC cannot use specific identification. The nature of the items is not subject to a particular flow of goods or deterioration over time. Under the FIFO cost formula, the cost of the ending inventory is determined using the most recent costs and is closer to replacement cost. However, since the software is identical and there is no issue of obsolescence, the average cost formula may better suit this type of inventory. In addition, it is the same method used for ABC‘s other inventories, LO 2,3 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA CM: Reporting

Legal Notice

CHAPTER 7 INTERNAL CONTROL AND CASH LEARNING OBJECTIVES 1. Explain the components of a good internal control system, including its limitations. 2. Apply key control activities to cash receipts and payments. 3. Prepare a bank reconciliation. 4. Explain the reporting and management of cash.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO 1.

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO

11.

16.

2,3

21.

12.

17.

2,3

22.

13.

18.

23.

1 1

14.

19.

24.

10.

15.

20.

Brief Exercises 1.

1,2

10.

13.

1,2

11.

14.

12.

Exercises 1.

1,2

10.

11.

1,2

Problems: Set A and B 1.

1,2

10.

1,2

11.

Accounting Cycle Review 1.

Cases 1.

Legend: The following abbreviations will appear throughout the solutions manual file.

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

The five primary components of a good internal control system include the control environment, risk assessment, control activities, information and communication, and monitoring. A control environment encourages integrity and a high standard of ethical behaviour. Risk assessment involves identification and management of key business risks. Control activities are policies and procedures to help mitigate the business risks. Information and communication ensure that the internal control system captures and communicates the appropriate information to internal and external users. Monitoring the internal control system for its adequacy is a recurring process.

LO 1 BT: C Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

The three main factors that can contribute to employee fraud include: opportunity, pressure, and rationalization. When divisions of duties are not ideal for an internal control standpoint, there is often a situation where an opportunity to defraud a company becomes present. An example would be where purchase invoices are not matched to receiving reports and authorized purchase orders. In this example, unauthorized purchases for goods obtained for personal use could take place without detection. The second factor is pressure experienced by the perpetrator of the fraud. The employee feels motivated to steal cash or assets because they are experiencing personal financial difficulties and feel that fraud may solve their immediate financial problems. The third factor is rationalization where the perpetrator is excusing their behaviour on the basis that they are somehow justified in their actions to defraud the employer. An employee might feel they are underpaid while the employer is making lots of money. Employees perpetrating fraud excuse their behaviour with this rationalization.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

When designing and explaining to all employees the system of internal control of the company, management must be clear as to their expectations concerning what actions all employees must take and the consequences of not following management‘s policies and procedures. Those individuals in top management must set the correct tone by strictly adhering to the company policies and procedures and providing a consistent example and message to all employees. This conformance will demonstrate commitment on the part of management to the importance of the internal control system and environment for all concerned and the pledge to administer consequences to anyone not following their lead.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The five control activities that apply to most companies are assignment of responsibility, segregation of duties, documentation, physical controls, and review and reconciliation.

LO 1 BT: K Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

Documentation procedures contribute to good internal control by providing evidence of the occurrence of transactions and events and, when signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to the accounting department contributes to recording transactions in the proper period, and the pre-numbering of documents helps to ensure that a transaction is recorded only once.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Independent review and reconciliation by internal auditors is necessary because employees can forget, or intentionally fail to follow internal controls, or they might become careless if there is no one to observe and evaluate their performance. Segregating the physical custody of assets from accounting record keeping is not enough to ensure that nothing has been stolen or recorded incorrectly. A performance review still needs to be done to ensure these controls are working effectively.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t004 CM: Reporting and Audit

External auditors are required to be independent of the organization they audit. This independence provides the reassurance needed by external users and owners of the organization about the financial condition and performance of the business depicted in the financial statements. Independence provides the proper environment to arrive at appropriate accounting and disclosure conclusions, particularly when judgement is involved. Internal auditors are not independent of the organization as they are employees of the organization. Their role is to assist management in their responsibility to provide a proper internal control system and environment.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t004 CM: Reporting and Audit

A company‘s system of internal control can only give reasonable assurance that assets are properly safeguarded and that accounting records are reliable because the cost of a perfect system outweighs its benefits. For example, if a company wanted flawless accounting records, they could double the number of accountants on staff and have the new accountants check all of the work that was done by experienced accountants but the benefit of this is outweighed by the costs. Absolute assurance is too costly. Furthermore, even if cost was not a factor, human error and collusion cannot be eliminated.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

A company might want to use a data analytics tool to review all journal entries that involve both a debit and a credit to an expense account. The reason for reducing an expense account might not be justified. A manager in charge of advertising might want to cover up a mistake or exceeding his budget amount for total expenses. By debiting another expense and crediting advertising expense, less attention is given to the line-item advertising expense in internal financial reports, leading to the conclusion that all is well. There can be valid explanations for entries that both increase and decrease different expenses. These entries may be needed to correct an error made in the initial recording of an expense. Another example is the situation of creating of a new expense account to track more details of the particular expense. When going back to year-to-date information, previously recorded expenses need to be reclassified to the new expense account.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

Collusion occurs when two or more employees agree to circumvent procedures or controls or get around control activities in an organization in order to gain an advantage or to cover up theft or fraud. The internal control activity that is most affected by collusion is the segregation of employees‘ duties.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

Electronic funds transfers normally result in better internal control since no cash or cheques are handled by employees, thereby limiting the possibility of misappropriation. However, controls over EFT payments (and collections) do need to be put in place.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

This is a violation of the assignment of responsibility control activity. Each cash register should only be used by one employee and an independent verification of the cash in each register at the end of each shift should be compared to the total of the sales recorded in the cash register plus the float (coins and paper currency for making change) in the register. If a discrepancy arises, the employee responsible for that register can be held responsible.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

Cash registers are visible to the customer. Thus, they prevent the sales clerk from ringing up a lower amount for the price and pocketing the difference. In addition, the customer receives an itemized receipt, and the cash register tape is locked into the register for further verification. Having scanners reduces the chance of error in entering the price of an item.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

This statement is true if the alternative to a cheque or electronic funds transfer (EFT) payment is a cash payment. It is not always practical to make all payments by cheque or EFT, but payment by cheque or EFT contributes to effective internal control over cash disbursements as they provide a record of all payments. Also, having only authorized individuals sign the cheques or execute EFT transactions reduces the likelihood of payments being made for unauthorized amounts or to unauthorized vendors.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

The receptionist has an opportunity to commit fraud. In the case of an appointment where the customer pays cash, the cash can be pocketed by the receptionist. The receptionist can then cancel the appointment, leaving no trace in the accounting records of the revenue generated by the service. This is a clear case of lack of segregation of duties.

LO 2 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

An employee who has no other responsibilities that relate to cash should prepare the bank reconciliation. If a person had responsibility for handling cash and also prepared the bank reconciliation, they could use the bank reconciliation to hide fraud by falsifying the bank balance or misstating reconciling items.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

A bank contributes significantly to internal control over cash because it: (1) safeguards cash on deposit, (2) minimizes the amount of cash that must be kept on hand, and (3) provides another record of all bank transactions.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

The lack of agreement between the cash balances may be due to either: (1) Timing differences—caused by recording a transaction on the company‘s books in one month and the bank recording it another month (example – outstanding cheque) or the bank recording a transaction first which the company will record after completing the bank reconciliation (example – a bank service charge, or an NSF cheque). (2) Errors—made by either the company or the bank. For example, a cheque for $110 is recorded by the depositor at $101.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

(a)

(b)

(c)

An NSF cheque is a cheque issued by a customer that was recorded by the company when it was received and then deposited in the bank only to discover later that the customer did not have the funds to cover the cheque payment. An NSF cheque makes the bank balance lower than the book balance and requires the book balance to be updated. Consequently, it is deducted from the balance per books. An NSF cheque results in an entry in the company‘s books, as a debit to Accounts Receivable and a credit to Cash. The debit to Accounts Receivable includes any additional charge that the bank may add for their services with respect to the NSF cheque or the company may add for late payment.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

Since the March cheque has still not cleared the bank at April 30, it must be included in the April 30th bank reconciliation as an outstanding cheque.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

When performing a bank reconciliation, outstanding cheques are subtracted from the bank balance to ―move‖ that balance closer to the one recorded on the company‘s books. Since the bank balance is lower than the book balance by the amount of this fraud, Sam will understate the amount of outstanding cheques on the reconciliation. For example, if there was no fraud, let‘s assume that the bank balance would be $5,000 and that the outstanding cheques were $3,000 so the book balance should be $2,000. After the fraud, the book balance is still $2,000 but the bank balance is now $3,300 instead of $5,000. When Sam prepares the reconciliation, he needs to make sure that the $3,300 will reconcile to $2,000 so he will list the outstanding cheques as only $1,300, thereby understating them by the amount of cash he has stolen. The real outstanding cheques of $3,000 less the stolen amount of $1,700, equals $1,300.

LO 3 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

22.

Cash includes cash on hand and cash in bank accounts. Cash equivalents include short-term, highly liquid investments convertible to a known amount of cash, less any bank overdrafts. Together, these two amounts are combined and reported as cash and cash equivalents in the current assets section of the statement of financial position.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

The basic principles of cash management are: (1) increase the speed of collection on receivables, (2) keep inventory levels low, (3) delay payment of liabilities, (4) plan the timing of major expenditures, (5) invest idle cash, and (6) prepare a cash budget. The first three principles are ways to increase cash on hand. The last three principles focus on making sure management understands when cash balances will be high so that investment income can be earned from idle cash and when cash balances will be low so that bank loans or other financing can be obtained.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

24.

Having too much cash on hand may hinder a business‘ performance if the cash cannot be used effectively and therefore not give a proper return to the shareholders. Effective uses of cash can include upgrading existing property, plant, and equipment, expanding the business, paying down debt, repurchasing shares, or paying dividends.

LO 4 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7.1 1. 2. 3. 4.

Financial pressure Rationalization Financial pressure Opportunity

LO 1 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.2 Control Activity

Example

Assignment of Responsibility

One person operates the cash register at the exit of the parking garage.

Segregation of duties

Tickets are provided to those entering the garage by an automated machine. This ticket is given to the attendant on exiting the parking garage. In this way, the attendant does not authorize the parking and collect the cash.

Documentation

The time on the ticket is entered into a machine to determine the amount owed, which is keyed into the cash register before the gate will open. In this way the total time in the parking garage is recorded.

Physical controls

Cash is kept in a cash register.

Review and reconciliation

If a customer is overcharged, they will complain. Review to make sure parking gate is not being raised prior to payment being received. Reconcile the number of parking tickets issued to the amount of cash received.

LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.3 a. b. c. d.

3 4 5 1

All transactions should include original, detailed receipts. Undeposited cash should be stored in the company safe. Surprise cash counts are performed by internal audit. Responsibility for related activities should be assigned to specific employees. EFT payment approvers are not allowed to record cash transactions

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.4 1. 2. 3. 4. 5.

Documentation and physical controls Review and reconciliation Segregation of duties Assignment of responsibility Physical controls

LO 1,2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.5 1. 2. 3. 4. 5. 6.

Documentation Review and reconciliation Physical controls Assignment of responsibility Segregation of duties Physical Control

LO 1,2 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.6 1. Bank – 2. NA 3. Bank + 4. Book – 5. Bank + 6. Book – 7. Book +

8. 9. 10. 11. 12. 13.

Bank – Book – Book – Bank – Book + NA

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.7 January deposits in transit: Deposits in transit at beginning of month Add: Deposits recorded in company books this month Less: Deposits recorded on this month‘s bank statement Deposits in transit at end of month

$ 0 . 5,000 4,000 $1,000

February deposits in transit: Deposits in transit at beginning of month Add: Deposits recorded in company books this month Less: Deposits recorded on this month‘s bank statement Deposits in transit at end of month

$1,000 . 5,600 4,600 $2,000

LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.8 November outstanding cheques: Outstanding cheques at beginning of month Add: Cheques recorded in company books this month Less: Cheques recorded on this month‘s bank statement Outstanding cheques at end of month

$ 0 27,100 25,900 $ 1,200

December outstanding cheques: Outstanding cheques at beginning of month Add: Cheques recorded in company books this month Less: Cheques recorded on this month‘s bank statement Outstanding cheques at end of month

$1,200 23,200 19,700 $ 4,700

LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.9 a.

Kashechewan should correct its books for the error in recording the EFT payment by reducing cash by $90 ($659 – $569). The cheque in the amount of $415 mistakenly deducted by the bank should be added back to the bank balance since it is the bank‘s error.

Accounts Payable ..................................................................... 90 Cash ...........................................................................

No entry is necessary for the cheque mistakenly deducted by the bank, although the bank should be notified of this error. LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.10 June 30, reconciled cash balance per bank reconciliation ......... Add: Cash receipts in July ......................................................... Less: Cash disbursements in July ............................................. July 31, unreconciled cash balance ...........................................

$18,920 21,700 24,300 $16,320

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.11 Cash balance per bank Add: Deposits in transit

$19,260 1,450 20,710 3,630 $17,080

Less: Outstanding cheques Reconciled cash balance per bank Cash balance per books (as per BE7.9) Add: EFT collections on account Less: Bank service charge NSF cheque and fee ($1,270 + $50) Reconciled cash balance per books

$16,320 2,170 18,490 $ 90 1,320 1,410 $17,080

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.12 July 31

Cash ......................................................................... Accounts Receivable .........................................

2,170

Bank Charges Expense ............................................ Cash ..................................................................

Accounts Receivable ................................................ Cash ..................................................................

1,320

2,170

1,320

LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.13 Ouellette Ltée should report the cash in the bank, the payroll bank account, and the cash register floats as cash. The term deposits would be reported as cash equivalents because they mature within 90 days and because they can be convertible to known amounts of cash. Cash and cash equivalents are recorded as a current asset. LO 4 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 7.14 a. Cash in savings account Cash on hand Cash in chequing account Cash reported as a current asset

$22,000 1,700 14,000 $37,700

b. Prepaid insurance, current assets

2,000

Amounts due from customers of $1,000 are accounts receivable, a current asset. LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 7.1 a. Control Strength or Weakness 1.

b. Suggested Improvements

No establishment of responsibility over the cash – weakness

The employees should use separate cash drawers.

Cash counts not performed independently – weakness

Cash counts should be performed by a supervisor at the end of the shift and the totals compared to the cash register reading.

Allowing all employees to purchase goods as required may lead to waste and unauthorized purchases – weakness

Centralize the purchasing function to an authorized individual. When goods are received, they should be checked against purchase orders, ensuring that the purchase was authorized.

Cash receipts procedures appear to illustrate good internal control – the segregation of duties between receiving, recording, and depositing cash greatly reduces the likelihood of cash being stolen or recorded incorrectly – strength

Improper segregation of duties could result in the misappropriation of cash and the ability to misstate the accounting records to cover up the misappropriation – weakness

Different individuals should receive cash, record cash receipts, and deposit the cash.

The procedures in place to conduct the physical inventory count appear to be reasonable – strength

In a small business this may be impossible; therefore, it is imperative that management take an active role in the operations and supervision of the business to enable detection of any accounting irregularities.

LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 7.2 1.

It is possible to detect this type of fraud by comparing the amount of inventory consumed during the evening with the sales that were recorded in cash registers.

This fraud can be prevented by segregating the duties of those individuals handling the drinks to those individuals having access to the cash register. If additional staff is not available, the floor supervisor should keep a close eye on the bartender or inventory could be counted once a day.

It is possible to detect this type of fraud as the bottles of liquor sold to establishments are not the same as those sold at a liquor store. A special label is attached, which can be detected at the end of the shift. As well, if the additional empty bottles are on hand at the end of the shift, when the inventory consumed (including the bartender‘s bottle) at the end of the bartender‘s shift is compared to sales, a discrepancy will be noticed.

It is possible to detect this type of fraud if someone notices that the number of appointments and services given by the spa does not reconcile to the revenue deposited in the bank account for the day. Most businesses of this nature will have someone comparing the bank deposit slips with the appointment schedule (often the schedule will be printed off a day or two prior to the scheduled date).

This fraud can be prevented by segregating the duties of those individuals handling the appointments, to those handing the cash, and again to those individuals making the bank deposit. If additional staff is not available, the owner of the spa should at least make the bank deposit and require that the scheduling software not allow appointment changes on the day of the appointment.

EXERCISE 7.2 (CONTINUED) 4.

It is possible to detect this type of fraud but likely only after the first instance of fraud. The individual in charge of approving the bank reconciliation could insist on looking at the cheques returned by the bank and detect the unauthorized cheque.

This fraud can be prevented by segregating the duties of those individuals handling the cheques with the individual preparing the bank reconciliation, and by being vigilant in scrutinizing the bank reconciliation and its supporting documents. In addition, the receptionist should not have access to the blank cheques. Blank cheques should be kept in a locked cabinet to which the receptionist does not have access.

LO 1 BT: C Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 7.3 a. Weakness

Control Activity

b. Recommended Improvement

Inability to fix responsibility for cash to a specific clerk.

Assignment of responsibility

There should be separate cash drawers and register pass codes for each clerk.

Cash is not adequately protected from theft.

Physical controls

Cash should be stored in a locked safe until it is deposited in the bank.

Cash is not independently counted.

Review and reconciliation

A cashier office supervisor should count cash and reconcile the amount of cash received to the cash register reading.

The accountant should not handle cash and record cash transactions.

Segregation of duties

An employee not otherwise handling cash or the accounting records should make the deposits.

Some sales will not be recorded so that they can be independently verified later; cash is not adequately protected from theft.

Documentation and physical controls

All sales should be entered in the cash register to provide evidence the transaction has occurred. In addition, the loose change box should be locked to keep it safe until the funds are deposited.

LO 1,2 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7.4 a. Weakness

Control Activity

b. Recommended Improvement

Cheques are not stored in a secure area.

Physical controls

Cheques should be stored in a safe or locked file drawer.

The approval of and payment to suppliers is done by the wrong employee.

Assignment of responsibility and segregation of duties

The purchasing manager should not approve bills for payment nor should this manager have signing authority. An employee, other than one involved with purchasing, who is aware of delivery of goods and services, should be authorizing the payment and another member of senior management should be assigned cheque signing duties.

Blank cheques are signed.

Assignment of responsibility

Establish a second signing authority with the bank.

Cheques are not prenumbered.

Documentation

Cheques should be prenumbered and their serial continuity subsequently tested for completeness.

The bank reconciliation is not independently prepared.

Review and reconciliation

A person independent of the accountant should prepare the bank reconciliation. If this is not possible, then the accountant can prepare the reconciliation but the owner, not the store manager (because they can access cash) should approve it.

LO 1,2 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7.5 a. August 31 reconciled cash balance per bank reconciliation ............. Add: (4) Cash deposits in September ............................................. Less: (1) Cheques issued ................................................ $176,978 (2) Salaries deposited to employee accounts ......... 39,170 (3) Monthly EFT payment for rent ........................... 2,600 September, unreconciled cash balance ............................................ b.

$ 34,780 199,680

218,748 $ 15,712

None of the above items would be included in the bank reconciliation as they are included in the starting (unreconciled) cash balance and have already been recorded by the company.

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7.6 Item 1. Deposits in transit at the end of April 2. Deposits in transit at the beginning of April that cleared the bank in April 3. Outstanding cheques at the beginning of April that cleared the bank in April 4. Outstanding cheques at the end of April 5. Bank service charges 6. Deposit of $400 made in error by the bank to the company‘s account 7. Cheque written for $250 recorded in error as $520 on the books 8. NSF cheque received from customer 9. EFT collection on account not previously recorded by company 10. Interest earned on bank account

Bank Add Deduct (Credit) (Debit) 

Books Add Deduct (Debit) (Credit)

Not Applicable

Journal Entry Required No

 No  No 

No 



Yes No



Yes 

Yes



Yes



Yes

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 7.7 a.

Deposits in transit: July 31 Deposits in transit, June 30 .................................................. Add: Deposits recorded in company books in July .............. Less: Deposits recorded on bank statement in July............. Deposits in transit, July 31 ....................................................

$ 2,000 14,750 15,820 $ 930

Deposits in transit: August 31 Deposits in transit, July 31 .................................................... Add: Deposits per books in company books in August ........ Less: Deposits recorded on bank statement in August ........ Deposits in transit, August 31 ...............................................

$ 930 22,900 22,500 $ 1,330

Outstanding cheques: July 31 Outstanding cheques, June 30 ............................................. Add: Cheques recorded in company books in July ............... Less: Cheques recorded on July bank statement ................. Outstanding cheques, July 31...............................................

$ 570 18,200 17,200 $ 1,570

Outstanding cheques: August 31 Outstanding cheques, July 31............................................... Add: Cheques recorded in company books in August .......... Less: Cheques recorded on August bank statement ............ Outstanding cheques, August 31 ..........................................

$ 1,570 22,700 23,520 $ 750

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7.8 a. NEOPOLITAN LTD. Bank Reconciliation July 31

Cash balance per bank statement Add: Deposits in transit

$10,670 1,968 12,638 2,359 $10,279

Less: Outstanding cheques Reconciled cash balance per bank Cash balance per books Add: Cheque No. 373 error ($980 – $890) EFT deposits

$ 9,277 90 1,276 10,643 (40) (324) $10,279

Less: Bank service charges EFT payment for utilities Reconciled cash balance per books

July 31

Cash ................................................................. Supplies.......................................................

Cash ................................................................. Accounts Receivable ...................................

1,276

Bank Charges Expense .................................... Cash ............................................................

Utilities Expense ............................................... Cash ............................................................

324

1,276

324

LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7.9 a.

Deposit in transit of May 31

Outstanding Cheques: Cheque No. 003 – May 14 Cheque No. 005 – May 18 Cheque No. 007 – May 22 Cheque No. 008 – May 23

$1,675 360 2,130 525

$ 4,690

Returned cheque – NSF S. Gillis – deduct NSF fee – deduct Bank service charges – deduct

1,350 25 40

$ 1,415

May1, beginning balance ........................................................ Add: Cash receipts in May ...................................................... Less: Cash disbursements in May .......................................... May 31, unreconciled cash balance........................................

$ 0 37,470 26,819 $10,651

$ 7,820

e. SHARP MANUFACTURING LTD. Bank Reconciliation May 31, 2024

Cash balance per bank statement Add: Deposits in transit

$6,106 7,820 13,926 4,690 $9,236

Less: Outstanding cheques Reconciled cash balance per bank Cash balance per books Less: Returned cheque – NSF S. Gillis NSF fee Bank service charges Reconciled cash balance per books

$ 10,651 1,350 25 40

1,415 $9,236

LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7.10 a.

(1) Items that are considered cash would include: 1. 2. 3. 5. 6. 8.

Currency and coin Royal Bank chequing account Royal Bank savings account Undeposited April customer cheques Over-the-counter receipts ($1,735 + $1,230) Cash register floats Total cash

123 4,325 5,000 750 2,965 500 $13,663

(2) Items that are considered cash equivalents include: 4.

b. c.

The $25,000 government treasury bill is likely considered a cash equivalent. In order to be a cash equivalent it has to have a maturity of 90 days or less from the date of acquisition. The value at which it will mature at is relatively certain.

Cash and cash equivalents = $13,663 [from (a)] + $25,000 = $38,663 7. IOU from company receptionist—Advances to Employees; Statement of Financial Position

LO 4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 7.11 Suggestions to improve cash management practices for Tory, Hachey, and Wedunn: 1. 2. 3. 4.

5. 6. 7. 8. 9.

Prepare a cash budget. Adopt a time docketing accounting system that will track work performed on files for individual clients. Invoice clients monthly as work progresses, using the accounting records established for docketing time. To the extent practicable, ask clients for retainers before work on files begins. Use the retainers received to apply payments for monthly invoices sent to clients. When retainers are used up, request additional retainers until the case is completed. Establish an operating line of credit with the bank for day-to-day operations. Arrange a non-current loan for renovations and equipment with repayment terms structured to coincide with expected future cash inflows. Negotiate terms with suppliers that allow for delayed payments. To the extent necessary, obtain additional investments from the three lawyers to ensure payment to suppliers and employees are made on time.

LO 4 BT: E Difficulty: C Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 7.1A a.

Control Activities

Application to Cash Receipts

Assignment of responsibility

Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash. Only ushers authorize entrance.

Segregation of duties

The duties of receiving cash and admitting customers are assigned to the cashier and to the doorperson (usher). The manager maintains custody of the cash until deposited, and the company accountant department records the cash.

Documentation

Tickets have unique QR codes. Cash count sheets are prepared and initialled. Deposit slips are prepared.

Physical controls

Cash from the first shift is stored in a safe in the manager‘s office. Cash is deposited in a bank vault nightly. Tickets are locked into the machine by the manager and the machine is used to issue tickets.

Review and reconciliation

Cash counts are made by the manager at the end of each cashier‘s shift. Daily comparisons are made by the head cashier and accounting department of cash received, deposited, and recorded.

PROBLEM 7.1A (CONTINUED) b. & c. Actions by the usher and cashier or the manager and cashier collaborate to misappropriate cash include: 1.

The usher could admit a customer in which the cashier has collected cash but not issued a valid ticket or QR code or paper ticket. The two could divide the cash. The cashier could issue a lower priced ticket than paid for and the usher would admit the customer. The difference between the ticket issued and the cash received could be divided between the usher and cashier. The manager could alter the count of tickets sold from the ticket rolls and pocket the cash.

LO 1,2 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.2A a. Control Weaknesses

b. Improvements

Fred or Asmaa can order goods John or Rehana should take on (assignment of responsibility) and the responsibility for the approve invoices for payment (up to purchase of goods. $20,000 for Fred and up to $5,000 for Asmaa). Fred is the sole signer of cheques less than $20,000. Fred could purchase items for personal use or create and pay invoices to companies that he owns. Fred signs cheques and prepares the bank reconciliation. Fred could write a cheque to himself and cover it up in the bank reconciliation and/or through journal entries.

Someone who does not record cash transactions or has access to cash and cheques should prepare the bank reconciliation. If this is not possible, then one of the owners should either prepare or at least review and approve the reconciliation.

One person can sign cheques

At least two individuals should sign each cheque to prevent inappropriate expenditures.

LO 1,2 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.3A a. Control Weaknesses

b. Recommendations

1. All employees have access to the spreadsheet which is used to record transactions. There could be unauthorized changes to accounting records such as recording revenue.

Spreadsheets used for recording accounting transactions are subject to unauthorized use and changes. Accountant transactions should be recorded in appropriate accounting software and should be restricted and protected with password or biometric restrictions.

2. Eliminating receiving reports and purchase orders causes problems when invoices from suppliers are received. Accountants will not be able to verify if the invoice pertains to items that have actually been received or approved. Incorrect or fictitious invoices may be paid, or unauthorized orders made. There is no confirmation of the goods delivered. It is possible for the warehouse staff to place extra merchandise in a customer‘s car during curbside pickup.

Receiving reports and purchase orders should be reinstated. Merchandise should be collected and signed off to a separate group for curbside pickup by the customer.

3. Payment using a photocopy of an invoice could lead to double payment or payment of a fictitious invoice.

Tighten controls so that invoices do not get misplaced. Many ways to achieve this including recording all incoming mail. Invoices should be approved for payment. Photocopies of invoices should not be paid.

4. Each loan officer is responsible for determining credit policies, and loan amounts. The officers are renumerated based on the size of the loan. They could provide a loan or mortgage to customers who do not qualify or grant an unwarranted large loan in order to earn a percentage of the loan amount.

An independent and experienced person should be responsible for setting credit limits for customers. Credit limit criteria should be determined by the company and consistently applied.

5. There is no segregation of duties in the accounting function. The accounting manager could prepare fictitious invoices for payment or write cheques to himself and not be detected because the accounting manager also prepares the bank reconciliation

An independent person should approve the invoices for payment and prepare the bank reconciliation.

LO 1,2 BT: AN Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.4A a. Control Weaknesses

b. Improvements

The tickets were unnumbered so there is Tickets should be prenumbered so no way of knowing if duplicates were that the students could be held more made and sold. accountable for the tickets and a final reconciliation could be performed between cash receipts and sales. No record was kept of which students took tickets to sell or how many they took so there is no way of knowing if tickets were given away for free and how many tickets were actually sold.

Roger should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had been sold at the door on the day of the dance.)

There was no control over unsold tickets. This deficiency made it possible for students to sell tickets, keep the cash, and tell Roger that they had disposed of the unsold tickets.

Students should have been required to return the unsold tickets to Roger as well as the cash. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned.

Did not receive a receipt from Obnoxious A receipt should have been obtained Al. Without a receipt, there is no way to from Obnoxious Al. verify how much Obnoxious Al was actually paid. For example, it is possible that he was only paid $100 and that Roger took the rest.

PROBLEM 7.4A (CONTINUED) a. and b. (continued) a. Control Weaknesses

b. Improvements

Inadequate control over the cash box.

Only Roger should have had access to the key and disbursed funds when necessary for purchases.

Praveen Patel counted the funds, made out the deposit slip, and took the funds to the bank. Praveen could have taken some of the money.

Roger should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Praveen deposit the funds.

Students taking money for decorations Roger should reimburse each were not required to have a receipt and student when a receipt is provided. had unrestricted access to the cash box to pay for their purchases. Sara Wu was collecting tickets and There should have been one receiving cash for additional tickets sold. person selling tickets at the door and a second person collecting tickets. The tickets collected times the price per ticket could then be compared to the cash collected. Net cash receipts anticipated.

were

less

than A final reconciliation should have been performed between cash on hand, ticket sales, and purchase receipts.

LO 1,2 BT: AN Difficulty: C Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.5A

MCINNIS LTD. Bank Reconciliation December 31

Cash balance per bank statement .............................................. Add: Deposits in transit ............................................................. Less: Outstanding cheques ($3,987 – $2,612) ..........................

$15,227 2,389 17,616 1,375

Reconciled cash balance per bank .............................................

$16,241

Cash balance per books ............................................................. Less: EFT withdrawals..............................................................

$18,395 1,596 16,799 558 $16,241

Less: Bank service charges ....................................................... Reconciled cash balance per books ........................................... The supplies are not a reconciling item because they were recorded by both the bank and the company. b.

Dec. 31

Utilities Expense ..................................................... Cash ..............................................................

1,596

Bank Charges Expense .......................................... Cash ..............................................................

558

1,596

LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

558

PROBLEM 7.6A a.

OGIMAA LTD. Bank Reconciliation June 30

Cash balance per bank statement ........................ Add: Deposits in transit………………………………………..

$12,980 4,700 17,680 1,798 $15,882

Less: Outstanding cheques .................................. Reconciled cash balance per bank ....................... Cash balance per books ....................................... Add: Note receivable collection ........................... Interest receivable collection on note..................... Less: NSF cheque ............................................... EFT error ($965 - $695) ............................... Bank service charges .................................. Reconciled cash balance per books ...................... b.

Jun. 30

$16,790 $ 2,284 233 $

3,000 270 155

Cash ................................................... Notes Receivable ..................... Interest Receivable ...................

2,517

Accounts Receivable .......................... Cash ..........................................

3,000

Utilities Expense ................................. Cash ..........................................

270

Bank Charges Expense ...................... Cash ..........................................

155

2,517 19,307

3,425 $15,882

2,284 233

3,000

270

155

LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.7A a.

February 28, reconciled cash balance per bank reconciliation Add: Cash receipts in March.................................................... Less: Cash disbursements in March ........................................ March 31, unreconciled cash balance .....................................

Deposits in transit: $4,012 (dated March 31).

Outstanding cheques: #3473 for $4,947 (dated March 29).

$17,029 9,249 7,912 $18,366

d. YAP LTD. Bank Reconciliation March 31 Balance per bank statement .......................................... Add: Deposits in transit [from (b)] .............................. Error in recording cheque #3472 ($1,823 – $1,283) .........................................

$17,163 $4,012 540

Less: Outstanding cheques No. 3473 [from (c)] ........................................... Reconciled cash balance per bank ...............................

4,947 $16,768

Balance per books [from (a)] ........................................ Add: EFT collection—Boudreault ............................. Less:

Service charges ................................................ NSF cheque and fee—Mustafa ($870 + $35) ... EFT loan payment ............................................ Reconciled cash balance per books ..............................

4,552 21,715

$18,366 610 18,976 $ 89 905 1,214

2,208 $16,768

PROBLEM 7.7A (CONTINUED) e.

Mar.

Cash ....................................................... Accounts Receivable ......................

610

Bank Charges Expense .......................... Cash ...............................................

Accounts Receivable .............................. Cash ...............................................

905

Bank Loan Payable ................................ Interest Expense..................................... Cash ...............................................

1,130 84

610

905

1,214

LO 3 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.8A a. October 31, reconciled cash balance per bank reconciliation ....... Add: Cash receipts in November .................................................. Less: Cash disbursements in November ...................................... November 30, unreconciled cash balance .................................... b.

$23,812 21,438 30,968 $14,282

HAMPTONS LIMITED Bank Reconciliation November 30

Balance per bank statement ......................................... Add: Deposits in transit (Nov. 30 cash receipt) ........... Less: Outstanding cheques No. 2474 ........................................................ No. 2480 ........................................................ No. 2482 ........................................................ Reconciled cash balance per bank ...............................

$18,958 2,676 21,634 $1,008 1,224 1,660

Balance per books [from (a)] ........................................ Add: EFT collection .................................................. Less:

NSF cheque and fee ($500 + $80) ................... Bank service charges ....................................... Error in recording cheque No. 2476 ($4,760 – $5,660) ............................................ Error in Nov. 20 deposit ($5,908 – $5,890) ...... Reconciled cash balance per books .............................

3,892 $17,742 $14,282 5,008 19,290

$580 50 900 18

1,548 $17,742

PROBLEM 7.8A (CONTINUED) c.

Nov. 30

Cash ..................................................................... Notes Receivable ........................................ Interest Income ..........................................

5,008

Bank Charges Expense ........................................ Cash .............................................................

Accounts Receivable (Giasson Developments) .... Cash .............................................................

580

Accounts Payable ................................................. Cash .............................................................

900

Accounts Receivable............................................. Cash .............................................................

4,400 608

580

900

LO 3 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.9A a. and b. Cash and cash equivalents (reported in Current Assets section) Cash: 1. Cash on hand ............................................................... $ 2,920 2. Commercial bank savings account ............................... 57,800 Commercial bank chequing account ............................ 25,000 U.S. bank account (Canadian equivalent) .................... 27,000 Total cash ............................................................................... 112,720 Cash equivalents: 4. Government of Canada Bond....................................... Total cash and cash equivalents ............................................. c.

50,000 $162,720

Amounts due from employees (travel advances) of $8,700 would be classified as other receivables in an account called Advances to Employees.

Trading investments would be listed separately in the current assets section of the statement of financial position and would include the term deposit that matures in 120 days (to be a cash equivalent it would have to have a maturity of 90 days or less from the date of acquisition) and the shares of Loblaw Companies Limited. The classification of the shares could also be non-current depending on management‘s intentions for holding the shares.

NSF cheques would be included in Accounts Receivable, assuming the company expects collection. If collection is doubtful, they might have been provided for as part of Bad Debts Expense and related Allowance for Doubtful Accounts or written off as uncollectible.

LO 4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.10A a.

Cash includes cash on hand, and money in bank accounts. Cash equivalents are short-term, highly liquid (easily sold) investments that are subject to insignificant risk of changes in value, less any bank overdrafts. Examples of investments that would be classified as cash equivalents include debt investments such as government treasury bills (T-bills) that have a short maturity of 90 days or less from the date of acquisition, money market funds, bank term deposits and guaranteed investment certificates. These two categories are often combined as they represent the cash either currently available or the cash that is readily available for use by the company.

In order to be classified as cash equivalents, the government treasury bills, the banker acceptance the corporate commercial paper and the guaranteed investment certificates must have short maturity dates of 90 days or less from the date of acquisition.

LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.11A Accelerating collection of receivables - currently only a minimal deposit of $50 is received from the customers. Increase the deposit to cover cost of decorations so that this money is received up front - have final payment due immediately following the function - both of these will improve cash flow as cash receipts will be accelerated - Bev will have to check with other decorating companies to see what their terms are in order to remain competitive - if final payment cannot be received immediately due to competitive pressures, Bev must monitor collections better and actively contact customers whose payments are overdue so that cash can be collected more promptly Delay payment of liabilities - Bev can apply for credit which will delay payment by 30 days, giving her use of this cash for 30 more days LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.1B a. Control Activities

Application to Cash Payments

Assignment of responsibility

Only the controller and assistant controller are authorized to sign cheques. Invoices are approved by the purchasing agent and goods received are approved by the receiving department supervisor.

Segregation of duties

The purchasing agent has only an approval function and does not work in the receiving or accounting areas. The receiving department supervisor has access to the assets but does not order or record purchases. Payment can only be made by the controller or assistant controller, and the cheque signers do not record the cash disbursement transactions. The bank reconciliation is not done by someone who records payments.

Documentation

Cheques are prenumbered. Following payment, the invoices are stamped ―PAID‖.

Physical controls

Blank cheques are kept in a safe in the controller‘s office. Only the controller and assistant controller have access to the safe. A computer is used for printing cheques.

Review and reconciliation

The cheque signer compares the cheque with the approved invoice prior to issue. A staff accountant reconciles the bank and book balances monthly.

Segal Office Supply should consider adopting the policy of having a second person signing all cheques which exceed a specified amount. Preferably, the second signer would be a person holding a senior position in the company and would be aware of the transactions requiring large payments. When co-signing the cheque, the person would check for evidence or documentation of the checks performed by the first cheque signer, on the invoices being paid. In addition, the co-signer would look for the proper approvals for purchase and delivery as indicated on the invoice.

LO 1,2 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.2B a.

The weaknesses in control activities in the handling of collections include:         

Each usher could take cash from the collection plates en route to the basement office. The head usher counts the cash alone so no one would ever know if the head usher stole cash. The head usher‘s notation of the count is left in the safe with the cash so no one other than the financial secretary will know if the cash placed in the safe was ever deposited. The financial secretary recounts the cash alone. The financial secretary withholds $200 per week – this is an unapproved payment. The cash is vulnerable to robbery when kept in the unlocked safe overnight. Cheques are made payable to ―Cash‖ so anyone can cash them. The financial secretary has custody of the cash, maintains church records, and prepares the bank reconciliation. No annual audits of cash receipts procedures are performed.

The improvements should include the following: (1) Head usher  The head usher and a finance committee member should take the cash to the office. The cash should be counted by the head usher and the financial secretary in the presence of the finance committee member. The amount counted should be written down on a cash count sheet and copies kept by the secretary and finance committee member. (2) Ushers  The ushers should transfer their cash collections to a cash pouch (or bag) held by the head usher. The transfer should be witnessed by a member of the finance committee.

PROBLEM 7.2B (CONTINUED) b. (continued) (3) Financial Secretary  Following the count, the financial secretary should prepare a deposit slip in duplicate for the total cash received, and the secretary should immediately deposit the cash in the bank‘s night deposit vault. A copy of the deposit slip should be given to a finance committee member.  A ―petty‖ or small cash fund should be established for the financial secretary to be used for weekly cash expenditures and requests for replenishment of the fund should be sent to the chairperson of the finance committee for approval. Receipts for items paid from this fund along with the unused cash should be kept in a locked cash box. Periodic counts of the cash box should be performed by a finance committee member to ensure that the cash on hand plus receipts for cash expenditures total the limit (for example, $200) established for the fund. (4) Finance Committee  A reconciliation of the cash count sheet and the bank deposit slip should be done every time a deposit is made to ensure all cash counted was actually deposited.  Members should make their cheques payable to the church, and not to cash.  At the end of each month, a member of the finance committee should prepare the bank reconciliation.  Annual audits should be performed. LO 1,2 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.3B a. Control Weaknesses

b. Recommendations

1. Cash is collected and kept in the car. This could result in theft.

Cash should be deposited in the bank each day.

2. The person purchasing the merchandise is the same person that verifies receipt of the goods and approves invoices for payment. Because this person is responsible for all activities related to purchasing, errors and theft could occur.

An independent person should verify the receipt of goods. The purchaser should approve bills for payment by the controller.

3. All three cashiers use the same cash drawer. This could result in difficulty establishing responsibility for errors.

Each employee should use a separate cash drawer.

4. The office manager opens the mail, deposits the cheques, and posts the entry in the accounting records. This could result in the office manager depositing cheques into his/her own account, and not posting the entry for accounting purposes or posting a debit to an expense rather than cash.

Mail should be opened by someone not responsible for making the bank deposit. The bank deposit slip should be reconciled to the accounting records (and perhaps a list of cheques kept by the mail room) on a daily basis to ensure all cheques received were deposited and recorded.

5. The sales staff provide the product to the customer for small orders, receive the cash or cheques from the customers, and restock their own inventory. This could result in the sales staff keeping the payment from the customer and/or taking the product themselves.

All sales staff should be provided with a set amount of product. Replacement product for product sold should only be provided to the sales staff by warehouse personnel after the sales staff submits the money collected (cash or cheque) for the product being replaced.

LO 1,2 BT: AN Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.4B a. Control Weaknesses

b. Improvements

Bank statements are not being reviewed as is evidenced by the fact that the bank statements have not been opened.

Bank statements should be reviewed on a regular basis and all deposits on the statement compared to accounting records. As well, cheques should be scrutinized to ensure they have been recorded and written to valid vendors and that appropriate endorsements (signatures) have been provided.

Accounting records have not been created nor updated regularly. The lack of accounting records means that the charity cannot meet its mandate of having financial statements available for the public to examine. Reconciliations cannot be performed if there are no accounting records to compare to the bank statement. Finally, it is impossible for the charity to know if its resources are being spent on charitable activities if there is no record of total cash receipts maintained.

An accounting system should be implemented immediately and all transactions recorded on a timely basis by an individual who does not have responsibility over the collection or deposit of cash receipts and the authorization or signing of cheques for cash disbursements.

Donation receipts are only issued for amounts over $20.

Prenumbered receipts should be issued for all donations as the donations are received. These receipts are reconciled by a representative of the charity at the end of the day to the actual cash collected. Charitable donation receipts, authorized by CRA, should be kept in a locked location in the charity‘s office and issued by a representative of the charity at the end of the day.

PROBLEM 7.4B (CONTINUED) a. and b. (continued) a. Control Weaknesses

b. Improvements

Collections are made by volunteers who work on a short-term basis.

This is a problem facing many charities and one that cannot easily be solved. Some charities will screen their volunteers for any criminal background. However, the use of prenumbered receipt books is often the only available control. Because the donations are typically received in cash, controls can be improved by having volunteers work in teams of two. One person collects the cash and the other person prepares a pre-numbered receipt. This decreases the possibility that the cash will be taken by the volunteer without issuing a receipt.

Drivers collect cash. There is a possibility that the driver could misappropriate cash and not report the collection.

The volunteer and the driver should count all cash receipts at the end of the day. A reconciliation of the cash per the receipt books and the deposit should be prepared. An independent person (not the driver) should make the deposit daily. The reconciliation should be sent back to the charity‘s head office to be used as a source document to update the accounting records and to prepare the charitable donation tax receipts.

The driver uses money from cash collections to pay expenses. This means that cash receipts, cash deposits, and cash disbursements may not be recorded correctly.

All cash receipts should be deposited intact. Cash disbursements should be by cheque only after appropriate approval has been obtained. A special cash fund, also known as a petty cash fund, could be established to allow for smaller cash disbursements.

Because no reconciliation was made of the cash receipts to the tickets printed for the dance, there is a possibility that the tickets could have been sold by the volunteers and the cash never remitted to the charity.

The dance tickets should have been prenumbered and the numbers of tickets taken by each volunteer recorded. Cash receipts from the ticket sales should have been reconciled to the tickets. Any unsold tickets should have been returned to the charity and accounted for in the reconciliation.

LO 1,2 BT: AN Difficulty: C Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual -859 Chapter 7 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

PROBLEM 7.5B a. O‘HEARNE LIMITED Bank Reconciliation May 31 Cash balance per bank statement .................................. Add: Deposit in transit ................................................. Bank error—O‘Bearne cheque............................

$15,230 $1,926 1,200

Less: Outstanding cheques ($2,900 – $2,240 + $1,892) Reconciled cash balance per bank ................................

3,126 18,356 2,552 $15,804

Cash balance per books ................................................ Add: EFT collections .................................................. Less: NSF cheque and service charge ($1,350 + $80) Bank service charge ...................................................... Reconciled cash balance per books ..............................

$13,126 4,188 17,314 $1,430 80

May 31 Cash ....................................................... Accounts Receivable ....................................................... 31

Accounts Receivable .............................. Cash ............................................... 31

Bank Charges Expense . Cash ...............................................

1,510 $15,804

4,188 4,188 1,430 1,430 80

LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.6B a. ISLAND MILLING LTD. Bank Reconciliation October 31 Cash balance per bank statement ......................... Add: Deposit in transit .......................................

$17,230 3,600 20,830 6,200 $14,630

Less: Outstanding cheques ................................ Reconciled cash balance per bank ....................... Cash balance per books ....................................... Add: Cheque #1926 error ($3,760 - $3,670)...... EFT collections.......................................... Less: NSF cheque ........................................... Bank service charge .................................. Reconciled cash balance per books ....................

Oct.

$14,565 $

90 2,650

$2,610 65

Cash ............................................... Professional Fees Expense ....

Cash ............................................... Accounts Receivable ..............

2,650

Accounts Receivable ...................... Cash .......................................

2,610

Bank Charges Expense .................. Cash .......................................

2,740 17,305 2,675 $14,630

2,650

2,610

LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.7B a.

April 30, reconciled cash balance per bank reconciliation ......... Add: Cash receipts in May ......................................................... Less: Cash disbursements in May ............................................. May 31, unreconciled cash balance ..........................................

Deposits in transit: $1,524 (dated May 31).

Outstanding cheques #545 for $1,535 (dated May 31)

$14,000 5,457 6,201 $13,256

d. RIVER ADVENTURES LTD. Bank Reconciliation May 31 Balance per bank statement ............................................. Add: Bank error cheque #543 ($2,210 – $2,120) .......... Deposits in transit [from (b)] .................................

$12,480 $

90 1,524

1,614 14,094

Less: Outstanding cheques No. 545 [from (c)] ......... Reconciled cash balance per bank ...................................

1,535 $12,559

Balance per books [from (a)] ............................................ Add: EFT collection A. Osborne ...................................

$13,256 1,475 14,731

Less:

Service charges ................................................... EFT insurance payment ...................................... NSF cheque and fee ($1,105 + $45) ................... Reconciled cash balance per books..................................

95 927 1,150

2,172 $12,559

PROBLEM 7.7B (CONTINUED) e.

Cash ...................................................................... Accounts Receivable ...................................

1,475

Accounts Receivable ............................................. Cash ..............................................................

1,150

Bank Charges Expense ......................................... Cash ..............................................................

Prepaid Insurance.................................................. Cash ..............................................................

927

1,475

1,150

927

LO 3 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.8B a.

November 30, reconciled cash balance per bank reconciliation ....... Add: Cash receipts in December ...................................................... Less: Cash disbursements in December .......................................... December 31, unreconciled cash balance ........................................

$12,743 8,955 15,148 $ 6,550

RACINE LIMITED Bank Reconciliation December 31 Cash balance per bank statement ............................. Add: Deposits in transit ............................................ Less: Outstanding cheques No. 3474 ..................................................... No. 3478 ..................................................... No. 3483 ..................................................... Reconciled cash balance per bank ............................

$10,395 1,197 11,592 $1,050 538 1,390

Cash balance per books [from (a)]............................. Add: EFT collection R. Nishimura ............................. Less:

NSF cheque and fee ($987 + $40) ............... Bank service charges ................................... Error in Dec. 17 deposit ($2,954 – $2,945)... Reconciled cash balance per books ..........................

2,978 $ 8,614 $6,550 3,145 9,695

$1,027 45 9

1,081 $8,614

PROBLEM 7.8B (CONTINUED) c.

Dec. 31

Cash ..................................................... 3,145 Accounts Receivable .................... ........................... Accounts Receivable ............................. Cash .............................................

1,027

Bank Charges Expense ........................ Cash .............................................

Accounts Receivable ............................. Cash .............................................

3,145

1,027

LO 3 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.9B a. and b.

Cash (1): 1. Cash on hand ........................................................................ 2. Bank chequing account ......................................................... 5. US dollar account (Canadian equivalent) .............................. Total cash balance ...........................................................

7,460 2,241 11,301

Cash equivalents (2): 3. Government of Ontario bond ................................................ Cash and cash equivalents............................................................

5,000 $16,301

$ 1,600

The cash due from the customer should be recorded as an account receivable, and reported as a current asset on the statement of financial position. The remainder of the entry should update inventory (current asset), sales (revenue), and cost of goods sold (assuming a perpetual inventory system).

The deposit with Hydro One should be recorded as an advance or deposit in the current assets section of the statement of financial position as it is very similar to a receivable that the company hopes to collect once the credit history is established.

LO 4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 7.10B a.

Cash includes cash on hand, and money in bank accounts. Cash equivalents are short-term, highly liquid (easily sold) investments that are subject to insignificant risk of changes in value, less any bank overdrafts. Examples of investments that would be classified as cash equivalents include debt investments such as government treasury bills (T-bills) that have a maturity of 90 days or less from the date of acquisition, money market funds, bank term deposits and guaranteed investment certificates. These two categories are often combined as they represent the cash either currently available or the cash that is readily available for use by the company.

In order to be classified as cash equivalents, the cash equivalents must have short maturity dates of 90 days or less from the date of acquisition.

LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 7.11B Accelerating collection of receivables - Currently, no deposit is received from the customers and billing is done at the end of the contract which is four months after the contract started - Jackie should ask customers for a large upfront deposit before the items are purchased on behalf of the customer - Jackie should also consider billing on a monthly basis throughout the contract so that cash is received earlier Delaying payment of liabilities - Jackie is currently paying for items purchased immediately. She can apply for credit and pay for the purchases on account, probably 30 days later than she is currently paying LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

ACR7.1 ACCOUNTING CYCLE REVIEW 2024 a. Jan.

1 8 13

17 18

21 24 26

Interest Payable ($2,000,000 x 3% x 1/12) ....... Cash..........................................................

5,000

Cash ................................................................. Accounts Receivable.................................

178,000

Accounts Receivable ......................................... Sales .........................................................

216,000

Cost of Goods Sold ........................................... Inventory ...................................................

122,000

Inventory ........................................................... Accounts Payable .....................................

75,000

Accounts Payable ............................................. Cash..........................................................

120,000

Salaries Payable ............................................... Salaries Expense .............................................. Cash..........................................................

34,000 36,000

Supplies ........................................................... Accounts Payable .....................................

1,500

Inventory ........................................................... Accounts Payable .....................................

98,000

Cash ................................................................. Accounts Receivable ......................................... Sales .........................................................

68,000 58,000

Cost of Goods Sold ........................................... Inventory ...................................................

68,000

5,000 178,000 216,000 122,000 75,000

120,000

70,000 1,500 98,000

126,000

68,000

ACR7.1 (CONTINUED) a. (Continued) Jan.

Cash ($50,000 - $25,000) ................................. Deferred Revenue ............................................. Sales .........................................................

25,000 25,000

Cost of Goods Sold ........................................... Inventory ...................................................

35,000

50,000 35,000

MATCHETT FABRICATIONS LTD. Bank Reconciliation January 31, 2024 Cash balance per bank statement ......................... Add: Deposits in transit ........................................

$181,162 25,000 206,162 12,000 $194,162

Less: Outstanding cheques .................................. Reconciled cash balance per bank ........................ Cash balance per books [refer to c.] ...................... Less: NSF cheque ................................... Bank service charges ............................... Reconciled cash balance per books ...................... Jan.

$204,000 $9,800 38

9,838 $194.162

Bank Charges Expense ............................. Cash...................................................

Accounts Receivable .................................. Cash...................................................

9,800

ACR7.1 (CONTINUED) c. and e. Cash Dec. 31, 2023 Jan. 8 Jan. 26 Jan. 31 Jan. 31

Jan. 31 Bal.

128,000 Jan. 1 178,000 Jan. 17 68,000 Jan. 18 25,000 204,000 Jan. 31 Jan. 31 194,162

Accounts Receivable Jan. Dec. 31, 2023 920,000 8 Jan. 13 216,000 Jan. 26 58,000 Jan. 31 9,800 Bal. 31 Bal 1,025,800

Dec. 31, 2023 Jan. 21 Bal. 31 Bal

Dec. 31, 2023 Jan. 15 Jan. 24 Jan. 31 Bal.

Dec. 31, 2023

Supplies 3,000 1,500 Jan. 31 1,300 Inventory 457,000 Jan. 13 75,000 Jan. 26 98,000 Jan. 31 Jan. 31 366,000 Equipment 2,280,000

5,000 120,00 0 70,000

38 9,800

Accumulated Depreciation—Equipment Dec. 31, 2023 380,000 Jan. 31 31,667 Jan. 31 Bal. 411,667

Jan. 17

Accounts Payable 120,000 Dec. 31, 2023 Jan. 15 Jan. 21 Jan. 24 Jan. 31 Bal.

410,000 75,000 1,500 98,000 464,500

Interest Payable 5,000 Dec. 31, 2023 Jan. 31 Jan. 31 Bal.

5,000 5,000 5,000

Salaries Payable 34,000 Dec. 31, 2023 Jan. 31 Jan. 31 Bal.

34,000 36,000 36,000

178,000 Jan. 1

Jan. 18 3,200

122,000 68,000 35,000 39,000

Jan. 31 Jan. 31

Deferred Revenue 25,000 Dec. 31, 2023 56,000 Jan. 31 Bal. Income Tax Payable Jan. 31 Jan. 31 Bal.

120,000 39,000

16,000 16,000

ACR7.1 (CONTINUED) c. and e. (continued) Bank Loan Payable Dec. 31, 2023

Common Shares Dec. 31, 2023 Retained Earnings Dec. 31, 2023 Sales Jan. 13 Jan. 26 Jan. 31 Jan. 31 Jan. 31 Bal. Jan. 13 Jan. 26 Jan. 31 Jan. 31 Jan. 31 Bal.

Cost of Goods Sold 122,000 68,000 35,000 39,000 264,000

Jan. 18 Jan. 31 Jan. 31 Bal.

Salaries Expense 36,000 36,000 72,000

2,000,000

250,000

589,000

216,000 126,000 50,000 56,000 448,000

Jan. 31

Depreciation Expense 31,667

Jan. 31

Interest Expense 5,000

Jan. 31

Supplies Expense 3,200

Jan. 31

Bank Charges Expense 38

Jan. 31

Income Tax Expense 16,000

ACR7.1 (CONTINUED) d.

2024 Jan.

Depreciation Expense ....................................... Accumulated Depreciation—Equipment ... ($2,280,000 ÷ 6 × 1/12 = $31,667)

31,667

Interest Expense ............................................... Interest Payable .................................... [$2,000,000 x 3% x 1/12)] = $5,000

5,000

Supplies Expense ............................................. Supplies .................................................... ($3,000 + $1,500 – $1,300 = $3,200)

3,200

Salaries Expense .............................................. Salaries Payable ......................................

36,000

Deferred Revenue ............................................. Sales .......................................................

56,000

Cost of Goods Sold ........................................... Inventory ...................................................

39,000

Income Tax Expense ........................................ Income Tax Payable ................................

16,000

31,667

5,000

3,200

36,000

56,000

39,000

16,000

ACR7.1 (CONTINUED) f. MATCHETT FABRICATIONS LTD. Adjusted Trial Balance January 31, 2024 o

Cash Accounts receivable Supplies Inventory Equipment Accumulated depreciation—equipment Accounts payable Interest payable Salaries payable Deferred revenue Income tax payable Bank loan payable Common shares Retained earnings Sales Cost of goods sold Salaries expense Depreciation expense Interest expense Supplies expense Bank charges expense Income tax expense

Debit $ 194,162 1,025,800 1,300 366,000 2,280,000

Credit

$411,667 464,500 5,000 36,000 39,000 16,000 2,000,000 250,000 589,000 448,000 264,000 72,000 31,667 5,000 3,200 38 16,000 $4,259,167

000000000 $4,259,167

ACR7.1 (CONTINUED) g. (1) MATCHETT FABRICATIONS LTD. Statement of Income Month Ended January 31, 2024 Sales Cost of goods sold Gross profit Operating expenses Salaries expense Depreciation expense Supplies expense Bank charges expense Total operating expenses Income from operations Other revenues and expenses Interest expense Total other revenues and expenses Income before income tax Income tax expense Net income

$448,000 264,000 184,000 $72,000 31,667 3,200 38 106,905 77,095 (5,000) (5,000) 72,095 16,000 $ 56,095

g. (2) MATCHETT FABRICATIONS LTD. Statement of Changes in Equity Month Ended January 31, 2024

Balance, January 1 Net income Balance, January 31

Common Shares $250,000 0000 000 $250,000

Retained Earnings $589,000 56,095 $645,095

Total Equity $839,000 56,095 $895,095

ACR7.1 (CONTINUED) g. (3) MATCHETT FABRICATIONS LTD. Statement of Financial Position January 31, 2024 Assets Current assets Cash Accounts receivable Supplies Inventory Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total assets

$ 194,162 1,025,800 1,300 366,000 1,587,262 $2,280,000 411,667

1,868,333 $3,455,595

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable Interest payable Salaries payable Deferred revenue Income tax payable Total current liabilities Non-current liabilities Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$464,500 5,000 36,000 39,000 16,000 $

560,500 2,000,000 2,560,500

$ 250,000 645,095 895,095 $3,455,595

LO 3 BT: AP Difficulty: M Time: 90 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

ct7.1 a.

FINANCIAL REPORTING case

The second paragraph of the Management‘s Responsibility for Financial Statements clearly states that management is responsible for establishing and maintaining an appropriate system of internal controls. In addition, a statement is made in this paragraph that the role of internal auditors of the company is to perform a review and evaluation of internal controls to provide management with the reasonable assurance that assets are safeguarded, transactions are authorized and recorded and that the financial records are reliable. In the Independent Auditor‘s Report, the auditor mentions how he obtains an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company‘s internal control. In addition, the auditor communicates any significant deficiencies in internal control that were identified during the audit.

Management has the primary responsibility for the system of internal control as indicated in the answer to a. above. The auditor states that management is responsible for internal control that will enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The auditor is not responsible for the design or effectiveness of internal controls and does not express an opinion as to their effectiveness. Nonetheless, the auditor does consider the internal controls in the design of their audit, as noted in a. above.

Management has the primary responsibility for the preparation and presentation of the financial statements. This responsibility is mentioned in both reports. The very first sentence of the Management‘s Responsibility for Financial Statements states this responsibility and then the auditor repeats the statement in the auditor‘s report.

LO 1 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001, cpa-t004 CM: Reporting and Audit

ct7.2

FINANCIAL REPORTING case

North West‘s cash reported at January 31, 2022 is $49,426,000.

Sobeys reported cash and cash equivalents at May 7, 2022 of $812.3 million.

North West Cash January 31, 2022 North West Cash January 31, 2021 Decrease in cash for 2022 Decrease as a % ($22,110 ÷ $71,536)

$49,426,000 71,536,000 22,110,000 30.9%

Sobeys May 7, 2022 Sobeys May 1, 2021 Decrease in CCE Decrease as a % ($78,200 ÷ $890,500)

$812,300,000 890,500,000 (78,200,000) 8.8%

North West‘s decrease in cash position is more severe that the decrease experienced by Sobeys. LO 4 BT: C Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

ct7.3 a.

PROFESSIONAL JUDGEMENT CASE

Vanessa should report several internal control weaknesses for the hotel operations to her father Patrick Chen: 1. For the room rental portion of operations:  The opportunity exists for unrecorded room rental revenues. Patrons who pay cash may have access and use of the room but the revenue from the rental remains unreported and the desk clerk pockets the cash collected.  Friends can gain access to rooms and related services without any charges and without any revenue to the hotel. 2. For bar revenues:  The bartender has the opportunity to bring in inventory purchased personally and resold at the bar, while keeping the cash receipts from sales.  Revenue from bar sales may go unrecorded as the bartender is too busy to enter sales in the cash register. 3. For parking lot revenues:  The opportunity exists for the attendant to understate the amount of parking revenue collected, while pocketing the cash.  Friends of the attendant may be allowed parking without having to pay any fees.

It will not always be possible to establish how much money has been lost or stolen from the hotel. While some errors or omissions can be measured, such as room rentals, unrecorded liquor sales will be very difficult to measure since the liquor sold may not have come from inventory purchased.

CT7.3 (CONTINUED) c. A general recommendation concerning hiring family members applies in this case for all of the hotel‘s operations. Collusion between management and its employees to defraud the hotel is heightened when the employees are members of the general manager‘s family. In addition, the following steps can be taken to avoid the possibility of fraud in the future: 1. For the room rental portion of operations:  A daily reconciliation should be prepared by someone other than the desk clerk, which compares the report for the number of rooms cleaned to the number of rooms rented. 2. For bar revenues:  A division of duty should be established between the person having access to inventory and the person handling cash receipts.  Supervision of the handling of the inventory and the handling of the cash should be done whenever possible. Any change in the normal procedures, such as was the case in the handling of the tequila, should be cause for termination.  A daily check should be made comparing the amount of revenue reported from bar sales to the inventory consumed. 3. For parking lot revenues:  Install the automated payment system which will remove the attendant‘s opportunity to understate revenues and pocket cash. LO 1 BT: S Difficulty: C Time: 40 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

ct7.4

ETHICS CASE

The stakeholders are the customers affected by the policy, the shareholders of the banks who want to see higher net income, and the management of the banks who make the decisions regarding fees and cheque processing policies.

(1)

If the bank processes cheque #3158 for $1,510 first, it will bounce due to non-sufficient funds as the balance in the account is only $1,500. All of the other cheques to be processed after that will also bounce so consequently all 5 cheques will bounce and the total NSF processing fees charged by the bank will be $225 (5 × $45).

(2)

If the bank processes the smallest cheques first, the 3 smallest cheques will clear processing and the 2 largest ones will bounce. By processing the cheques in this way, the bank will earn a processing fee of only $90 (2 x $45).

Whether this is ethical is subject to debate. On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts. Some customers are frequently overdrawn; thus, only severe penalties will persuade them to maintain an adequate balance. However, it could also be argued that processing cheques from largest to smallest is ―gouging‖ and takes unfair advantage of the customer.

In deciding what approach to take, the bank must consider its relationship with the customer. For customers who do not write NSF cheques frequently, it probably does not matter which approach is taken. Any customer that is frequently overdrawn may not be the type of customer that the bank is willing to deal with over the long term so it may be beneficial to other account holders to treat those who are always overdrawn as severely as possible. If the ―largest to smallest‖ policy is used by all banks, customers won‘t gain an advantage by switching accounts to other banks if this policy angers them.

Answer will vary depending on students‘ opinions.

LO 3 BT: E Difficulty: M Time: 30 min. AACSB: Ethics and Analysis CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

ct7.5

ANALYTICS MINDSET

All payments to suppliers should have purchase orders, receiving reports and invoices. Checking that each payment made to a supplier has a proper purchase order, receiving report and invoice adds to the strong internal control over cash payments. Purchase orders ensure that the purchase is properly authorized by providing evidence of the approval by the designated employee in charge of authorizing purchases. The information from invoices is matched to that of the purchase order in order to ensure that the terms negotiated on the purchase have been followed and that the correct goods and prices on the goods have been applied to the invoice. Attached to the invoice would be a copy of the receiving report that shows evidence that the receiving department has matched the information of the goods received to the authorized purchase order. Before processing a payment, the information of the receiving report and purchase order are matched to the invoice and an accuracy check of the invoice is performed. Overall, the three-way match report ensures that payments are made for the correct amount, for goods that have been received for authorized purchases. LO 1 BT: C Difficulty: M Time: 15 min. AACSB: Analysis CPA: cpa-t001 CM: Reporting

ct7.6

SERIAL CASE

The strengths in ABC‘s system of internal control and related control activity are as follows: Strength 1. Password access to the cash register

Control Activity Physical controls

Cash register calculates the pricing of the Documentation goods and prints receipt 2. Cash is deposited daily

Physical controls

Owners are involved in the reconciliation Review and reconciliation of cash with totals from the cash register Review and reconciliation 3. Inventory is counted monthly Doug or Bev authorize the purchase of Assignment of responsibility inventory 4. The monthly payroll schedule is Review and reconciliation reconciled to actual salaries paid 5. Invoices are prepared when the services Documentation have been performed

CT7.6 (CONTINUED) The weaknesses in ABC‘s system of internal control and the control activities violated are as follows:

Weaknesses

Control Activity

1. Employees share one cash register and Assignment of responsibility management currently is unable to affix responsibility for cash to a specific employee Segregation of duties Cashier is handling cash and inventory

4. 5.

Entering transactions can be performed by incorrect cashier, due to no logging off No mention of supervision of employees entering sales and handling inventory No mention of procedures for voided transactions or pricing adjustments on sales Reconciliation of sales is not done daily and so one cannot establish who has made an error on a sale Inventory is counted monthly to determine what products to reorder, but should also be used to determine unrecorded sales No system in place to avoid duplication of purchases Documentation of authorized overtime is not obtained Invoices for services are not prenumbered

Physical controls Segregation of duties Assignment of responsibility

Review and reconciliation

Review and reconciliation Documentation Documentation

Invoices are not issued in duplicate - Documentation photocopies have to be made and if staff forget to make a photocopy, sales could go unrecorded

CT7.6 (CONTINUED) b. (continued) In order to address the weaknesses, improvements that ABC‘s management should consider include: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Program the cash register such that a new transaction cannot be entered without the operator logging off from the previous transaction. Reconcile the sales to the deposit daily and establish the responsibility of errors to the particular employee causing the error. Provide supervision of employees or install cameras to ensure that all sales are recorded. Design procedures involving owners for voiding or altering the pricing for transactions entered. Compare and reconcile the reduction of inventory to the sales recorded daily. Implement the use of pre-numbered invoices that are printed in duplicate copies that cannot be altered. Account for the numerical sequence of invoices. Consider automating the production of invoices. Install a log of purchase orders made to avoid duplication of orders.

LO 1 BT: Difficulty: C Time: 50 min. AACSB: Communication CPA CM: Reporting

Legal Notice

CHAPTER 8 REPORTING AND ANALYZING RECEIVABLES LEARNING OBJECTIVES 1. Identify the types of receivables and record accounts receivable transactions. 2. Account for credit losses. 3. Account for notes receivable. 4. Explain the statement presentation of receivables. 5. Apply the principles of sound accounts receivable management.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Solutions Manual 8-887 Chapter 8 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Item LO

BT Item LO

BT Item LO BT Item LO Questions

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1,3

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Problems: Set A and B 1.

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Accounting Cycle Review 1. 1,2,3,4 AP

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Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Time:

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

AACSB

Association to Advance Collegiate Schools of Business

Difficulty:

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

ANSWERS TO QUESTIONS 1.

Three types of receivables along with examples follow: (a) Type (1) Accounts receivable

(b) Examples Accounts receivable from trade customers

(2) Notes receivable

Notes receivable from trade customers Notes receivable obtained when selling property

(3) Other receivables

Interest receivable, loans to company officers, advances to employees, sales tax recoverable, and income tax receivable

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Trade receivables are the result of sales transactions while nontrade receivables are the result of transactions other than sales (or service revenue in a non-merchandising business) transactions of the business, such as interest receivable, income tax receivable, and similar types of receivables.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

For a service company, a receivable is recorded when the revenue is

considered to be earned, which occurs when the service is provided. In a merchandising company, a receivable is recorded when revenue is considered to be earned, which occurs when the merchandise is sold (normally at the point of sale). (b)

The five-step process used to measure and report revenue: 6. 7. 8. 9. 10.

The timing of the recognition of revenue will determine the point at which the account receivable will be recognized in the accounts. LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

The carrying amount of accounts receivable is the amount that is presented on the statement of financial position and represents management‘s estimate of the receivables that will ultimately be collected after expected credit losses.

LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

Using an accounts receivable subsidiary ledger makes it possible to determine the balance owed by an individual customer at any point in time. This makes it easier to manage receivables, answer customer inquiries, follow up on payments, and decide if additional credit should be granted.

(b)

The general ledger control account should agree with the total of the individual accounts in the subsidiary ledger.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

An aging schedule shows the receivables in various stages outstanding; 0–30 days, 31–60 days, 61–90 days, and so on, as long as required.

(b)

The aging schedule is used to apply percentages to outstanding receivables in each age category, to determine the total estimated uncollectible accounts.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

The purpose of the account Allowance for Expected Credit Losses is to show an estimate of the accounts receivable expected to become uncollectible. The allowance account is used because the amount is only an estimate and we do not know for certain which customers will not pay, so we cannot reduce specific customer accounts in the subsidiary ledger or the related accounts receivable control account in the general ledger. Instead, we increase the allowance account balance.

(b)

The account can be in a debit balance if the amount of actual write offs exceeds previous provisions for credit losses. A debit balance will arise during the period when these write offs are recorded, but by the end of the reporting period, adjusting entries will be made that will bring the balance in the allowance account back into a credit position. The credit entry to this account is offset with a debit to Credit Losses.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The allowance for expected credit losses is determined by the company‘s historical credit loss experience, including an aging of the balance, adjusted for expected future economic conditions. Additional insight as to how much of the accounts receivable will ultimately be collected is obtained by the efforts made through the collection process. These efforts would include discussions with the accounts payable department of the customers.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Debit balances in the Allowance for Expected Credit Losses occur during the year when the amounts recorded for write offs exceed the opening balance in the Allowance for Expected Credit Losses. Since the amount arrived at for the adjusted balance in the Allowance for Expected Credit Losses at the end of the previous period is based on estimates, it is possible that this situation could occur. The excess amount of write offs beyond the opening balance of the allowance account could relate to accounts receivable that were outstanding at the end of the previous period. To the extent that this is the case, the financial statements of the previous period had an understatement in the Credit Losses account as well as an understatement of Allowance for Expected Credit Losses balance, and therefore overstatement of net accounts receivable. This situation is treated as a change in estimate and is not considered an error in the previous period financial statements.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

The Credit Losses account reflects only the current year‘s estimates while the Allowance for Expected Credit Losses is a cumulative result of estimates, write offs, and subsequent recoveries from the current and prior periods.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

The write off of an uncollectible account reduces both Accounts Receivable and the Allowance for Expected Credit Losses by the same amount. Thus, the net carrying amount (which is the difference between accounts receivable and allowance for expected credit losses) does not change. The carrying amount will change, however, when an adjusting entry is made to record the estimate of uncollectible accounts, because only the Allowance account is affected in this entry.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

Two journal entries are required because the first journal entry has to restore the previously written off accounts receivable and the second journal entry records the actual receipt of payment on the account. This way, there is a record that the person did eventually pay, and that may affect future credit decisions. Furthermore, the date on which the determination that the receivable is actually collectible and the date it is actually collected may be different and this would necessitate the separate recording of these events.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

Using data analytics-informed credit decisions can have a positive effect on the statement of income. Extending credit to new customers can generate additional sales. The decision to extend credit should be an informed decision based on information that supports taking on the risk of non collection. For example, should the credit applicant show reluctance to provide access to their social media network or spends very little time filling out a credit application, these could be signs of bad credit history or poor payment performance. Limits can be set on the amount of credit that is extended to a new applicant, allowing for establishing a payment pattern over time. Once a clean payment history can be established, the limit can be increased.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

Avoiding delays in collections, solving collection disputes and potentially avoiding write-offs of accounts receivable are some of the benefits of using data analytics. Whenever a customer deviates from their normal payment patterns, there is a reason. This reason could be as simple as a change in staff or as serious as a severe cash shortage or insolvency. Becoming aware of the reason and rectifying the delay in payment can be obtained using automatic phone calls or email notifications. Speeding up collection will improve cash flow and avoid interest charges that would apply for loans obtained by the company to finance overdue accounts receivable balances. Pinpointing and resolving disputes about shipments will enhance customer relations and secure future sales. Finally, collection efforts can be increased on those accounts which become delinquent and could become subject of write-offs. In summary, the statement of income can be improved by reduced interest costs, increased sales and reduced write-offs of accounts receivable.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

(a)

The similarities between accounts receivable and notes receivable are that they are both credit instruments, both can be sold, and both are valued at their carrying amount.

(b)

Differences between accounts receivable and notes receivable include the following: An accounts receivable is an informal promise to pay, while a note receivable is a written promise, giving the payee a stronger legal claim. An account receivable arises from credit sales, while a note receivable can arise for a number of reasons such as the financing of a purchase, lending money, or extending the terms of an account receivable. An account receivable is usually due within a short period of time, while a note receivable can extend for longer periods of time (which is why it bears interest). An account receivable does not incur interest unless the account is overdue, while a note usually bears interest for the entire period.

LO 1,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

(a)

Interest is normally recorded for an account receivable if a customer does not pay in full within a specified period of time (usually 30 days). The invoice will specifically state the amount or percentage of interest due on overdue accounts. In the case of notes receivable, the amount of interest accrues starting from the date of the issuance of the note and continues to the maturity date of the note. Interest earned is recorded when accrued at the end of each accounting period or when collected, whichever comes first.

(b)

Accounts Receivable is normally debited for interest accrued on overdue balances. This accomplishes two goals: updating a particular customer‘s balance in the subsidiary ledger to allow management to decide if additional credit should be granted if overdue balances are not yet paid; it also allows the company to easily send a statement of transactions to the customer that includes interest charges so that the customer will be aware of them. In the case of notes receivable, when accrued, Interest Income is credited and Interest Receivable is debited. The Note Receivable account is for the principal balance of the loan, whereas the interest is recorded and reported separately.

LO 1,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

Notes are not recorded at their maturity value (which would include interest) because the interest on the note is not receivable when the note is first recorded. The interest is earned over time and is recorded when earned.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Cobden Inc., as the party making the promise to pay, is the maker of the note. It would record a note payable. Scotiabank, as the party who will be paid, is the payee. It would record a note receivable.

LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

When a note receivable is honoured at maturity it is paid in full, while a dishonoured note is not paid in full at maturity. A dishonoured note receivable is no longer negotiable. The payee still has a claim against the maker of the note and, if eventual collection is expected, an accounts receivable is recorded.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

These notes should be reported at their carrying amount. An entry should be made to debit Credit Losses and to credit Allowance for Expected Credit Losses for the amount that will reduce the net notes receivable to their expected collectible amount.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Both the gross amount of receivables and the allowance for expected credit losses must be reported either on the statement of financial position or in the notes to the financial statements. It is usual to report the receivables on the statement of financial position at their carrying amount and to provide additional information about the allowance in the notes to the statements.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

22. Current assets Accounts receivable Less: Allowance for expected credit losses Carrying amount of accounts receivable Notes receivable (due in three months) Sales tax recoverable Income tax receivable

$xxx xxx

Non-current assets Notes receivable (due in two years)

$xxx xxx xxx xxx

$xxx

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

(a) Account (1) Sales or Service Revenue (2) Credit Losses (3) Interest Income

(b) Classification Revenues Operating expenses Other income and expenses

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

24.

The steps involved in good receivables management are: (1) Determine to whom credit is extended. (2) Establish a payment period. (3) Monitor collections. (4) Evaluate the liquidity of receivables.

LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

25.

To help in determining whether High Liner‘s receivables management has improved or worsened the average collection period should be determined. Average collection period

2021 365 = 30.9 days 11.8

2020 365 = 32.3 days 11.3

High Liner‘s receivable management has improved. The receivables turnover has increased from 11.3 times to 11.8 times, indicating a faster collection of receivables. The average collection period shows this more clearly; the average time it takes to collect a receivable has decreased from 32.3 days to 30.9 days. LO 5 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

26.

(a)

An increase in the current ratio does not necessarily mean that the liquidity of a company has improved. To determine if liquidity has improved, we need to understand why the current ratio rose. If it rose because the company has more cash, then the company is more liquid. On the other hand, if the cash has fallen but inventory has risen by a larger amount because of declining sales, the current ratio will rise but this does not mean that the company is more liquid. It simply means that the company has some inventory that it cannot sell and the company has less liquidity. The same is true if net accounts receivable increases because of a slowdown in collections, not fully adjusted for in the estimate of uncollectible accounts.

(b)

Other ratios that focus on specific current assets rather than current assets in total (as the current ratio does) give us insight into the components of working capital and allow us to understand liquidity in more detail. Examples include the receivables turnover ratio and the inventory turnover ratio. In general, if these ratios are rising, liquidity is improving because cash is being received more quickly.

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

27.

If the receivables turnover is significantly higher than its competitors, it means the company is collecting its receivables faster, indicating it may have an earlier payment due date. Customers may move to a competitor that does not collect its receivables as quickly, to better manage their cash flow. If a company has a receivables turnover that is significantly lower than its competitors, it may be at a competitive disadvantage because it is financing its customers‘ purchases for a longer time and delaying the time it takes to receive cash.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 Solutions Manual 8-897 Chapter 8 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

CM: Reporting and Finance

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8.1 a. b. c. d. e. f.

Notes receivable Accounts receivable Other receivables Other receivables Notes receivable Other receivables

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.2 a.

July 1

July 8

July 29

Accounts Receivable ................................................. Refund Liability ($58,000 x 5%) ........................... Sales ....................................................................

58,000

Cost of Goods Sold ................................................... Estimated Inventory Returns ($32,000 x 5%) ............ Inventory ..............................................................

30,400 1,600

Refund Liability .......................................................... Accounts Receivable ............................................

2,400

Inventory .................................................................... Estimated Inventory Returns ................................

1,320

Cash .......................................................................... Accounts Receivable ($58,000 – $2,400) ............

55,600

2,900 55,100

32,000

2,400

1,320

55,600

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.3 a.

April 28 Accounts Receivable ................................................. Refund Liability ($26,000 x 4%) ........................... Sales ....................................................................

26,000

Cost of Goods Sold ................................................... Estimated Inventory Returns ($18,000 x 4%) ............ Inventory ..............................................................

17,280 720

May 3 Refund Liability .......................................................... Accounts Receivable ............................................

980

Inventory .................................................................... Estimated Inventory Returns ................................

680

Cash .......................................................................... Accounts Receivable ($26,000 – $980) ...............

25,020

May 6

1,040 24,960

18,000

980

680

25,020

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.4 Accounts Receivable Subsidiary Ledger Chiu Corp. Jan. 7 1,800 Jan. 17 Jan. 31 Bal. 1,100

700

Elbaz Inc. Jan. 15 6,000 Jan. 24 Jan. 31 Bal. 4,000

2,000

Lewis Elbaz Corp. Inc. Jan. Jan.23 15 3,700 6,000 Jan. Jan.2924 Jan. Jan.31 31Bal. Bal. 4,000 0

3,700 2,000

General Ledger Control Account Accounts Receivable Jan. 31 11,500 Jan. 31 Jan. 31Bal. 5,100

6,400

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.5 a. Number of Days Outstanding

Accounts Receivable

Estimated Percentage Uncollectible

0–45 days

$726,000

$14,520

46–90 days

248,000

12,400

Over 90 days

112,000

16%

17,920

Total

Total Estimated Uncollectible Accounts

$1,086,000

$44,840

Required ending balance for Allowance for Expected Credit Losses $44,840 b.

Credit Losses ............................................................... Allowance for Expected Credit Losses ............... ($44,840 – $13,175)

31,665

Credit Losses ............................................................... Allowance for Expected Credit Losses ............... ($44,840 + $8,920)

53,760

31,665

53,760

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.6 a. Number of Days

Accounts

Estimated Percentage

Outstanding

Receivable

Uncollectible

Uncollected Accounts

0-30 days

$368,000

$ 3,680

31-60 days

120,000

4,800

61-90 days

72,000

10%

7,200

Over 90 days

40,000

20%

8,000

Total b. Dec. 31

c. Dec. 31

$600,000

Total Estimated

$23,680

Credit Losses ($23,680 – $3,600) ................................... Allowance for Expected Credit Losses ..................

20,080

Credit Losses ($23,680 + $5,400) ................................... Allowance for Expected Credit Losses ..................

29,080

20,080

29,080

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.7 a.

Jan. 24

Allowance for Expected Credit Losses .................. Accounts Receivable.....................................

(1) Accounts receivable Allowance for expected credit losses Carrying amount

Before Write Off $480,000 29,000 $451,000

11,000 11,000

(2)

After Write Off $469,000 18,000 $451,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.8 Mar. 4

Accounts Receivable ....................................................... Allowance for Expected Credit Losses ..................

11,000

Cash ................................................................................ Accounts Receivable.............................................

11,000

LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.9 Aug.

Aug. 31

Sept. 30

Oct.

Notes Receivable ........................................................... Accounts Receivable ..............................................

26,000

Interest Receivable ($26,000 × 6% × 1/12) .................... Interest Income .......................................................

130

Interest Receivable ($26,000 × 6% × 1/12) .................... Interest Income .......................................................

130

Cash ............................................................................... Interest Receivable ................................................. Notes Receivable ...................................................

26,260

26,000

130

260 26,000

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.10 Jan.

Feb.

Mar.

April 30

July

Accounts Receivable ...................................................... Sales ......................................................................

48,000

Cost of Goods Sold ........................................................ Inventory.................................................................

32,000

Notes Receivable ........................................................... Accounts Receivable ..............................................

48,000

Cash ............................................................................. Interest Income ($48,000 x 7% x 1/12) ...................

280

Interest Receivable ($48,000 × 7% × 1/12) .................... Interest Income .......................................................

280

Cash ............................................................................... Notes Receivable ................................................... Interest Income ($48,000 × 7% × 1/12) ..................

48,280

48,000

32,000

48,000

280

48,000 280

Note: Interest collections on April 1, May 1 and June 1 would also be recorded although not shown above. LO 1,3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.11 2023 April 1

Dec. 31

Notes Receivable ........................................................... Sales ......................................................................

10,000

Cost of Goods Sold ........................................................ Inventory.................................................................

6,000

Interest Receivable ($10,000 × 9% × 9/12) .................... Interest Income .......................................................

675

10,000 6,000 675

(At the end of each year, interest is accrued for the time elapsed since the date of a note)

2024 Mar 31

10,900 675 10,000 225

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.12 a.

Apr. 1 Notes Receivable ......................................................... Accounts Receivable ..........................................

40,000

July 1 Cash ............................................................................ Notes Receivable ................................................ Interest Income ($40,000 × 6% × 3/12)...............

40,600

Apr. 1 Notes Receivable ......................................................... Accounts Receivable ..........................................

40,000

July 1 Accounts Receivable ................................................... Notes Receivable ................................................ Interest Income ($40,000 × 6% × 3/12)...............

40,600

Apr. 1 Notes Receivable ......................................................... Accounts Receivable ..........................................

40,000

July 1 Credit Losses ............................................................... Notes Receivable ...............................................

40,000

40,000 40,000 600 40,000 40,000 600 40,000 40,000

Note that no interest income is recorded in (c) because it is unlikely that it will be collected. LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.13 NIAS CORPORATION Statement of Financial Position (Partial) February 28, 2024

Assets Current assets Cash ........................................................................ Trading investments................................................. Accounts receivable ................................................. Less: Allowance for expected credit losses ............. Sales tax recoverable .............................................. Notes receivable (due Nov. 1, 2024) ....................... Inventory .................................................................. Estimated inventory returns ..................................... Prepaid rent ............................................................. Total current assets .................................................

$ 150,000 330,000 $470,000 30,000

440,000 38,000 300,000 380,000 19,000 8,000 $1,665,000

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8.14 a. ($ in thousands) Receivables turnover Average collection period

2021 $4,521,082 = $122,030 + $116,297 2 365 = 37.9

Credit sales

Days in year

37.9 times 9.6 days

Average gross accounts receivable Accounts receivable turnover

2020 $4,303,722 $116,297 + $123,617 2 365 35.9

35.9 times

10.2 days

Accounts receivable turnover

Average collection period in days

The receivables turnover is better in 2021 and the average collection period is correspondingly decreased by slightly more than half of one day.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 8.15 a. ($ in millions) Receivables turnover Average collection period

2021 $7,684.9 $434.7 + $363.7 2 365 19.3

Credit sales

Days in year

19.3 times

18.9 days

Average gross accounts receivable Accounts receivable turnover

2020 $5,454.4 $363.7 + $264.0 2 365 17.4

17.4 times

21.0 days

Accounts receivable turnover

Average collection period in days

The receivables turnover is better in 2021 and the average collection period is correspondingly reduced by 2.1 days.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO EXERCISES EXERCISE 8.1 a. Jan.

Compton Limited 6 Accounts Receivable. ..................................................... Sales ......................................................................

b. Jan.

45,200 45,200

Cost of Goods Sold ........................................................ Inventory.................................................................

26,500

Cash ............................................................................... Accounts Receivable. .............................................

45,200

26,500

45,200

Singh Inc. 6 Inventory ......................................................................... Accounts Payable ...................................................

45,200

Accounts Payable ........................................................... Cash .......................................................................

45,200

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.2 a. Feb.

Accounts Receivable (Andrew Noren) ............................ Refund Liability ($1,140 x 8%) ................................ Sales ......................................................................

1,140

Cost of Goods Sold ........................................................ Estimated Inventory Returns ($765 x 8%) ...................... Inventory.................................................................

704 61

Refund Liability ............................................................... .... Accounts Receivable (Andrew Noren) ....................

Inventory ......................................................................... Estimated Inventory Returns ..................................

Accounts Receivable (Dong Corporation) ...................... Refund Liability ($760 x 8%) ................................... Sales ......................................................................

760

Cost of Goods Sold ........................................................ Estimated Inventory Returns ($490 x 8%) ...................... Inventory.................................................................

451 39

Cash ............................................................................... Refund Liability ($842 x 8%) ................................... Sales ......................................................................

842

Cost of Goods Sold ........................................................ Estimated Inventory Returns ($622 x 8%) ...................... Inventory.................................................................

572 50

Accounts Receivable (Rafik Kurji) .................................. Refund Liability ($920 x 8%) ................................... Sales ......................................................................

920

Cost of Goods Sold ........................................................ Estimated Inventory Returns ($680 x 8%) ...................... Inventory.................................................................

626 54

Cash ............................................................................. Accounts Receivable (Dong Corporation) ..............

760

91 1,049

765

61 699

490

67 775

622

74 846

680

760

EXERCISE 8.2 (CONTINUED) a. (continued) Feb. 24

Accounts Receivable (Andrew Noren) ............................ Refund Liability ($696 x 8%) ................................... Sales ......................................................................

696

Cost of Goods Sold ........................................................ Estimated Inventory Returns ($410 x 8%) ...................... Inventory.................................................................

377 33

Accounts Receivable (Batstone Corporation) ................. Refund Liability ($1,738 x 8%) .............................. Sales.....................................................................

1,738

Cost of Goods Sold ........................................................ Estimated Inventory Returns ($1,105 x 8%) ................... Inventory ...............................................................

1,017 88

56 640

410

139

1,599

1,105

Cash ............................................................................... Accounts Receivable (Andrew Noren) ..................

1,000 1,000

Accounts Receivable Subsidiary Ledger

Andrew Noren Feb. 2 1,140 Feb. 4 24 696 28 Feb. 28 Bal. 746

90 1,000

Batstone Corporation Feb. 27 1,738 Feb. 28 Bal. 1,738

Dong Corporation Feb. 5 760 Feb. 22 Feb. 28 Bal. 0

Feb. 10 Feb. 28 Bal.

760

Rafik Kurji 920 920

General Ledger Control Account Accounts Receivable Feb. 2 1,140 Feb. 4 5 760 22 10 920 28 24 696 27 1,738 Feb. 28 Bal. 3,404

90 760 1,000

EXERCISE 8.2 (CONTINUED) c.

Subledger listing Andrew Noren ............................................................................... Dong Corporation .......................................................................... Rafik Kurji .......................................................................... Batstone Corporation .................................................................... Total ..............................................................................................

$ 746 0 920 1,738 $3,404

Balance per general ledger control account ..................................

$3,404

LO 1 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.3 a.

Dec. 31

Credit Losses ($36,000 – $4,400).............. Allowance for Expected Credit Losses

31,600

Credit Losses ($36,000 + $2,400).............. Allowance for Expected Credit Losses

38,400

31,600

38,400

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.4 a.

Age of Accounts 0-30 days 31-60 days 61-90 days Over 90 days

Mar. 31

Amount $260,000 50,400 34,000 25,600

% 2 10 30 50

Credit Losses ................................................... Allowance for Expected Credit Losses .... ($33,240 – $8,800)

Estimated Uncollectible $ 5,200 5,040 10,200 12,800 $33,240 24,440 24,440

The carrying amount of the accounts receivable at March 31 is as follows: Accounts receivable ............................................................. Less: Allowance for expected credit losses .......................... Carrying amount ...................................................................

$370,000 33,240 $336,760

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.5 a. 2023 Dec. 31

Credit Losses.................................................................. Allowance for Expected Credit Losses .................... ($16,800 + $2,000)

18,800

Allowance for Expected Credit Losses ........................... Accounts Receivable ...............................................

1,900

Accounts Receivable ...................................................... Allowance for Expected Credit Losses ....................

1,900

Cash ............................................................................... Accounts Receivable ...............................................

1,900

18,800

2024 May 11

Nov. 12

1,900

Accounts receivable Less: Allowance for losses Carrying amount

expected

Dec. 31 2023

May 11 2024

Nov.12 2024

$300,000

$298,100

16,800 $283,200

14,900 $283,200

16,800 $281,300

credit

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.6 a. March 1 Balance Sales

March 31 Balance

Accounts Receivable 30,000 40,000 Collections Write offs 32,000

35,000 (1)

(1) Write offs: $30,000 + $40,000 – $35,000 – $32,000 = $3,000

Write offs

Allowance for Expected Credit Losses March 1 Balance Credit Losses (1) March 31 Balance

5,000 (2) 4,500

(1) Write offs: $30,000 + $40,000 – $35,000 – $32,000 = $3,000 (2) Credit losses: $4,500 – [$5,000 – $3,000 (from (1) above)] = $2,500

b. To record write offs: Allowance for Expected Credit Losses ......................... Accounts Receivable .......................................

3,000 3,000

c. To record credit losses: Credit Losses ............................................................... Allowance for Expected Credit Losses.............

2,500 2,500

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.7 Nov.

Dec.

Feb.

Notes Receivable ........................................................... Cash .......................................................................

116,000

Notes Receivable ........................................................... Sales ......................................................................

22,600

Cost of Goods Sold ........................................................ Inventory.................................................................

13,200

Notes Receivable ........................................................... Accounts Receivable ..............................................

24,000

22,826

Interest Receivable ......................................................... Interest Income .......................................................

3,780

116,000

22,600

13,200

24,000

22,600 226

Calculation of interest Income on February 28: Bouchard note: Aquilina note: Total accrued interest

$116,000 × 9% × 4/12 $24,000 × 6% × 2.5/12

= $3,480 =. 300 $3,780

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

3,780

EXERCISE 8.8 May

June 30

July

Aug.

Sept.

Oct.

Nov.

Notes Receivable ........................................................... Accounts Receivable ..............................................

12,000

Interest Receivable ($12,000 × 5% × 2/12) .................... Interest Income .......................................................

100

Notes Receivable ........................................................... Cash .......................................................................

10,000

Cash ............................................................................... Interest Income ($10,000 × 7% × 1/12) ..................

Cash ............................................................................... Interest Income .......................................................

10,058

Credit Losses ................................................................. Note Receivable ..................................................... Interest Receivable .................................................

12,100

12,000

100

10,000

10,000 58

12,000 100

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.9 FINNING INTERNATIONAL INC. Statement of Financial Position (partial) December 31, 2021 (in millions) Assets Current assets Receivables Trade accounts receivable ............................................. Less: Allowance for expected credit losses ....................

$874 35

$839

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.10

Accounts payable Accounts receivable Advances to employees Allowance for expected credit losses Cash Credit losses Interest expense Interest income Inventory Notes receivable (current) Notes receivable (non-current) Prepaid insurance Sales Sales tax recoverable

$22,600 18,200 2,900 1,300 7,500 2,000 2,400 6,000 26,400 25,000 75,000 1,500 370,000 3,150

a. SFP or SI SFP SFP SFP SFP SFP SI SI SI SFP SFP SFP SFP SI SFP

b. Classification

Operating expense Non-operating expense Non-operating revenue

Operating revenue

c. APOLLO CORPORATION Statement of Financial Position (partial) November 30, 2024 Assets Current assets Cash .............................................................................. Accounts receivable ....................................................... $18,200 Less: Allowance for expected credit losses .................... 1,300 Notes receivable ................................................................................. Advances to employees ....................................................................... Sales tax recoverable ........................................................................... Inventory .............................................................................................. Prepaid insurance ................................................................................ Total current assets ....................................................................

$ 7,500 16,900 25,000 2,900 3,150 26,400 1,500 $83,350

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8.11 a.

($ in millions)

2021 Current ratio =

$3,426 $3,120

= 1.1 : 1

Current Assets Current Liabilities

Receivables turnover =

Credit sales

$14,477 = 13.3 times ($1,102 + $1,080) ÷ 2 Average gross accounts receivable

Average collection period =

Days in year

Accounts receivable turnover

2020 Current ratio =

365 days 13.3 times

Accounts receivable turnover

= 27.4 days

Average collection period in days

$3,102 $3,274

= 0.9 : 1

Receivables turnover =

$13,819 = 11.9 times ($1,080 + $1,241) ÷ 2

Average collection period =

365 days 11.9 times

= 30.7 days

In 2021, accounts receivable increased 2.0% [($1,102 − $1,080) ÷ $1,080] while revenues increased 4.8% [($14,477 − $13,819) ÷ $13,819]. The receivables turnover ratio increased and the average collection period decreased. This indicates that CN is doing a better job of collecting its receivables. The current ratio has increased (improved) from 0.9:1 in 2020 to 1.1:1 in 2021. This increase can be attributed to the 10.4% [($3,426 – $3,102)  $3,102] increase in current assets compared to the decline in current liabilities of 4.7% [($3,120 – $3,274)  $3,274].

LO 5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 8.12 a.

($ in thousands)

2021 Current ratio =

$758,426 $97,037

= 7.8 : 1

Current Assets Current Liabilities

Receivables turnover =

Credit sales

$1,001,994 = 6.9 times ($166,467 + $125,850) ÷ 2 Average gross accounts receivable

Average collection period =

Days in year

2020 Current ratio =

365 days 6.9 times

Accounts receivable turnover

$781,153 $68,006

Accounts receivable turnover

= 52.9 days

Average collection period in days

= 11.5 : 1

Receivables turnover =

$852,493 = 6.7 times ($125,850 + $129,475) ÷ 2

Average period =

365 days 6.7 times

collection

= 54.5 days

EXERCISE 8.12 (CONTINUED) b.

In 2021, accounts receivable increased 32.3% [($166,467 − $125,850) ÷ $125,850] while revenues increased 17.5% [($1,001,994 − $852,493) ÷ $852,493]. The receivables turnover ratio and the average collection period indicate that the company‘s management of receivables has improved. The turnover has increased from 6.7 times in 2020 to 6.9 times in 2021. The average collection period has decreased from 54.5 days in 2020 to 52.9 days in 2021 so cash is being collected more quickly. The current ratio has decreased (deteriorated) from 11.5 in 2020 to 7.8 in 2021 and remains very high. This change in the ratio occurred because the 42.7% [($97,037 – $68,006) / $68,006] increase in current liabilities and the 2.9% [($758,426 – $781,153) / $781,153] decrease in current assets.

LO 5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 8.13 a.

At first glance, the increase in the current ratio might lead to the conclusion that Lin‘s liquidity has improved in 2024. When looking further and noting a deterioration in the receivables and inventory turnover ratios in the same period, one must conclude that the increase in the current ratio does not mean that Lin‘s liquidity has improved. In this case, total current assets have increased in comparison to current liabilities because of increases in accounts receivable and inventory.

Lin must determine the source of the deterioration of both the receivables and inventory turnover ratios. If the deterioration is a result of specific policy changes in the way in which Lin is managing its accounts receivable, for example, by extending its credit terms, the deterioration of the accounts receivable turnover is not a surprising result. Similarly, if the deterioration of the inventory turnover is a result of a management strategy to improve sales and profitability, the outcome is also not a surprise to management. On the other hand, if Lin establishes that there have been no direct causes to the change that can be readily explained through the actions of management, specific measures to improve the management of its accounts receivable and inventory must be undertaken immediately. These measures could include the following for accounts receivable: 1. 2. 3.

Establishment of credit policies and credit limits for certain customers. Initiate the use of a cash discount to encourage early payment of receivables. Aggressively monitor collections to encourage customers to pay on time.

These measures could include the following for inventory: 1. 2. 3.

Monitor inventory levels carefully and only reorder when inventory is selling and additional inventory is required. Limit the amount of inventory by improving its purchasing relationships with suppliers. If possible, move to a just-in-time system, where inventory is only purchased as needed.

LO 5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO PROBLEMS PROBLEM 8.1A a.

Accounts Receivable .................................................... 5,400,000 Refund Liability ($5,400,000 x 2%) ........................ Sales .....................................................................

108,000 5,292,000

Cost of Goods Sold ....................................................... 2,910,600 Estimated Inventory Returns ......................................... 59,400 Inventory................................................................

2,970,000

Refund Liability .............................................................. Accounts Receivable .............................................

80,000

Inventory ...................................................................... Estimated Inventory Returns .................................

44,000

80,000

44,000

Cash .............................................................................. 5,400,000 Accounts Receivable ............................................. Allowance for Expected Credit Losses .......................... Accounts Receivable .............................................

160,000

Accounts Receivable ..................................................... Allowance for Expected Credit Losses ..................

72,000

Cash .............................................................................. Accounts Receivable .............................................

72,000

Credit Losses ................................................................ Allowance for Expected Credit Losses ....................... $104,000 – ($118,000 – $160,000 + $72,000) = $74,000

74,000

5,400,000

160,000

72,000

74,000

PROBLEM 8.1A (CONTINUED) b. Accounts Receivable Bal. 1,760,000 (1) 5,400,000 (2) (5) 72,000 (3) (4) (5) Bal 1,520,000

80,000 5,400,000 160,000 72,000

Allowance for Expected Credit Losses Bal. 118,000 (4) 160,000 (5) 72,000 (6) 74,000

Bal.

104,000

January 1, 2024 Accounts receivable ............................................................... Less: Allowance for expected credit losses ............................ Carrying amount .....................................................................

$1,760,000 118,000 $1,642,000

December 31, 2024 Accounts receivable ............................................................... Less: Allowance for expected credit losses ............................ Carrying amount .....................................................................

$1,520,000 104,000 $1,416,000

UNDERWOOD IMPORTS INC. Statement of Financial Position (partial) December 31, 2024 Assets

Current assets Accounts receivable .................................................... Less: Allowance for expected credit losses .................

$1,520,000 104,000

$1,416,000

UNDERWOOD IMPORTS INC. Statement of Income (partial) Year Ended December 31, 2024

Sales .................................................................................................. $5,292,000 Less: Cost of goods sold .................................................................. 2,910,600 Gross profit......................................................................................... 2,381,400 Operating expenses Credit Losses........................................................................... 74,000 LO 1,2,4 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.2A a.

Accounts Receivable ..................................................... Sales .........................................................................

4,300,000

Cost of Goods Sold........................................................ Inventory....................................................................

3,100,000

Cash .............................................................................. Accounts Receivable .................................................

5,200,000

Allowance for Expected Credit Losses .......................... Accounts Receivable .................................................

185,000

Accounts Receivable ..................................................... Allowance for Expected Credit Losses ......................

28,000

Cash .............................................................................. Accounts Receivable .................................................

28,000

Credit Losses [see (e)]................................................... Allowance for Expected Credit Losses ......................

98,000

4,300,000

3,100,000

5,200,000

185,000

28,000

98,000

e. Accounts Receivable Beg. Bal. 2,100,000 Sales 4,300,000 Collections Recovery 28,000 Write off Collections End Bal.

Allowance for Expected Credit Losses Beg. Bal 144,000 5,200,000 Write off 185,000 Recovery 28,000 185,000 Credit losses 98,000 28,000 End Bal 85,000 1,015,000

Before credit losses was recorded, the Allowance account had a debit balance of $13,000 ($144,000 – $185,000 + $28,000). To adjust this to $85,000 requires a credit to this account of $98,000 with an offsetting debit to Credit Losses.

PROBLEM 8.2A (CONTINUED) f.

AZIM ENTERPRISES LTD. Statement of Financial Position (partial) Assets Current assets Accounts receivable ............................................................... Less: Allowance for expected credit losses ............................ Carrying amount.....................................................................

$1,015,000 85,000 930,000

LO 1,2,4 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.3A Beg. bal.

End. bal.

Accounts Receivable 24,000 (a) 150,000 90,000

(b)82,000 (c) 2,000

Allowance for Expected Credit Losses 2,500 Beg. bal. (d) 2,000 Unadj. bal. 500 (e) 3,000 End. bal. (f) 3,500 Sales 150,000 Credit Losses (g) 3,000 a. Addition to accounts receivable (from Sales) = $150,000 b. $24,000 + $150,000 (a) – $2,000 (c) - $90,000 (ending balance) = $82,000 (b) c. Write offs of accounts receivable obtained from reduction of allowance for expected credit losses $2,000 (d) d. $2,500 – $500 =$2,000. e. $3,500 (f) - $500 = $3,000 (e) and this represents the credit side of the credit losses entry. f. Allowance for expected credit losses = $3,500 (given) g. Credit losses = Adjustment to allowance for expected credit losses = $3,000

[from (e)] LO 2 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.4A a.

Total estimated allowance for expected credit losses:

Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total

Accounts Receivable $ 690,000 430,000 102,000 80,000 $1,302,000

Estimated Percentage Uncollectible 3% 5% 10% 20%

Estimated Uncollectible Accounts $ 20,700 21,500 10,200 16,000 $68,400

(1) Credit Losses ........................................................................... Allowance for Expected Credit Losses .............................. [$68,400 – $10,630] (2)

57,770 57,770

If the allowance for expected credit losses had an unadjusted debit balance of $10,630 the credit losses in the entry above would be $79,030 ($68,400 + $10,630)

Allowance for Expected Credit Losses ..................................... Accounts Receivable .........................................................

54,370

Accounts Receivable ................................................................ Allowance for Expected Credit Losses ..............................

14,378

Cash ......................................................................................... Accounts Receivable .........................................................

14,378

54,370

14,378

LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.5A a.

Total estimated allowance balance at March 31, 2023:

Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total

Accounts Receivable $370,000 125,000 160,000 240,000 $895,000

Estimated Percentage Uncollectible 2% 7% 13% 21%

Estimated Uncollectible Accounts $ 7,400 8,750 20,800 50,400 $87,350

Total estimated allowance balance at March 31, 2024:

Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total

Accounts Receivable $430,000 260,000 130,000 60,000 $880,000

Estimated Percentage Uncollectible 2% 7% 13% 21%

Estimated Uncollectible Accounts $ 8,600 18,200 16,900 12,600 $56,300

Total accounts receivable decreased slightly from 2023 to 2024. However, the estimated allowance balance decreased significantly relative to the decrease in accounts receivable. Amounts outstanding over 90 days in 2024 were one quarter of those in 2023. This implies that some receivables over 90 days were collected or written off in 2024. b.

Credit Losses ..................................................................... Allowance for Expected Credit Losses .............................. ($87,350 – $6,400)

80,950

Allowance for Expected Credit Losses ..................................... Accounts Receivable .........................................................

95,000

80,950

95,000

PROBLEM 8.5A (CONTINUED) d.

Accounts Receivable ................................................................ Allowance for Expected Credit Losses ..............................

5,500

Cash ......................................................................................... Accounts Receivable .........................................................

5,500

Credit Losses ............................................................................ Allowance for Expected Credit Losses .............................. $56,300 – (balance in the allowance before adjustment): $56,300 – ($87,350 – $95,000 + $5,500) = $58,450

58,450

f. Accounts receivable.................................................................. Less: Allowance for expected credit losses .............................. Carrying amount .....................................................................

5,500

58,450

2024 $880,000 56,300 $823,700

2023 $895,000 87,350 $807,650

LO 2 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.6A Jan.

Mar.

May

June

Notes Receivable ........................................................... Sales ......................................................................

13,200

Cost of Goods Sold ........................................................ Inventory ................................................................

6,600

Accounts Receivable ....................................................... Sales ..................................................................

8,700

Cost of Goods Sold ........................................................ Inventory ................................................................

6,900

Accounts Receivable ...................................................... Sales ......................................................................

15,000

Cost of Goods Sold ........................................................ Inventory ................................................................

11,000

Accounts Receivable ...................................................... Sales ......................................................................

10,000

Cost of Goods Sold ........................................................ Inventory ................................................................

4,000

Notes Receivable ........................................................... Accounts Receivable ..............................................

15,000

Cash ($13,200 + $220) .................................................. Notes Receivable ................................................... Interest Income ($13,200 × 5% × 4/12) ..................

13,420

Accounts Receivable ($15,000 + $225) ........................ Notes Receivable ................................................... Interest Income ($15,000 × 6% × 3/12) ..................

15,225

Interest Receivable ....................................................... Interest Income ...................................................... Poulin: ($8,700 × 36% × 4/12) = $1,044 JP: ($10,000 × 36% × 3/12) = $900

1,944

13,200 6,600

8,700 6,900

15,000 11,000 10,000

4,000

15,000

13,200 220

15,000 225

1,944

LO 1,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.7A a.

Nov.

Dec.

Jan.

Feb.

Nov.

Dec.

Jan.

Feb.

Notes Receivable ...................................... Accounts Receivable.........................

60,000

Cash .......................................................... Interest Income ................................. ($60,000 × 9% × 1/12)

450

Interest Receivable ($60,000 × 9% × 1/12) Interest Income .........................................

450

Cash .......................................................... Interest Receivable ...........................

450

Cash .......................................................... Interest Income ($60,000 × 9% × 1/12) Notes Receivable ..............................

60,450

Accounts Payable ..................................... Notes Payable ...................................

60,000

Interest Expense ....................................... Cash ($60,000 × 9% × 1/12) .............

450

Interest Expense ($60,000 × 9% × 1/12) ... Interest Payable ................................

450

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

450

Notes Payable ........................................... Interest Expense ($60,000 × 9% × 1/12) ... Cash..................................................

60,000 450

60,000

450

450 60,000

60,000

450

60,450

PROBLEM 8.7A (CONTINUED) c. (1)

(2)

Feb.

Accounts Receivable ................................. Interest Income ................................. Notes Receivable ..............................

60,450

Credit Losses ............................................ Notes Receivable .............................

60,000

450 60,000

60,000

LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.8A a.

Notes receivable total $61,000 and interest receivable $603 at September 30, 2024: RES Inc. Ihara Ltd. Dragon Limited MGH Corp. Total

Oct.

$17,000 × 6% × 6/12 = 17,500 × 4% × 1/12 = 6,000 × 7% × 1/12 = 20,500 × 5% × 0/12 = $61,000

$510 58 35 0 $603

Cash ($17,500 × 4% × 1/12) ..................... Interest Receivable ...........................

Accounts Receivable ................................. Notes Receivable .............................. Interest Receivable ($6,000 × 7% × 1/12) ........................ Interest Income ($6,000 × 7% × 1/12) ........................

6,070

Cash .......................................................... Notes Receivable .............................. Interest Receivable ($17,000 × 6% × 6/12) ...................... Interest Income ($17,000 × 6% × 1/12) ......................

17,595

Interest Receivable ................................... Interest Income ................................. Ihara Ltd. $17,500 × 4% × 1/12 = $ 58 MGH Corp. $20,500 × 5% × 1/12 = 85 Total $143

143

6,000 35 35

17,000 510 85

143

PROBLEM 8.8A (CONTINUED) c. Interest Receivable Bal. see (a) 603 Oct. 1 Oct. 31 143 31 31 Bal. 143

58 35 510

Bal. see (a) 61,000

Notes Receivable Oct. 31 31

6,000 17,000

Bal. 38,000

d. TARDIF CORPORATION Statement of Financial Position (partial) October 31, 2024 ______________________________________________________________ Assets Current assets Accounts receivable ............................................... ..... Interest receivable.................................................. .....

$6,070 143

Non-current assets Notes receivable .................................................... .....

$ 38,000

LO 3,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.9A

CANADIANA CORPORATION Statement of Financial Position (Partial) December 31, 2024 (in thousands)

Assets Current assets Cash Trading investments Accounts receivable Less: Allowance for expected credit losses Notes receivable Income tax receivable Inventory Supplies Total current assets Non-current assets Notes receivable Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total assets

$ $1,630 32

592 196 1,598 2,481 99 1,902 85 6,953

101 $ 1,077 $2,734 960 $737 488

1,774 249

3,100 $10,154

LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.10A a. Nike (in US $ millions)

(

Receivables turnover

* =

Average collection period

)

Adidas (in euro millions)

(

* =

times

)

times

days

= 4 days

Credit sales

Average gross accounts receivable

Accounts receivable turnover

Days in year

Accounts receivable turnover

Average collection period in days

Nike has a better turnover than Adidas, and both companies are behind the industry average. Adidas‘ collection experience is weaker (meaning that it collects its receivables more slowly).

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 8.11A a.

2024

2023

2022

Average collection period

365 = 45 days 8.2

365 = 49 days 7.4

365 = 54 days 6.7

Days in inventory

365 = 37 days 9.9

365 = 42 days 8.7

365 = 49 days 7.5

At first glance, it appears that Pampered Pets‘ liquidity has improved over the past two years since the company‘s current ratio has increased from 2.1:1 to 2.6:1. The current ratio aggregates all current assets together. To get a better understanding of why this increase in the current ratio occurred, we need to analyze specific accounts that are included in this ratio. To do this, we can examine the receivables and inventory turnover ratios. The increase in the receivables turnover ratio indicates that the company is collecting its receivables faster and this improves cash flow and liquidity. As well, the company appears to be moving its inventory more quickly as evidenced by the higher inventory turnover ratio and this also improves cash flow and liquidity. Therefore, it does appear that the company‘s overall liquidity is improving.

Changes in the turnover ratios indirectly affect profitability. Improvements in the receivables turnover and inventory turnover speed up the cash cycle, which provides the company with better cash flow and decreases the need for outside financing, thus decreasing interest expense. Furthermore, improvements in the receivables turnover usually arise as a direct result of improvements in credit management and better collection efforts. These improvements result in fewer defaults and decreases in credit losses. Improvements in the inventory turnover improve profitability by reducing carrying charges associated with stocking inventory (such as warehousing costs). Improved inventory turnover also reduces the risk of merchandise not selling and becoming obsolete or selling at reduced prices. Obsolete inventory lowers profitability because the cost of this type of inventory has to be written off.

PROBLEM 8.11A (CONTINUED) d.

Changes in the turnover ratios directly affect cash flow. Improvements in the receivables turnover and inventory turnover speed up the cash cycle, which provides the company with better cash flow and less need for outside financing.

There are several steps that Pampered Pets could consider to improve its receivables and inventory management: Receivables The company could establish credit policies and credit limits for certain customers, if it doesn‘t already have them. The company could initiate the use of a cash discount to encourage early payment of receivables. The company could more aggressively monitor collections to encourage customers to pay on time. Inventory Pampered Pets should monitor its inventory levels carefully and only reorder when inventory is selling and additional quantities are required. If inventory is not selling (e.g., not in favour or in season), it should mark it down quickly to get rid of it rather than risk it not selling at all and having to pay carrying costs for obsolete inventory. The company could limit the amount of inventory by improving its purchasing relationships with suppliers. If inventory could be purchased more frequently, high levels of inventory will not have to be carried and stored. Also, were it possible to move to a system where inventory is only purchased as needed (called ―just-in-time‖), Pampered Pets could reduce the amount of inventory it had to carry and improve the turnover ratio. However, there is some risk to this option as sales could be lost if stock-outs occur.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 8.1B a.

Accounts Receivable ................................................. Refund Liability ................................................ Sales ................................................................

1,800,000

Cost of Goods Sold ................................................... Estimated Inventory Returns ..................................... Inventory ..........................................................

981,360 62,640

Refund Liability.......................................................... Accounts Receivable .......................................

82,000

Inventory ................................................................... Estimated Inventory Returns............................

48,000

Cash ......................................................................... Accounts Receivable .......................................

1,600,000

Allowance for Expected Credit Losses ...................... Accounts Receivable .......................................

51,000

Accounts Receivable ................................................. Allowance for Expected Credit Losses ............

12,000

Cash ......................................................................... Accounts Receivable .......................................

12,000

Credit Losses ............................................................ Allowance for Expected Credit Losses ... $31,000 – ($42,000 – $51,000 + $12,000) = $28,000

28,000

108,000 1,692,000

1,044,000

82,000

48,000

1,600,000

51,000

12,000

28,000

PROBLEM 8.1B (CONTINUED) b. Accounts Receivable Bal. 510,000 (1) 1,800,000 (2) (5) 12,000 (3) (4) (5) Bal. 577,000 c.

82,000 1,600,000 51,000 12,000

Allowance for Expected Credit Losses Bal. 42,000 (4) 51,000 (5) 12,000 (6) 28,000

Bal.

31,000

January 1, 2024 Accounts receivable ...................................................................... Less: Allowance for expected credit losses .................................. Carrying amount ...........................................................................

$510,000 42,000 $468,000

December 31, 2024 Accounts receivable ...................................................................... Less: Allowance for expected credit losses .................................. Carrying amount ...........................................................................

$577,000 31,000 $546,000

d. BORDEAUX INC. Statement of Financial Position (partial) December 31, 2024 Assets Current assets Accounts receivable .................................................. Less: Allowance for expected credit losses ..............

$577,000 31,000

$546,000

e. BORDEAUX INC. Statement of Income (partial) Year Ended December 31, 2024 Sales .................................................................................. Less: Cost of goods sold .................................................... Gross profit .......................................................................... Operating expenses Credit losses .............................................................

$1,692,000 981,360 710,640 28,000

LO 1,2,4 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.2B a.

Accounts Receivable...................................................... Sales ..........................................................................

4,700,000

Cost of Goods Sold ........................................................ Inventory ....................................................................

2,900,000

Cash............................................................................... Accounts Receivable .................................................

4,800,000

Allowance for Expected Credit Losses ........................... Accounts Receivable .................................................

146,000

Accounts Receivable...................................................... Allowance for Expected Credit Losses ......................

3,000

Cash............................................................................... Accounts Receivable .................................................

3,000

Credit Losses (see (e) below) ........................................ Allowance for Expected Credit Losses ......................

101,000

4,700,000

2,900,000

4,800,000

146,000

3,000

101,000

e. Accounts Receivable Beg. Bal. 945,000 Sales 4,700,000 Collections Recovery 3,000 Write off Collections End Bal. 699,000

4,800,000 146,000 3,000

Allowance for Expected Credit Losses Beg. Bal. 139,000 Write off 146,000 Recovery 3,000 Credit losses 101,000 End Bal. 97,000

PROBLEM 8.2B (CONTINUED) e. (continued) Before credit losses were recorded, the balance in the Allowance account was a debit $4,000 ($139,000 – $146,000 + $3,000). To adjust this balance to a credit of $97,000 requires a credit to the Allowance of $101,000 with an offsetting debit to Credit Losses. f. HUANG LTD. Statement of Financial Position (partial) Assets Current assets Accounts receivable .............................................................. Less: Allowance for expected credit losses .......................... Carrying amount ...................................................................

$699,000 97,000 602,000

LO 1,2,4 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.3B Beg. bal.

End. bal.

Accounts Receivable (a) 27,750 225,000 22,500

(b) 250 230,000

Allowance for Expected Credit Losses 1,000 Beg. bal. 250 Unadj. bal. 750 (c) 400 End. bal. (d) 1,150 Sales (e) 225,000 Credit Losses (f) 400 a.

Solving for the opening Accounts Receivable balance (a) we get: (a) + $225,000 – $230,000 – $250 (b) = $22,500 (a) = $27,750

Write offs of accounts receivable obtained from reduction of allowance for expected credit losses $250.

This amount represents the increase in the Allowance for Expected Credit Losses caused by recorded credit losses: Unadjusted balance $750 + (c) = $1,150 (we know the $1,150 balance (d) – it was given) (c) = $400

Allowance for expected credit losses = $1,150 (given)

Addition to Accounts receivable (arising from credit sales) = $225,000

Credit losses = Adjustment to allowance for expected credit losses = $400 (from (c))

LO 2 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.4B a.

Total estimated allowance for expected credit losses:

Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total b.

Accounts Receivable $280,000 90,000 45,000 18,000 $433,000

Estimated Percentage Uncollectible 1% 3% 10% 15%

Estimated Uncollectible Accounts $2,800 2,700 4,500 2,700 $12,700

(1) Credit Losses ......................................................................... Allowance for Expected Credit Losses .............................. ($12,700 + $4,300 = $17,000) (2)

17,000 17,000

If the allowance for expected credit losses had an unadjusted credit balance of $4,300, the credit losses in the entry above would be $8,400 ($12,700 – $4,300). The difference is $8,600 less in credit losses compared to b. (1). This is the case because there is already a balance in the Allowance for Expected Credit Losses account of $4,300, which need not be accrued again in the current period.

Allowance for Expected Credit Losses ..................................... Accounts Receivable .........................................................

4,200

Accounts Receivable ................................................................ Allowance for Expected Credit Losses ..............................

2,300

Cash ......................................................................................... Accounts Receivable .........................................................

2,300

4,200

2,300

LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.5B a.

Total estimated allowance balance at Dec. 31, 2023:

Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total

Accounts Receivable $220,000 86,000 52,000 22,000 $380,000

Estimated Percentage Uncollectible 3% 6% 12% 20%

Estimated Uncollectible Accounts $ 6,600 5,160 6,240 4,400 $22,400

Total estimated allowance balance at Dec. 31, 2024:

Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total

Accounts Receivable $240,000 104,000 62,000 34,000 $440,000

Estimated Percentage Uncollectible 3% 6% 12% 20%

Estimated Uncollectible Accounts $ 7,200 6,240 7,440 6,800 $27,680

Accounts receivable has increased and so has the allowance balance. The increase in the accounts receivable appears to be spread throughout the aging analysis and is not concentrated in any of the aging categories. Thus, the increase in the allowance is attributable to a general increase in accounts receivable rather than to increased age.

PROBLEM 8.5B (CONTINUED) b.

Credit Losses .................................................................... Allowance for Expected Credit Losses .............................. ($22,400 – $3,000)

19,400

Allowance for Expected Credit Losses ..................................... Accounts Receivable .........................................................

28,000

Accounts Receivable ............................................................ Allowance for Expected Credit Losses ..............................

3,000

Cash ......................................................................................... Accounts Receivable .........................................................

3,000

19,400

28,000

3,000

Credit Losses .................................................................... 30,280 Allowance for Expected Credit Losses .............................. 30,280 $27,680 – balance in allowance before adjustment ($22,400 – $28,000 + $3,000)

f. Accounts receivable.................................................................. $380,000 Less: Allowance for expected credit losses .............................. Carrying amount ....................................................................

2024

2023 $440,000

27,680 $412,320

22,400 $357,600

LO 2 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.6B Jan.

2 5

Feb.

Mar.

Apr.

25 Aug.

25 Sept. 30

Notes Receivable ........................................................... Cash .......................................................................

10,000

Accounts Receivable ...................................................... Sales ......................................................................

11,000

Cost of Goods Sold ........................................................ Inventory ................................................................

6,700

Notes Receivable ........................................................... Accounts Receivable ..............................................

11,000

Cash ............................................................................... Interest Income ($11,000 × 9% × 1/12) ..................

Cash ($11,000 + $83) .................................................... Notes Receivable ................................................... Interest Income ($11,000 × 9% × 1/12) ..................

11,083

Cash ............................................................................... Note Receivable ..................................................... Interest Income ($10,000 × 8% × 3/12) ..................

10,200

Notes Receivable ........................................................... Accounts Receivable ..............................................

3,000

Accounts Receivable ....................................................... Sales .......................................................................

6,000

Cost of Goods Sold ........................................................ Inventory ................................................................

4,000

Credit Losses ............................................................... Notes Receivable ...................................................

3,000

Accounts Receivable ($6,000 × 24% × 1/12) ................. Interest Income ......................................................

120

10,000 11,000 6,700 11,000 83

11,000 83

10,000 200

3,000 6,000

4,000 3,000 120

LO 1,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.7B a.

Aug.

Sept.

Oct.

Aug.

Sept.

Oct.

Notes Receivable ...................................... Accounts Receivable .........................

30,000

Interest Receivable .................................... Interest Income.................................. ($30,000 × 4% × 1/12)

100

Cash ......................................................... Interest Receivable ............................

100

Cash .......................................................... Notes Receivable .............................. Interest Income ................................. ($30,000 × 4% × 1/12)

30,100

Accounts Payable ...................................... Notes Payable ...................................

30,000

Interest Expense ($30,000 × 4% × 1/12) ... Interest Payable ................................

100

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

100

Notes Payable ........................................... Interest Expense ($30,000 x 4% x 1/12).... Cash .................................................

30,000 100

Accounts Receivable ................................. Notes Receivable .............................. Interest Income.................................. ($30,000 × 4% × 1/12)

30,100

Credit Losses ............................................ Notes Receivable .............................

30,000

100

30,000 100

30,000

100

30,100

c. (1)

(2)

Oct.

30,000 100

30,000

LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.8B a.

Total notes receivable is $58,000 and total interest receivable $918 at November 30, 2024: Kootenay Inc. Cassiar Ltd. Namu Limited Siska Corp. Total

Dec.

$17,000 × 6% × 8/12 = 15,000 × 4% × 1/12 = 6,000 × 7% × 3/12 = 20,000 × 5% × 1/12 = $58,000

$680 50 105 83 $918

Cash ($50 + $83) ...................................... Interest Receivable ...........................

133

Credit Losses ........................................... Notes Receivable .............................. Interest Receivable ($6,000 × 7% × 3/12) ........................

6,105

Cash .......................................................... Notes Receivable .............................. Interest Receivable ($17,000 × 6% × 8/12) ...................... Interest Income ($17,000 × 6% × 1/12) ......................

17,765

Interest Receivable ................................... Interest Income ................................. Cassiar Ltd. $15,000 × 4% × 1/12 = $ 50 Siska Corp. $20,000 × 5% × 1/12 = 83 Total ................................................ $133

133

6,000 105

17,000 680 85 133 133

PROBLEM 8.8B (CONTINUED) c. Interest Receivable Bal. See (a) 918 Dec. 1 Dec. 31 133 31 31 Bal. 133

133 105 680

Bal. See (a) 58,000

Notes Receivable Dec. 31 31

6,000 17,000

Bal. 35,000

d. KITIMAT CORPORATION Statement of Financial Position (partial) December 31, 2024 ________________________________________________________________________ Assets Current assets Interest receivable........................................................

$133

Non-current assets Notes receivable ..........................................................

$35,000

LO 3,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.9B

OUTAOUAIS INC. Statement of Financial Position (Partial) January 31, 2024 (in thousands)

Assets Current assets Accounts receivable Less: Allowance for expected credit losses Notes receivable Income tax receivable Inventory Supplies Total current assets Non-current assets Notes receivable Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Goodwill

$2,468 268

$2,200 50 20 3,000 50 5,320

300 $200 $1,000 250 $750 375

Total assets

750 375

1,325 100 $7,045

LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8.10B a. Rogers (in millions)

Telus (in millions)

$14,655 ($3,826 + $4,941)

Receivables turnover

* 2 = 3.3 times

Average collection period

(

* = 7.0 times

365 = 110.6 days 3.3

)

365 = 52.1 7.0

Credit sales

Average gross accounts receivable

Accounts receivable turnover

Days in year

Accounts receivable turnover

Average collection period in days

Telus‘ receivables turnover was considerably better than that of Rogers‘, which means Telus was more efficient than Rogers in collecting its receivables. Both Rogers and Telus collect their receivables at a slower pace than does the industry average of 44 days. Rogers takes about 67 days longer than the industry average to collect its receivables.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 8.11B a.

2024

2023

2022

Average collection period

365 = 46 days 8

365 = 52 days 7

365 = 61 days 6

Days in inventory

365 = 61 days 6

365 = 52 days 7

365 = 46 days 8

At first glance it appears that Tianjin‘s liquidity had remained stable over the past year since the company‘s current ratio has remained at 1.5:1. However, the company is taking less time to collect its accounts receivable as evidenced by the increasing receivables turnover ratio and decreasing collection period. In contrast, it appears to be moving its inventory less quickly as evidenced by the lower inventory turnover ratio and increasing days in inventory. It is possible that the stable current ratio is due to the fact that the improving collections and deteriorating inventory turnover ratios are offsetting.

Changes in the turnover ratios indirectly affect profitability. Improvements in the receivables turnover and inventory turnover speed up the cash cycle, which provides the company with better cash flow and decreases the need for outside financing, thus decreasing interest expense. Furthermore, improvements in the receivables turnover usually arise as a direct result of improvements in credit management and better collection efforts. These improvements result in fewer defaults and decreases in credit losses. Deterioration of the inventory turnover reduces profitability by increasing carrying charges associated with stocking inventory (such as warehousing costs). Slower inventory turnover also increases the risk of merchandise not selling and becoming obsolete or selling at reduced prices. Obsolete inventory lowers profitability because the cost of this type of inventory has to be written off.

PROBLEM 8.11B (CONTINUED) d.

There are several steps that Tianjin might consider to improve its receivables and inventory management: Receivables The company could establish credit policies and credit limits for certain customers, if it doesn‘t already have them. The company could initiate the use of a cash discount to encourage early payment of receivables. The company could more aggressively monitor collections, to encourage customers to pay on time. Inventory Tianjin should monitor its inventory levels carefully and only reorder when inventory is selling and additional quantities are required. If inventory is not selling (e.g., not in favour or in season), it should mark it down quickly to get rid of it rather than risk it not selling at all and having to pay carrying costs for obsolete inventory. The company could limit the amount of inventory by improving its purchasing relationships with suppliers. If inventory could be purchased more frequently, required inventory levels could be reduced. Further, were it possible to move to a system where inventory is only purchased as needed (called ―just-in-time‖), Tianjin could reduce the amount of inventory it had to carry and improve the turnover ratio. However, there is some risk to this option as sales could be lost if stockouts occur.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

ACR8.1 a.

Jan. 4

ACCOUNTING CYCLE REVIEW

Cash ................................................................. Accounts Receivable.................................

236,000

Inventory ........................................................... Accounts Payable .....................................

150,000

Cash ................................................................. Notes Receivable ...................................... Interest Receivable ...................................

51,000

Account Receivable .......................................... Deferred Revenue ............................................. Refund Liability ($198,000 x 3%) .............. Sales .........................................................

188,000 10,000

Cost of Goods Sold ........................................... Estimated Inventory Returns ($102,000 x 3%) .. Inventory ...................................................

98,940 3,060

Salaries Payable ............................................... Salaries Expense .............................................. Cash..........................................................

16,000 10,000

Allowance for Expected Credit Losses .............. Accounts Receivable.................................

18,000

Notes Receivable ............................................. Accounts Receivable.................................

20,000

Refund Liability.................................................. Accounts Receivable.................................

4,000

Inventory ........................................................... Estimated Inventory Returns .....................

2,400

236,000

150,000

50,000 1,000

5,940 192,060

102,000

26,000

18,000

20,000

4,000

2,400

ACR8.1 (CONTINUED) a. (continued) Jan.

Accounts Receivable ......................................... Allowance for Expected Credit Losses ......

9,000

Cash ................................................................. Accounts Receivable.................................

9,000

Cash ................................................................. Accounts Receivable......................................... Refund Liability ($184,000 x 3%) .............. Sales .........................................................

92,000 92,000

Cost of Goods Sold ........................................... Estimated Inventory Returns ($98,000 x 3%) .... Inventory ...................................................

95,060 2,940

Accounts Payable ............................................. Cash..........................................................

150,000

Accounts Payable ............................................. Cash..........................................................

117,000

Inventory ........................................................... Accounts Payable .....................................

138,000

Inventory ........................................................... Cash..........................................................

1,000

Bank Loan Payable ........................................... Interest Expense ($800,000 x 3% x 1/12) ......... Cash..........................................................

15,000 2,000

9,000

5,520 178,480

98,000

150,000

117,000

138,000

1,000

17,000

ACR8.1 (CONTINUED) a. (continued) Total estimated allowance balance at Jan. 31, 2024: Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total

Jan.

Estimated Accounts Percentage Receivable Uncollectible $280,000 2% 130,000 5% 40,000 6% 20,000 12% $470,000

Estimated Uncollectible Accounts $ 5,600 6,500 2,400 2,400 $16,900

Credit Losses .................................................... Allowance for Expected Credit Losses ...... Required balance $16,900 above less unadjusted Balance $4,000 [from T account part (b]

12,900

DITURI DESIGNS LTD. Bank Reconciliation January 31, 2024

Balance per bank statement ...........................................

$328,772

Less: Outstanding cheques ........................................... Reconciled cash balance per bank .................................

67,000 $261,772

Balance per books [from T account part (b] ....................

$274,000

Less:

NSF cheque ...................................................... Bank service charges ......................................... Reconciled cash balance per books ...............................

12,900

Jan.

Accounts Receivable ......................................... Bank Charges Expense .................................... Cash..........................................................

$12,100 128

12,228 $261,772

12,100 128 12,228

ACR8-1 (CONTINUED) b. and e.

Dec. 31 Bal. Jan. 4 Jan. 8 Jan. 19 Jan. 23 Unadj. Bal. Bal. Jan. 31

Cash 197,000 Jan. 12 236,000 Jan. 24 51,000 Jan. 25 9,000 Jan. 26 92,000 Jan. 31 274,000 Jan. 31 AJE 261,772

Accounts Receivable Dec. 31 Bal. 468,000 Jan. 4 Jan. 10 188,000 Jan. 14 Jan. 19 9,000 Jan. 15 Jan. 23 92,000 Jan. 17 Jan. 19 Unadj. Bal. 470,000 Jan. 31 AJE 12,100 Bal. Jan. 31 482,100

26,000 150,000 117,000 1,000 17,000 12,228

236,000 18,000 20,000 4,000 9,000

Dec. 31 Bal. Jan. 6 Jan. 17 Jan. 26 Jan. 26 Bal. Jan. 31

Inventory 2,682,000 Jan. 10 150,000 2,400 Jan. 23 138,000 1,000 2,773,400

Estimated Inventory Returns Jan. 10 3,060 Jan. 17 Jan. 23 2,940 Bal. Jan. 31 3,600

Dec. 31 Bal. Unadj. Bal. Bal. Jan. 31

Prepaid Insurance 14,000 14,000 Jan. 31 AJE 12,250

102,000 98,000

2,400

1,750

Interest Receivable Allowance for Expected Credit Losses Dec. 31 Bal. 13,000 Jan. 14 18,000 Jan. 19 9,000 Unadj. Bal. 4,000 Jan. 31 AJE 12,900 Jan. 31 Bal. 16,900

Dec. 31 Bal. Jan. 15 Bal. Jan. 31

Notes Receivable 50,000 Jan. 8 20,000 20,000

Dec. 31 Bal. Unadj. Bal. Jan. 31 AJE Bal. Jan. 31

Dec. 31 Bal. Jan. 31 Bal.

1,000 Jan. 8 0 75 75

1,000

Equipment 1,560,000 1,560,000

50,000 Accumulated Depreciation-Equipment Dec. 31 Bal. 972,000 Unadj. Bal. 972,000 Jan. 31 AJE 13,000 Jan. 31 Bal. 985,000

ACR8.1 (CONTINUED) b. and e. (continued) Accounts Payable Dec. 31 Bal. 150,000 Jan. 6 117,000 Jan. 26 Jan. 31 Bal.

398,000 150,000 138,000 419,000

Refund Liability 4,000 Jan. 10 Jan. 23 Jan. 31 Bal.

5,940 5,520 7,460

Income Tax Payable Jan. 31 AJE

24,000

Salaries Payable 16,000 Dec. 31 Bal. Unadj. Bal. Jan. 31 AJE Jan. 31 Bal.

16,000 0 36,000 36,000

Jan. 10

Deferred Revenue 10,000 Dec. 31 Bal. Jan. 31 Bal.

44,000 34,000

Jan. 31

Bank Loan Payable 15,000 Dec. 31 Bal. Jan. 31 Bal.

800,000 785,000

Jan. 24 Jan. 25

Jan. 17

Jan. 12

Common Shares Dec. 31 Bal. Jan. 31 Bal.

Sales Jan. 10 Jan. 23 Jan. 31 Bal.

370,540

Cost of Goods Sold Jan. 10 Jan. 23

98,940 95,060

Jan. 31 Bal.

194,000

Jan. 12 Unadj. Bal.

Salaries Expense 10,000 10,000

Jan. 31 AJE Jan. 31 Bal.

36,000 46,000

Depreciation Expense Jan. 31 AJE 13,000

Jan. 31 AJE

Insurance Expense 1,750

Bank Charges Expense Jan. 31 AJE 128 600,000 600,000 Jan. 31 AJE

Retained Earnings Dec. 31 Bal. Jan. 31 Bal.

192,060 178,480

Credit Losses 12,900

2,129,000 2,129,000

ACR8.1 (CONTINUED) b. and e. (continued) Interest Income Jan. 1 Unadj. Bal. Jan. 31 AJE Jan. 31 Bal.

Jan. 31 0 0 75 75

Interest Expense 2,000

Income Tax Expense Jan. 31 AJE 24,000

ACR8.1 (CONTINUED) Adjusting journal entries (AJE) Jan. 31

Depreciation Expense ......................................... Accumulated Depreciation—Equipment ..... ($1,560,000 ÷ 10 x 1/12)

13,000

Insurance Expense .............................................. Prepaid Insurance ...................................... ($14,000 ÷ 8)

1,750

Salaries Expense................................................. Salaries Payable ........................................

36,000

Interest Receivable .............................................. Interest Income .......................................... ($20,000 x 9% x .5/12)

Income Tax Expense ........................................... Income Tax Payable ..................................

24,000

13,000

1,750

36,000

24,000

ACR8.1 (CONTINUED) f. DITURI DESIGNS LTD. Adjusted Trial Balance January 31, 2024

Cash Accounts receivable Allowance for expected credit losses Notes receivable Inventory Estimated inventory returns Prepaid insurance Interest receivable Equipment Accumulated depreciation—equipment Accounts payable Refund liability Income tax payable Salaries payable Deferred revenue Bank loan payable Common shares Retained earnings Sales Cost of goods sold Depreciation expense Salaries expense Insurance expense Credit losses Bank charges expense Interest income Interest expense Income tax expense

Debit 261,772 482,100

Credit

16,900 20,000 2,773,400 3,600 12,250 75 1,560,000 985,000 419,000 7,460 24,000 36,000 34,000 785,000 600,000 2,129,000 370,540 194,000 13,000 46,000 1,750 12,900 128 75 2,000 24,000 $5,406,975

________ $5,406,975

ACR8.1 (CONTINUED) g. (1) DITURI DESIGNS LTD. Statement of Income Month ended January 31, 2024 Sales Cost of goods sold Gross profit Operating expenses Salaries expense Depreciation expense Credit losses Insurance expense Bank charges expense Total operating expenses Income from operations Other income and expenses Interest income Interest expense Income before income tax Income tax expense Net income

370,540 194,000 176,540 $46,000 13,000 12,900 1,750 128 73,778 102,762 ($75) 2,000

1,925 100,837 24,000 $ 76,837

g. (2) DITURI DESIGNS LTD. Statement of Changes in Equity Month ended January 31, 2024

Balance, January 1 Net income Balance, January 31

Common Shares $600,000 0000 000 $600,000

Retained Earnings $2,129,000 76,837 $2,205,837

Total Equity $2,729,000 76,837 $2,805,837

ACR8.1 (CONTINUED) g. (3) DITURI DESIGNS LTD. Statement of Financial Position January 31, 2024 Assets Current assets Cash Accounts receivable $482,100 Less: Allowance for expected credit losses 16,900 Notes receivable Interest receivable Inventory Estimated inventory returns Prepaid insurance Total current assets Property, plant and equipment Equipment $1,560,000 Less: Accumulated depreciation 985,000 Total assets Liabilities and Shareholders‘ Equity Current Liabilities Accounts payable Refund liability Salaries payable Income tax payable Deferred revenue Current portion of bank loan payable* Total current liabilities Non-current liabilities Bank loan payable Total Liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity *$15,000 x 12 months = $180,000 LO 1,2,3,4

BT: AP

Difficulty: M

Time: 80 min.

261,772 465,200 20,000 75 2,773,400 3,600 12,250 3,536,297

575,000 $4,111,297

$ 419,000 7,460 36,000 24,000 34,000 180,000 700,460 605,000 1,305,460 $ 600,000 2,205,837 2,805,837 $4,111,297 AACSB: Analytic

CPA: cpa-t001

CM: Reporting

CT8.1

FINANCIAL STATEMENT IMPACT

Transaction Wrote off a customer account. Made sales on account. Accepted a two-month note from a customer who was unable to pay its accounts receivable balance. Customer returned goods that had been purchased on account. Recorded interest income on a note receivable. Collected an account receivable. Recorded credit losses for the period. Collected a note receivable in full. Received payment from a customer whose account had been previously written off.

Net Income Unchanged Increase Unchanged

Total Assets Unchanged Increase Unchanged

Cash Flow Unchanged Unchanged Unchanged

Unchanged Increased Unchanged Decrease Unchanged Unchanged

Decreased Increased Unchanged Decrease Unchanged Unchanged

Unchanged Unchanged Increased Unchanged Increased Increased

LO 2,3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT8.2 a.

FINANCIAL REPORTING CASE

The North West Company Inc. reports $99,241,000 accounts receivable on its January 31, 2022 balance sheet. From note 5, we can see that this amount is made up of: Trade accounts receivable Corporate and other accounts receivable Less: Allowance for doubtful accounts

$86,841,000 24,565,000 (12,165,000) $99,241,000

b. ($ in thousands)

2022

Receivables turnover

$2,248,796 $99,241 + $91,443 2

Average collection period

365 23.6

2021 =

23.6 times

$2,359,239 $91,443 + $104,869 2

15 days

365 24.0

Credit sales

Average net accounts receivable

Accounts receivable turnover

Days in year

Accounts receivable turnover

Average collection period in days

24.0 times

15 days

North West has exhibited consistent performance in the collection of its accounts receivable. It showed a slight deterioration in its receivables management in 2022. It should also be noted that an average collection period of less than 30 days is normally an excellent collection period, depending on the terms of sale.

LO 1,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT8.3 a. ($ in thousands) Current ratio

FINANCIAL REPORTING CASE

North West ($ in thousands) $403,358 $294,490

Receivables turnover

$2,248,796 $99,241 + $91,443 2

Average collection period

365 23.6

Ratio Current ratio Receivables turnover Average collection period

Sobeys ($ in millions)

1.4:1

$3,185.8 $4,153.3

23.6 = times

$30,162.4 $558.8 + $547.0 2

15 days

North West 1.4:1 23.6 times 15 days

365 54.6

Sobeys 0.8:1 54.6 times 7 days

0.8:1

54.6 times

7 days

Industry 1.7:1 89.0 times 4 days

Sobeys seems to demonstrate superior management of accounts receivable as shown by its receivables turnover and average collection period ratios, which are better than those of North West but falls short of the industry average. It should be noted that North West sells appliances and other household items, which Sobeys and other industry competitors do not. The credit terms granted to customers on these purchases may be longer, explaining why their average collection period is also longer. On the other hand, Sobeys‘ current ratio is far lower than that of North West and below the industry average. Further investigation as to why Sobeys‘ current ratio is so low is warranted before drawing a conclusion about its liquidity. LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT8.4

FINANCIAL REPORTING CASE

Both Lava and Flow provide the information on the carrying amount of the trade receivables, but Lava provides disclosure of the amount of the allowance for expected credit losses. Lava also provides more detail as to the aging of its accounts receivable, which is useful in assessing credit risk. The analyst can see that over 70% ($1,322 ’ $1,854) of Lava‘s receivables are current in 2024.

Since Lava is a publicly traded company with many shareholders and creditors, it is to its benefit to provide more information for the users of the financial statements to help them to assess credit and collection risks and management‘s policies with respect to accounts receivable.

Big Bank would want an aging analysis of Flow. In addition, here are some examples of additional information Big Bank would need to assess credit risk:    

Normal payment terms for the company and industry; An analysis by major customers; Details on how creditworthiness is evaluated; and Details on how Lava and Flow follow up on receivables that are past due for a significant amount of time.

LO 2,4,5 BT: E Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT8.5

FINANCIAL ANALYSIS CASE

Current ratio 2024: 1.6:1 ($10,600,000 ÷ $6,800,000) 2023: 2.1:1 ($10,500,000 ÷ $5,100,000) Yes, the current ratio exceeds the bank‘s requirement of a current ratio of 1.5:1 in both years.

b. Allowance for Expected Credit Losses Bal. 2023 500,000 2024 write offs 100,000 Bal. 2024 400,000 Notes Receivable Bal. 2023 2,000,000 2024 New notes 1,500,000 2024 Collections 800,000 Bal. 2024 2,700,000

It is difficult to say whether the Allowance for Expected Credit Losses is adequate or not. It is noteworthy that in 2023 the allowance was 10% of the royalties receivable ($500,000 ÷ $5,000,000). In 2024, after the write off, the allowance is 6.7% of the royalties receivable ($400,000 ÷ $6,000,000). It is quite likely, given the increase in sales from $50 million to $60 million and the increase in receivables from $5 million to $6 million, that the allowance should also increase proportionately unless there is evidence to the contrary. HHL should prepare an aging of its accounts (royalty) receivable and monitor its collection history so that it can ensure that it provides for the appropriate level of allowance.

CT8.5 (CONTINUED) d.

Accounts receivable turnover ratio (calculated using ending balances rather than average balances) 2024: 10.0 times ($60,000,000 ÷ $6,000,000) 2023: 10.0 times ($50,000,000 ÷ $5,000,000) The liquidity of the company has deteriorated based on the decline in the current ratio calculated in (a). The cash balance is lower in 2024 while current liabilities are higher. While the accounts (royalties) receivable turnover is unchanged in 2024, the collectability of the accounts receivable as well as the notes receivable arising from dishonoured notes is suspect because of the reluctance of the vice-president to write off dishonoured notes.

LO 2,3,4 BT: E Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT8.6

DATA ANALYTICS CASE

When deciding whether or not to extend credit to a new customer, a company will consider the following factors in their decision. a.

The amount of time the applicant spends scrolling through the credit application form could give some indication as to the credit worthiness of the applicant. If very little time is spent and very little reference information is provided, this could be an indication that the applicant has very little experience in proving its credit worthiness or has very little payment history to provide.

If the applicant shows an unwillingness to share their social media contacts it might be an indication that some of their contacts have had bad credit experience with the applicant or that the applicant has a history of paying very slowly.

The applicant‘s social media network can shed a light on the applicant‘s interaction with other members of the social media. The applicant‘s approach in dealing with the public and the level of their customer engagement on social network can give some insight concerning the size and type of business the applicant is in engaged in and whether their business is thriving. Mention of their customers and the new business derived from their customers might reveal why the terms of credit are being requested. Announcements of large purchase orders or contracts give some level of assurance that payment will be forthcoming.

LO 2,5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT8.7

DATA ANALYTICS CASE

a. The retail sales channel had the largest percentage increase in accounts receivable in 2024 of 19%, while the wholesale channel increase was 10%, as calculated below. 2024 <45 days 45-90 days > 90 days

Wholesale $1,768,600 454,100 167,300 $2,390,000

Retail $905,760 293,040 133,200 $1,332,000

Total $2,674,360 747,140 300,500 $3,722,000

2023 <45 days 45-90 days >90 days

Wholesale $1,782,680 304,360 86,960 $2,174,000 $216,000 10%

Retail $886,380 134,640 100,980 $1,122,000 $210,000 19%

Total $2,669,060 439,000 187,940 $3,296,000

Increase As a %

b. The retail sales channel represented the largest portion of expected credit losses relative to accounts receivable in that sales channel. Retail was 8% while wholesale was 4% as calculated below. Retail Wholesale Total allowance for expected credit losses $103,363 $101,575 Total accounts receivable (from a above) $1,332,000 $2,390,000 As a percentage 8% 4% c. The amount of credit losses that would be reported on Treadway‘s statement of income would be $ 139,238 arrived at by total allowance required of $204,938 ($103,363 + $101,575) less credit balance in the allowance account of $65,700 = $139,238. d. The amount of credit losses that would be reported on Treadway‘s statement of income would be $ 247,738 arrived at by total allowance required of $204,938 ($103,363 + $101,575) plus debit balance in the allowance account of $42,800 = $247,738. LO 2 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT8.8 a.

ETHICS CASE

The stakeholders in this situation are: The controller of Encounter Limited, Sam Wong The president of Encounter Limited, Suzanne Chen The company‘s bank The shareholders of this publicly traded company Any other parties who rely upon the company‘s financial statements

The president of the company likely made the request to improve the current ratio to show that the company is more liquid than it really is. In this way, the bank‘s expectations will be met.

Yes. The controller has an ethical dilemma—should Sam follow the president's ―suggestion‖ and prepare misleading financial statements by understating the allowance for expected credit losses and credit losses or should Sam attempt to stand up to and possibly anger the president by preparing a fair (realistic) statement of financial position.

No. Encounter‘s liquidity should be measured using fair financial statements. The controller should not prepare financial statements with the objective of achieving or sustaining a predetermined level of liquidity. The current ratio should be a product of proper estimates made by management and operating results, not of ―creative accounting.‖

LO 2 BT: C Difficulty: M Time: 20 min. AACSB: Ethics CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT8.9 a.

SERIAL CASE

Software Solutions is not currently adhering to ABC‘s credit terms of 30 days and have asked for an increase to 60 days. Several repeat clients, have also extended their payment period to 45 days. Advantages to Anthony Business Company (ABC) of enforcing credit terms of 30 days for its clients: 

Cash flow will increase and the stress of ensuring that there are adequate funds on hand to purchase additional inventory and pay for salaries and salary related costs will be alleviated with respect to those clients currently taking longer than 30 days to pay.



Will provide ABC with a consistent credit policy. When negotiating terms with new customers it may wish to offer credit to, it will be able to say that it has a credit policy that is consistent with what is being offered to current customers—whether major or not.

Disadvantages to ABC of enforcing credit terms of 30 days for clients:  Software Solutions and other repeat clients wishing a payment period of longer than 30 days may choose to go elsewhere. Not only would ABC lose its current contractual commitment but also the additional revenues it expects to earn from these clients in the future. 

Since some clients have been delaying payment to 45 days in the past without any consequences, enforcing a 30-day payment period may be problematic. If ABC feels that a particular client in this situation is loyal and is a major source of its profitability and growth, it may have to consider whether the cost equals the benefits of enforcing credit terms of 30 days.

There are implications on operations and cash flows when deciding to double services for Software Solutions. Doug, Bev, and Emily must carefully consider the company‘s cash flow requirements. One of the implications is deciding what terms of credit to extend. (1)

If ABC enforces its credit terms of 30 days, there might not need to be additional short-term financing. The collection of the accounts would occur in the same cash cycle as payroll which is the major expense related to doubling the service with Software Solutions. Should ABC wish to be consistent with its term with all of its customers, terms of 30 days will speed up cash collection well ahead of the current level.

CT8.8 (CONTINUED) b. (Continued) (2)

If ABC maintains is current credit terms of 45 days to pay without any interest penalty, they will have increased cash flow strain from having to hire additional staff as a result of the planned increase in services. These additional costs will have to be considered when determining cash flows. All employee related costs will increase as a consequence of the additional staff. For example, electricity costs will increase and expenditures for more equipment may be necessary. Payments for payroll and related costs cannot be delayed. Since ABC is selling services and not inventory to Software Solutions, it cannot pass on delays in payment to its own suppliers. Additional short-term financing will be needed which will bring interest costs to ABC.

(3)

The cash flow strain that would be experienced under the requested 60 days terms would be considerably more severe than that experienced under the current 45 days to pay. Additional short-term financing, beyond the level of the current terms would be needed. This would in turn increase interest costs further to ABC.

LO 2,5 BT: E Difficulty: C Time: 45 min. AACSB: Communication CPA: cpa-t001, cpa-t005, cpa-e003 CM: Reporting, Finance and Comm.

Legal Notice

CHAPTER 9 REPORTING AND ANALYZING LONG-LIVED ASSETS LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6.

Determine the cost of property, plant, and equipment. Explain and calculate depreciation. Account for the derecognition of property, plant, and equipment. Identify the basic accounting issues for intangible assets and goodwill. Illustrate how long-lived assets are reported in the financial statements. Describe the methods for evaluating the use of assets

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO BT Item LO BT Item LO BT Item LO Questions

13.

19.

25.

14.

20.

26.

15.

21.

27.

10.

16.

22.

28.

11.

17.

2,4

23.

29.

12.

18.

24.

21.

Brief Exercises 1.

11.

16.

12.

17.

2 2

13.

18.

14.

19.

15.

4,5

20.

10.

Exercises 1.

1,2

2,3

10.

12.

2,3

11.

4,5

14.

2,4

11.

1,2,3

Problems: Set A and B 1.

2,3

10.

4,5

2. 3.

1,2

2,3

2,3,5

11.

1,2

2,3

12.

Accounting Cycle Review 1.

2,3,4,5

Cases 1.

2,5

2,6

2,5

1,2,4,6

2,6

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

(a)

Accounting standards require property, plant, and equipment to be recorded initially at cost, which consists of the purchase price, less any discounts or rebates, plus any other expenditures necessary to acquire the asset and make it ready for its intended use at its intended location of use.

(b)

Operating expenditures are expensed in the period they are incurred. They help maintain an asset but do not add additional value, useful life, or economic benefits. Capital expenditures are included as part of the cost of the equipment. They are incurred to make an asset ready for use or to enhance its productivity or efficiency or extend its life.

(c)

An asset retirement cost is an estimate of the cost of an obligation to dismantle, remove, or restore a long-lived asset when it is retired. These costs are included in the cost of property, plant, and equipment and depreciated over the life of the asset.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Land improvements are structural additions made to the land such as parking lots and fences. They are depreciable assets as they deteriorate over time. Clearing and grading the land are not land improvements but are part of the land cost as they are required to get the land ready for its intended use. They would therefore be capitalized (recorded) in the Land account.

LO 1 BT: C Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

Under IFRS almost all leases are capitalized as right-of-use assets and lease liabilities. The two exceptions are low value leases and short-term leases which are treated as operating leases. The right-of-use asset and the liability related to the leased asset are recorded on the company‘s books even though the asset is not legally owned by the party leasing the asset.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

4. (1) Depreciation Expense

(2) Net Income

(3) Accumulated Depreciation

(4) Carrying Amount Declines by a constant amount each year

(a) Early years Straight-line

Same each year Constant charge (depreciation expense) to income

Increases by a constant amount each year

Units-ofproduction

Varies with number of units produced

Impact on income will vary with the number of units produced

Increases by a Declines by a variable amount variable amount based on number of units produced

Diminishingbalance

Decreases each year

Increasing income each year because depreciation expense is lower each year

Increases by a diminishing amount each year

Declines by a higher amount in the early years

All three result in the same total depreciation expense

All three result in the same total impact on net income

All three result in the same total accumulated depreciation

All three result in the same ending carrying amount

(b) Total life Straight-line, units-ofproduction, diminishingbalance

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

If the residual value was deducted for the diminishing balance method, the carrying value would never reach the residual value. Applying a fixed percentage rate to a diminishing balance will always result in an undepreciated balance because a portion of the depreciable amount will always remain at the end of the period. Residual value is considered in the diminishing-balance method by ensuring that the asset is never depreciated below its residual value. In this way, we always make sure that the undepreciated balance (carrying amount) is adjusted to equal residual value at the end of the asset‘s useful life. Residual value is subtracted from the cost when using the other methods because the resulting depreciable cost is needed to determine the annual depreciation expense.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The straight-line and diminishing-balance methods use annual depreciation rates in their depreciation calculations. Therefore, the result must be adjusted for any period less than one year. The units-ofproduction method does not need to be adjusted for partial periods as this method multiplies the depreciation rate per unit by the actual units produced in the period. This reflects how much the asset was used during the period. For example, if an asset produced 10,000 units in 2023, it would not matter if the units were produced in 6 months, 9 months or 12 months. The depreciation charge is based on the number of units produced, not the time it took to produce them.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

A company should choose the depreciation method it believes will best reflect the pattern over which the asset‘s future economic benefits are expected to be consumed. The depreciation method must be revised if the expected pattern of consumption of the future economic benefits has changed.

(b)

Private companies using ASPE would not be allowed to use the revaluation model and therefore must use the cost model. Publicly traded companies, which must follow IFRS, can choose to use the cost model or the revaluation model. Factors to consider when choosing the revaluation model over the cost model are whether fair values are more relevant than cost (such as in the real estate industry), whether reliable measures of fair value can be obtained, and whether the benefits from the revaluation model exceed the additional costs involved in determining the value of the assets each year.

LO 2 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Depreciation involves the allocation of cost of long-live assets over their benefiting periods. Components of a large long-lived asset may have varying lengths of benefitting periods or different patterns of economic benefits and should therefore be treated separately when calculating depreciation expense.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

The calculation of depreciation of a building and a natural resource will be similar in their approach in that they will both consider any residual value or obligation to dismantle, remove or restore the asset when retired at the end of the useful life. Where the depreciation calculation will differ is that buildings are usually depreciated using the straight-line method as the allocation of the depreciable cost over the benefitting period is generally estimated to be even over the useful life. On the other hand, a better method for natural resources is the units-of-production method which achieves a better matching, especially if the depletion of the natural resource is uneven over its useful life. In addition, depletion is usually recorded by a debit to depletion expense[ on the statement of income.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

(a)

Companies need to calculate an impairment loss when an asset becomes obsolete or when a competitive market causes a decline in sales of products produced by that asset. The impairment loss is the amount by which the carrying amount of the asset exceeds its fair value. The loss is recorded with a debit to Impairment Loss and a credit to the Accumulated Depreciation account of the asset or the asset itself if a contra account is not used.

(b)

Some companies attempt to record asset impairments in fiscal years where the company is experiencing poor results and the additional charge for the impairment will not be noticed or will be received in a better light by the financial statement users. Once the carrying amounts of the assets are reduced from the recording of the impairment loss, subsequent depreciation is correspondingly reduced. Since management‘s judgement is involved in arriving at the amount of impairment loss, the timing of the recording of the loss may be the result of management‘s objective to manipulate current and future years‘ financial results. This approach becomes problematic to the financial statement users who are looking to compare results over several fiscal years to properly identify and assess financial trends.

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

11. (a)

Revisions of estimates for an asset‘s useful life and its residual value are not considered errors or changes in accounting principles and are therefore accounted for prospectively and not retrospectively. Estimates concerning the useful life and the residual value of assets are arrived at in good faith with the information available at that time in order to calculate depreciation. Revisions are inevitable when one considers the nature of the assets involved and the years over which these assets are used.

(b)

Revisions to increase an asset‘s useful life will reduce the amount of the depreciation expense as the depreciable amount of the asset is allocated to more years.

(c)

Revisions to increase an asset‘s residual value will reduce the amount of the depreciation expense as the depreciable amount has become smaller.

12.

When recording depreciation every year, cash is not involved in the transaction. The purpose of recording depreciation is to allocate the cost of the long-lived asset over the accounting periods the asset is used to assist in producing revenue and earning income. Although cash is paid when the asset is purchased, when recording depreciation, no cash is set aside for the purpose of replacing the asset at the end of the useful life. That is why the financial statements must disclose the cost and the accumulated depreciation of the long-lived assets in order for the reader to predict the future cash flows that will be involved when a retirement and replacement of the asset takes place.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

The installation of usage sensors on equipment will assist management in arriving at the amount of depreciation expense to record each year. If the usage is determined to be far greater than anticipated, management can decide if the remaining useful life (or units of production) should be adjusted going forward. In addition, the residual value that is expected to be obtained at the end of the useful life might also need revision when calculating depreciation expense.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

Depreciation must be updated for the period that has elapsed since depreciation was last recorded to the date of the sale because the depreciation expense must properly reflect the total period over which the asset‘s economic benefits are used. Updating depreciation also aids in determining the correct amount of the gain or loss on disposition.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

In a disposal of property, plant, and equipment, the carrying amount of the asset is compared to the proceeds received from the disposal. If the proceeds of the disposal exceed the carrying amount of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying amount of the asset sold, a loss on disposal occurs. The calculation is the same for an asset that is retired if proceeds, such as a residual value, are received. Often there are no proceeds received when an asset is retired. If no proceeds are received, a gain will never occur.

LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

The machine and related accumulated depreciation should continue to be reported on the statement of financial position without further depreciation or adjustment until the asset is retired. Reporting the asset and related accumulated depreciation on the statement of financial position informs the reader of the financial statements that the company is still using the asset. Once an asset is fully depreciated, even if it is still being used, no additional depreciation should be taken on this asset. In no situation can the accumulated depreciation on the asset exceed the cost of the asset.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

Tangible and intangible assets have similar characteristics, in that they are purchased for use in the operations and not for resale, have usefulness beyond one fiscal year, and are depreciated or amortized, with the exception of land and indefinite life intangible assets. Tangible and intangible assets are also similar in that their cost includes all of the necessary outlays that are made to get the asset ready for its intended use. They differ in their physical substance in that intangible assets have no physical substance.

LO 2,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Since finite intangible assets have limited usefulness to the business, each period of benefit should be charged with the allocation of the amortizable cost of the intangible asset. Indefinite life intangible assets cannot have a systematic allocation of their amortizable cost allocated against revenues as the period of benefit is indeterminable. Rather, these assets are tested for impairment more frequently to ensure that their fair value continues to exceed their carrying amount.

LO 4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

(a)

The accountant‘s argument is not valid. The cost of intangible assets with finite lives should be amortized over the shorter of that asset's useful life (the period of time when operations are benefited by use of the asset) or its legal life. In many instances, reasonable estimates must be arrived at in order to record the necessary transactions and adjusting entries at the end of an accounting period. Having an alternative to the estimate that is more certain does not make the information more relevant.

(b)

If useful life is shorter than legal life, amortizing the asset over its legal life would be inappropriate because the amortization each year would be too low and the asset would have a carrying amount shown on the statement of financial position after its useful life had passed.

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

Research involves the search for new products, processes or applications that can generate revenue in the future. When research is performed, it is often not possible to determine if the efforts will generate any benefit in the future. This is why the costs of research are expensed immediately. For development costs, when certain criteria are met that indicate that the product being developed will have future benefit, the costs can be capitalized and then amortized over the benefitting periods. The six criteria include: 1. The product is technically feasible. 2. The company intends to complete development of the product. 3. The company can sell or use the product. 4. The company has adequate resources to complete development of the product. 5. The company can reliably measure the costs incurred on the product. 6. A market exists for the product that will provide future economic benefits.

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Goodwill and intangible assets have similar characteristics, in that they are recorded at cost, purchased for use in the operations of the business and not for resale, have usefulness beyond one fiscal year, and have no physical substance. They differ in that goodwill does not exist on its own, is unidentifiable and cannot be separated from a business entity and so it cannot be sold; nor is it based on contractual or legal rights. Goodwill is not amortized as it has an indefinite life and is only derecognized if the business as a whole is resold. Goodwill can also be reduced from impairment.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

22.

The legal fees should be added to the cost of the patent and amortized over the patent‘s remaining useful life as they prove the patent‘s validity and add to, or ensure the continuation of, the future economic benefits to be generated by the patent.

LO 4 BT: C Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

Goodwill is the value of many favourable attributes that are intertwined in the business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold.

LO 4 BT: C Difficulty: M Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

24.

(a)

Long-lived assets are normally reported on the statement of financial position under the headings ―property, plant, and equipment‖, ―intangible assets‖, and ―goodwill.‖ The balances of the major classes of assets should be disclosed, as well as the accumulated depreciation and accumulated amortization, either on the statement of financial position or in the notes to the financial statements.

(b)

The statement of income reports, in the operating expenses section, depreciation expense, amortization expense, any gain or loss on disposal of property, plant, and equipment, and any impairment losses. Depreciation and amortization expense may instead be reported in the notes to the financial statements.

(c)

The statement of cash flows reports, in the investing activities section, any cash paid to purchase long-lived assets and any cash received on their disposal. The statement of cash flows prepared using the indirect method may report depreciation and amortization expense, gain and losses as separate ―non-cash‖ items to reconcile net income to cash provided by operating activities.

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

25.

The notes to the financial statements should disclose the balance of the major classes of assets as well as the accumulated depreciation and amortization for depreciable and amortizable assets if this information has not been reported directly in the financial statements. The depreciation and amortization method(s) used and the useful lives or rates should also be described. Under IFRS, companies must disclose if they are using the cost or revaluation model for each class of long-lived assets and include a reconciliation of the carrying amount at the beginning and end of period for each class of long-lived assets. If the revaluation model is used, disclosure of any increases and decreases from revaluation, as well as other information, is required. Information relating to any impairment recorded must also be disclosed. For companies using ASPE, the disclosure requirements a

LO 5 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

26. Gains and losses recorded on the disposal of property, plant, and equipment are classified in the operating section of the statement of income because they are basically an adjustment to depreciation, which is classified as an operating expense. They are not reported as investing activities in the statement of cash flows. Rather, the proceeds from any disposal of property, plant, and equipment are reported as an increase in cash in the investing activities in the statement of cash flows. LO 5 BT: C Difficulty: M Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

27.

(a)

Accounting firms, like any professional services firm, do not need a significant amount of long-lived assets to operate. Although the assets would be lower when comparing with a grocery stores, the sales would also be lower. Consequently, the asset turnover will be lower for accounting firms. In addition, the profit margin will most likely be higher due to lower amounts of depreciation compared to other types of businesses like grocery stores. Furthermore, accounting firms attract clients due to the quality of their work and the relationships they develop with clients and, unlike other companies, are not as subject to pricing pressures in a competitive market that could reduce profit margins.

(b)

Grocery stores usually have a high asset turnover and a low profit margin. This is typical in industries that have high sales relative to assets and are in an industry where there are many competitors. Food must have a high inventory turnover. These factors result in reduced assets, compared to capital intensive industries (although a grocery store would most likely be more capital intensive than an accounting firm).

LO 6 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

28.

The return on assets ratio measures the return being generated by each dollar invested in the business (net income ÷ average total assets). The return on assets can also be calculated by multiplying the profit margin by the asset turnover ratio. The profit margin measures how effective the business is at generating net income from its sales and the asset turnover measures how well the company can generate sales from a given level of assets. Together, the two ratios can be combined to measure how effective a company is at generating net income from a given level of assets (return on assets). Therefore, if a company wants to improve its return on assets, it can do so either by increasing the margin it generates from each dollar of sales (profit margin) or by increasing the volume of goods that is sells (asset turnover).

LO 6 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance Solutions Manual 9-996 Chapter 9 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

29. ($ in millions) Return on assets

Asset turnover

2021 $986 = 6.2% $15,978

$5,509 = 0.3 times $15,978

2020 $688 = 4.3% $15,906

$5,407 $15,906

0.3 times

Shaw‘s return on assets improved substantially and the asset turnover ratio remained the same in 2021 compared to 2020. LO 6 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9.1 All of the expenditures, except the fence, should be included in the cost of the land. Therefore, the cost of the land is $490,000 (cash price of $450,000 + legal fees of $8,500 + removal of old building $25,000 + clearing and grading costs of $6,500). The fence would be included in the cost of land improvements. LO 1 BT: AP Difficulty: S Time: 3 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.2 The cost of the truck is $43,750 (invoice price $42,000 + installation of trailer hitch $1,000 + painting and lettering $750). The expenditures for insurance and motor vehicle licence are annual costs that do not benefit future periods and should be expensed and not added to the cost of the truck. LO 1 BT: AP Difficulty: S Time: 3 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.3 a. O b. C c. C d. C e. C f. O g. O h. C i. C j. O LO 1 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.4 a.

The depreciable amount is $72,000 ($80,000 – $8,000). With a 4-year useful life, annual depreciation is $18,000 ($72,000 ÷ 4). Under the straight-line method, depreciation expense is the same each year.

Total depreciation over the truck‘s life will be $18,000 per year × 4 years = $72,000

LO 2 BT: AP Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.5 Depreciation expense for 2024 = $18,000 × 8/12 = $12,000 Depreciation expense for 2025 = $18,000 LO 2 BT: AP Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.6 a. Depreciation rate = 1 ÷ 4 = 25%; 25% x 2 = 50% January 1 Carrying amount 2024 2025 2026 2027

$80,000 40,000 20,000 10,000

Rate

50% 50% 50% to residual value

Depreciation expense

December 31 Carrying amount

$40,000 20,000 10,000 2,000 $72,000

$40,000 20,000 10,000 8,000

Calculations: 2024 Depreciation expense = $80,000 × 50% = $40,000 2025 Depreciation expense = ($80,000 – $40,000) × 50% = $20,000 2026 Depreciation expense = ($80,000 – $40,000 – $20,000) × 50% = $10,000 2027 Depreciation expense = ($80,000 – $40,000 – $20,000 – $10,000) × 50% = $5,000 (amount calculated of $5,000 is adjusted to $2,000 so that the carrying amount will equal the residual value) As explained in the chapter, the double-diminishing-balance method can require an adjustment in the final year of depreciating an asset in order for the carrying amount to equal the residual value. In the scenario illustrated in the question, the company stopped depreciating the asset at the end of Year 4. This relatively short life was chosen for the purposes of this comparative problem and resulted in a very small amount of depreciation expense in Year 4. This can occur when the double-diminishing-balance method is used to depreciate an asset with a short life. Because of this effect, the double-diminishing-balance method is often used on assets with longer lives. In situations like this in real life, a company would revise the useful life of the asset if it anticipated continuing to use the asset beyond Year 4. b.

Total depreciation expense = $40,000 + $20,000 + $10,000 + $2,000 = $72,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.7 (A) Carrying amount 2024 $80,000 2025 ($80,000 – $13,333) = $66,667

(B) (1 ÷ 4) Rate

25% 25%

8 12

[(A) × (B) × (C)] ÷12 Depreciation expense $13,333 16,667

LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.8 The depreciation rate per unit is $0.10 per km. calculated as follows: (Cost – Residual value) ÷ total km = ($33,000 – $500) ÷ 325,000 = $0.10 2023 2024 expense

105,000 km × $0.10 125,000 km × $0.10

= $10,500 depreciation expense = $12,500 depreciation

LO 2 BT: AP Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.9 a. Accumulated depreciation ($200,000 – $20,000) ÷ 5 × 2 = $36,000 × 2 = $72,000; Carrying amount $200,000 – $72,000 = $128,000 b. Carrying amount Fair value Impairment loss

$128,000 100,000 $ 28,000

LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.10 Carrying Amount – Revised Residual Value = Revised depreciation expense Remaining life in years ($36,000 - $13,600) - $0 = $5,600 4 LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.11 a. The annual depreciation expense on the equipment is the cost less residual value divided by the useful life in years. Since we are not given the useful life, we must calculate the depreciation per year. Given that the accumulated depreciation after one year and 6 months (July 1, 2023 to December 31, 2024) is in the amount of $7,500, the annual depreciation is $5,000 ($7,500 ÷ 1.5). b. The annual depreciation expense on the equipment is the cost less residual value divided by the useful life in years. The estimated useful life of the equipment is 12 years calculated as follows: $64,000 - $4,000 = $5,000 Solve for X X $60,000 ÷ 5,000 = 12 years. c.

From July 1, 2023 to Dec. 31, 2032 (9.5 years) the accumulated depreciation will be $47,500 ($5,000 x 9.5) Accumulated depreciation balance of $51,250 will occur in 2033 when $3,750 ($51,250 - $47,500) is recorded. $3,750 ÷ $5,000 = 75% of the year or nine months into 2033, or September 30, 2033 is when the accumulated depreciation will reach $51,250. By September 30, 2033 the company will have owned the equipment for 10 years and three months.

LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.12 a.

Depreciation Expense [(($144,000 – $4,000) ÷ 5) × 9/12] ........ Accumulated Depreciation—Equipment .............................

21,000

Cash ......................................................................................... Accumulated Depreciation—Equipment ................................... Loss on Disposal ...................................................................... Equipment........................................................................

42,000 77,000 25,000

Proceeds from sale Cost of equipment Less: Accumulated depreciation Carrying amount at date of disposal Loss on disposal

21,000

144,000 $42,000

$144,000 77,000* 67,000 $(25,000)

* Depreciation Jan. 1, 2022 – Dec. 31, 2023 ($144,000 – $4,000) ÷ 5 = $28,000 $28,000 × 2 years Depreciation Jan. 1, 2024 – Sept. 30, 2024 $28,000 × 9/12 Accumulated depreciation

$56,000 21,000 $77,000

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.13 a.

Accumulated Depreciation—Equipment ................................... Equipment ............................................................................

42,000

Accumulated Depreciation—Equipment ................................... Loss on Disposal ...................................................................... Equipment ............................................................................

40,000 2,000

Proceeds from disposal Cost of equipment Less: Accumulated depreciation Carrying amount at date of disposal Loss on disposal

42,000

42,000 $

$42,000 40,000 2,000 $(2,000)

LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.14 a. The annual depreciation expense on the equipment is the cost less residual value divided by the useful life in years. The carrying value of the equipment on December 31, 2024 is $63,000 calculated as follows: Depreciation expense: $3,000 = $12,000

$75,000 6

Carrying amount: $75,000 - $12,000 = $63,000 b.

Carrying amount of the equipment $63,000 X 25% = $15,750 Add gain on disposal 2,000 Proceeds from disposal $17,750

Cash ......................................................................................... Accumulated Depreciation—Equipment ($12,000 x 25%) ........ Gain on Disposal ............................................................. Equipment ($75,000 x 25%) ............................................

17,750 3,000 2,000 18,750

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.15 a. (1)

Apr. 2 Patents............................................................ Cash ..

(2) Dec. 31

Amortization Expense ($180,000  5 × 9/12 = $36,000 × 9/12) ......... Accumulated Amortization—Patents ......

180,000 180,000

27,000 27,000

SURKIS CORPORATION Statement of Financial Position (Partial) December 31, 2024 Assets Intangible assets Patents Less: Accumulated amortization Carrying amount

$180,000 27,000 153,000

LO 4,5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.16 a. (1) June 1

(2) Dec. 1

Trademarks.......................................................... Cash .......

1,000 1,000

Trademarks.......................................................... 10,000 Cash ....... 10,000

The trademarks do not need to be amortized as they normally have an indefinite life.

LO 4 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.17 a.

Purchase price – Fair value of net identifiable assets = Goodwill $500,000 – ($900,000 - $410,000) = $10,000

Goodwill is not amortized as it has an indefinite life and is only derecognized if the business as a whole is resold. Goodwill can also be reduced from impairment.

LO 4 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.18 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q)

PPE (contra asset) NA (expense) PPE I I NA (Goodwill is shown as a separate item) NA (expense) NA (current asset) PPE PPE PPE I I NA (expense) NA PPE I

LO 5 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.19 SAPUTO INC. Statement of Financial Position (Partial) March 31, 2022 (in millions) Property, plant, and equipment Land ........................................................................................ Buildings .............................................................. $ 1,427.6 Less: Accumulated depreciation .......................... 418.0 Furniture, machinery, and equipment .................. 4,253.8 Less: Accumulated depreciation .......................... 1,696.6 Total property, plant, and equipment ................ $3,773.6 Intangible assets Definite-life intangible assets ................................................... Less: Accumulated amortization .......................................... Goodwill ................................................................... Total long-lived assets ............................................................. $8,356.5

$ 206.8 1,009.6 2,557.2

1,932.0 415.2

1,516.8 3,066.1

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 9.20 a.

(1) (2)

Coke has a better return on assets ratio. Pepsi has a better asset turnover ratio.

Profit margin × Asset turnover = Return on assets Coke: Profit margin × 0.4 = 8.9%; Solving for profit margin = 22.3% Pepsi: Profit margin × 0.8 = 8.3%; Solving for profit margin = 10.4% Coke has the better profit margin.

LO 6 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 9.21 a. ($ in millions)

2021

2020

$467 (1) Asset turnover

(

$675 + $764 2

$504 )

= 0.6 times

(2) Profit margin

$764 + $591

(

= 0.7 times

$93 = 19.9 % $467

$99 = 19.6 % $504

$93 (3) Return on assets

(

$675 + $764

12.9 b.

)

$99 )

$764 + $591

(

)

= 14.6%

The asset turnover deteriorated slightly and the profit margin improved. The decline in asset turnover produced the decrease in the return on assets. The return on assets changed primarily due to a change in asset turnover.

LO 6 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO EXERCISES EXERCISE 9.1 (a)

Under the cost principle, the acquisition cost for property, plant, and equipment includes all expenditures necessary to acquire the asset and make it ready for its intended use. For example, the cost of factory equipment includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and expenditures required in assembling, installing, and testing the equipment.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Land Land Land Land Improvements Buildings Land Vehicles Vehicles Repairs and Maintenance Expense Prepaid Insurance

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 9.2 a. Cost of equipment = insurance in transit

$75,000 + $500 delivery + $200

+ $2,800 testing and installation = $78,500 The one-year insurance payment is for an annual expense and unlike the insurance for the equipment in transit, was not incurred to get the asset ready for use. Training costs are also expensed as they were incurred to get staff ready to use the machinery. These costs were not incurred on the machinery itself. b.

The company should use the straight-line method since the economic benefits are expected to be consumed evenly over the equipment‘s useful life.

Depreciation expense in 2024 would be $5,888 ($78,500 ÷ 10 × 9/12).

LO 1,2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.3 a. (1)

Straight-line method ($172,000 – $16,000) Depreciation = 4

$39,000

2020 expense = $39,000 × 9/12 =

$29,250

2021, 2022, 2023 expense =

$39,000 each year

2024 expense = $39,000 × 3/12 =

$9,750

(2)

Double-diminishing-balance rate = 1 ÷ 4 = 25%; 25% × 2 = 50% January 1 Carrying amount

2020 2021 2022 2023 2024

$172,000 107,500 53,750 26,875 16,000

Rate

Depreciation expense

50% $86,000 × 9/12 = $64,500 50% 53,750 50% 26,875 to residual value 10,875 0

December 31 Carrying amount $107,500 53,750 26,875 16,000 16,000

Depreciation ceases in 2023 as the carrying amount cannot fall below residual value.

EXERCISE 9.3 (CONTINUED) (3)

Units of production: Depreciation expense per unit = ($172,000 – $16,000) 10,000 hours

2020 2021 2022 2023 2024

(b)

Units Used 1,500 2,200 2,300 2,100 1,900 10,000

$15.60

Expense Per Unit $15.60 15.60 15.60 15.60 15.60

Depreciation Expense $ 23,400 34,320 35,880 32,760 29,640 $156,000

All three methods result in the same amount depreciation expense over the life of the asset and so the same income will be experienced as well. The choice of depreciation method will have no impact on cash flow.

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.4 a. Cost Less: Residual value Depreciable cost Useful life in years

Machine 1 $800,000 40,000 $760,000

Cost Less: Residual value Depreciable cost

Machine 2 $120,000 5,000 $115,000

Annual depreciation $760,000 ÷ 20 = $38,000

$115,000 ÷ 5 = $23,000

Accumulated depreciation, December 31, 2023 Machine 1 ($38,000 × 9 years) Machine 2 ($23,000 × 1 year)

$342,000 23,000

Carrying amount, December 31, 2023 Machine 1 ($800,000 – $342,000) Machine 2 ($120,000 – $23,000)

$458,000 97,000

Carrying amount – Revised residual value = Depreciation expense 2024 Remaining useful life Machine 1 $458,000 - $62,000 = $24,750 25-9 Machine 2 $97,000 - $7,000 = $30,000 4-1

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.5 a.

The term used to describe the depreciation of natural resource assets is depletion. The method usually used to record the use of these assets is units-of-production.

Oil well cost divided by total units of output. $2,000,000 ÷ 50,000 barrels = $40 depletion rate per barrel. $40 x 2,200 = $88,000 depletion for the current year.

Dec. 31

Depletion Expense ................................................ 88,000 Accumulated Depletion—Oil Well .......................... 88,000

Since the fair value of $37 per barrel is below the $40 per barrel depletion amount, the oil well is impaired and a loss on impairment should be recorded.

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.6 a.

The amount paid for the equipment is $1,100.

Jan.

1,100

Depreciation Expense ........................................... Accumulated Depreciation—Equipment ................

100 100

The amount of the gain on disposal is $50 and is derived from the disposal entry that follows.

Dec. 31

1,100

The amount of depreciation expense is $100.

Dec. 31

Equipment ............................................................. Cash ......................................................................

Cash .............................................................................. Accumulated Depreciation—Equipment ........................ Gain on Disposal ................................................... Equipment .............................................................

450 40 50 440

The amount of the impairment loss on the remaining equipment is $55.

Dec. 31

Impairment Loss ............................................................ Accumulated Depreciation—Equipment ................

LO 2,3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.7 a. (1)

Straight-line method $17,000 $1,000

$4,000

each year

4 (2)

Double-diminishing-balance (DDB) method

DDB Rate: 1 ÷ 4 = 25%; 25% × 2 = 50% Year 1: $17,000 × 50% = $8,500 Year 2: ($17,000 – $8,500) × 50% = $4,250 Year 3: ($17,000 – $8,500 – $4,250) × 50% = $2,125

Year 1 Year 2 Year 3 Total

Straight-Line Depreciation Carrying Expense Amount $4,000 $13,000 4,000 9,000 4,000 5,000 $12,000

(1)

Straight-line method

Double Diminishing-Balance Depreciation Carrying Expense Amount $8,500 $8,500 4,250 4,250 2,125 2,125 $14,875

Proceeds – carrying amount = Gain $5,800 – $5,000 = $800 (2)

Double diminishing-balance method

Proceeds – carrying amount = Gain $5,800 – $2,125 = $3,675

EXERCISE 9.7 (CONTINUED) c.

(1)

Straight-line method Depreciation expense: $12,000 - Gain: $800 = $11,200

(2)

Double-diminishing balance method Depreciation expense: $14,875 – Gain: $3,675 = $11,200

Note: There is no difference in the total expense over the life of the asset. d.

Because of the nature of the asset in question, a boardroom table, it would be most appropriate to use the straight-line method of depreciation. There is typically no change in the usefulness of the asset over the fouryear life and so an equal depreciation charge allows for the best matching of the expense to the usefulness of the asset over the four-year period.

LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.8 a. Jan.

Sept

Dec.

18,000

Depreciation Expense ($10,980 ÷ 3 × 8/12) .................. Accumulated Depreciation—Equipment ................

2,440

Cash .............................................................................. Accumulated Depreciation—Equipment ($10,980 ÷ 3 × 2 = $7,320; $7,320 + $2,440) ................ Loss on Disposal [$500 – ($10,980 – $9,760)] .............. Equipment .............................................................

500

1 Cash ...................................................................... Accumulated Depreciation—Vehicles ([$62,000 – $6,000] ÷ 4 × 3) .......................................... Loss on Disposal [$18,000 – ($62,000 – $42,000)] ....... Vehicles ................................................................

Depreciation Expense ($150,000 ÷ 10) ................. Accumulated Depreciation—Equipment ................

42,000 2,000 62,000

2,440

9,760 720 10,980 15,000

Accumulated Depreciation—Equipment [($150,000 ÷ 10) × 10] ................................................... 150,000 Equipment .............................................................

15,000

150,000

The accounts that are affected by the error include: Gain on Disposal Overstated Accumulated Depreciation—Vehicles Overstated Vehicles Overstated Depreciation Expense Overstated Loss on Disposal Understated

LO 3 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.9 1.

Depreciation is the process of allocating the cost of a long-lived asset to expense over the asset‘s useful life. Because the value of land generally does not decline with time and usage, its usefulness and economic benefits do not decline. In addition, the useful life of land is indefinite so the expected useful life is not determinable. Therefore, it would be incorrect for the student to depreciate the land.

Trademarks are intangible assets with indefinite lives. Under both ASPE and IFRS, trademarks are not amortized but reviewed annually for impairment. If a decline in the trademarks‘ fair value has occurred, the trademarks‘ carrying amounts are reduced by recording an impairment loss which appears on the statement of income. Therefore, the amortization entry should be reversed and no reduction in carrying amount recorded unless an impairment has occurred.

International Financial Reporting Standards (IFRS) permit companies to use the revaluation model for the subsequent measurement of property, plant, and equipment. To qualify for the revaluation model, the fair value of the building must be reliably measurable, the revaluations must be carried out on an ongoing basis, and the entire category of buildings must be revalued to fair value. Using the revaluation model for one building is therefore not appropriate. It is also unlikely that the revaluation model will be relevant to all users of Chin‘s financial statements. This fair value adjustment should be reversed and the building carried at cost, less accumulated depreciation.

LO 2,4 BT: AP Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 9.10 a. Jan.

Mar.

Sept. 1

Dec. 31

b. Dec. 31

Copyrights............................................................... 120,000 Cash .......................................................................

120,000

Franchises ...................................................................... 540,000 Cash ....................................................................... Bank Loan Payable .................................................

500,000

Trademarks ..................................................................... Cash .......................................................................

75,000 75,000

Trademarks ..................................................................... Cash .......................................................................

35,000

40,

35,000

Accounts Receivable ...................................................... 48,000 Furniture ........................................................................ 160,000 Leasehold Improvements................................................ 277,000 Goodwill ........................................................................ 115,000 Cash .......................................................................

Amortization Expense ..................................................... Accumulated Amortization—Copyrights.................. ($120,000 ÷ 6 = $20,000)

20,000

Amortization Expense ..................................................... Accumulated Amortization—Franchises ................. [($540,000 ÷ 9) × 10/12 = $50,000]

50,000

600,000

20,000

No amortization recorded on the trademark purchased Sept. 1 as this intangible asset has an indefinite useful life. The furniture and leasehold improvements are not depreciated in 2024 as the assets were purchased on the last day of the fiscal year. A full year of depreciation will be recorded in 2025. Finally, goodwill is never amortized, as it also has an indefinite life but it is tested for impairment.

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

50,000

EXERCISE 9.11 a. Jan.

April

July

Sept.

Dec.

Patents.................................................................... Cash .......................................................................

40,000 40,000

Goodwill .......................................................................... 300,000 Cash .......................................................................

300,000

Franchises ...................................................................... 250,000 Cash .......................................................................

250,000

Research Expenses ........................................................ 150,000 Cash .......................................................................

150,000

Development Costs......................................................... Cash .......................................................................

50,000 50,000

8,000

Amortization Expense ............................................. Accumulated Amortization—Patents....................... ($40,000 ÷ 5 = $8,000)

8,000

Given that fair values exceeded carrying amounts for intangible assets, no impairment loss is recognized.

Impairment Loss ............................................................. Goodwill ..................................................................

30,000 30,000

b. COLLINS LTD. Statement of Financial Position (Partial) December 31, 2024 Intangible assets Patents ........................................................... Less: Accumulated amortization ..................... Franchise ........................................................ Development costs ......................................... Total intangible assets ........................................... Goodwill .................................................................

$40,000 8,000

$ 32,000 250,000 50,000 332,000 270,000

LO 4,5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.12 a. Account

Financial Statement Section

Accumulated amortization— software licenses

Statement of Financial Position

Intangible assets

Accumulated depreciation— buildings

Statement of Financial Position equipment

Property, plant, and

Accumulated depreciation— furniture and equipment

Statement of Financial Position

Property, plant, and equipment

Accumulated depreciation— leasehold improvements

Statement of Financial Position

Property, plant, and equipment

Accumulated depreciation— right-of-use properties

Statement of Financial Position equipment

Property, plant, and

Amortization expense

Statement of Income

Operating expenses

Depreciation expense

Statement of Income

Operating expenses

Furniture and equipment

Statement of Financial Position

Property, plant, and equipment

Goodwill

Statement of Financial Position

Goodwill

Impairment loss on property, plant and equipment

Statement of Income

Operating expenses

Land and buildings

Statement of Financial Position

Property, plant, and equipment

Leasehold improvements

Statement of Financial Position

Property, plant, and equipment

Right-of-use properties

Statement of Financial Position

Property, plant, and equipment

Software licenses assets

Statement of Financial

Intangible

(intangible assets)

Position

EXERCISE 9.12 (CONTINUED) b. CGI INC. Statement of Financial Position (Partial) September 30, 2021 (in thousands)

Property, plant, and equipment Land and buildings................................................. $ 78,907 Less: Accumulated depreciation buildings ............. 21,961 Furniture and equipment ........................................ 150,617 Less: Accumulated depreciation ............................ 97,693 Right-of-use properties .......................................... 1,080,867 Less: Accumulated depreciation ............................ 606,558 Leasehold improvements ...................................... 244,824 Less: Accumulated depreciation ............................ 156,012 Total property, plant, and equipment ............ Intangible assets Software licenses................................................... Less: Accumulated amortization ............................

$ 56,946 52,924 474,309 88,812

167,374 124,201

Goodwill ..........................................................................

$672,991

43,173 8,139,701

Goodwill is only added to the accounts when there an acquisition of another company. CGI appears to have had several or some very large acquisitions in its history. Goodwill cannot be internally generated.

LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 9.13 Company A: Costco (retail) Company B: Apple The company most likely operating in the retail industry is Company A (Costco) because it has the higher asset turnover and lower profit margin. It is reasonable to expect retail companies like Costco to sell goods at a higher rate (volume) at a lower profit margin than Apple. A company such as Costco requires a higher investment in long-lived assets, such as their retail store locations, and can be expected to have a lower asset turnover ratio and a higher profit margin. A company such as Apple requires a lower investment in long-lived assets and so would have a higher return on assets. LO 6 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 9.14 a. ($ in millions)

(1) Return on assets

(2) Asset turnover

(3) Profit margin

$550 ($7,200 + $6,800) 2 $14,000 ($7,200 + $6,800) 2 $550 $14,000

7.9%

2.0 times

3.9%

Profit Margin × Asset Turnover = Return on Assets [(net income ÷ net sales) × (net sales ÷ average total assets)] = net income ÷ average total assets = ($550 ÷ $14,000) × [$14,000 ÷ (($7,200 + $6,800) ÷ 2)] = ($550 ÷ $14,000) × [$14,000 ÷ $7,000] = 0.0392857 × 2.0 = 0.0785714 = 7.85714%

Ajax‘s ratios are better than the industry averages in every respect. Ajax can generate a higher return on assets through higher volume of sales or greater efficiencies in using its asset base to generate those sales. Overall Ajax is performing better than its industry.

LO 6 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO PROBLEMS PROBLEM 9.1A

Account Debited

Explanation

Vehicles

Capital expenditure incurred to acquire fleet of trucks.

Land

Legal fees were incurred to purchase the land and are included as costs related to the purchase of the land.

Vehicles

The cost incurred for branding the vehicles are capital expenditures. The cost is not separate from the delivery vehicles and will help the company get the vehicles ready for their intended purpose.

Equipment

Separate equipment from the vehicles, however cost of equipment required in order to operate electric powered vehicles.

Vehicles

Do the battery replacements extend the life of electric vehicles? Replacing the batteries of electric vehicles extends the life of the asset and provides future economic benefit as such it is a capital expenditure and not repair or maintenance costs. This is the equivalent of replacing the engine of a gas-powered vehicle.

Land improvements

Non permanent expenditure.

Prepaid Insurance

The cost of the insurance adds no direct benefit to the delivery vehicles and is considered a prepaid expense.

Buildings

Capital expenditure, which makes the office more productive. If the heating system had a significant cost and different useful life from the building an argument could be made to treat it as a separate asset (component).

Buildings

Capital expenditure, which makes the office more productive. If the heating system had a significant cost and different useful life from the building, an argument could be made to treat it as a separate asset (component).

PROBLEM 9.1A (CONTINUED) Account Debited 10. Repairs and Maintenance Expense

Explanation

Does not extend the life of the building or make it more productive or efficient.

If the damage was covered by insurance, a receivable (from the insurance company) account would be debited. If the loss was considered to be significant, it would be recorded separately as a loss due to damages, rather than as repairs and maintenance expense.

LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 9.2A a. Feb.

Mar.

July

Aug. 29

Land ............................................................................. 1,100,000 Cash ..................................................................... Mortgage Payable ................................................ Note: There is no intention of using the old building so the purchase price relates to only the land. Land ............................................................................. Cash .....................................................................

22,000

Land ............................................................................. Cash .....................................................................

60,000

Cash ............................................................................. Land .....................................................................

16,000

Land ............................................................................. Cash .....................................................................

4,000

Buildings....................................................................... Cash .....................................................................

72,000

300,000 800,000

22,000

60,000

16,000

4,000

72,000

Buildings....................................................................... 2,600,000 Cash ..................................................................... Bank Loan Payable .............................................. Prepaid Insurance ........................................................ Cash .....................................................................

10,000

Land Improvements ..................................................... Cash .....................................................................

48,000

680,000 1,920,000

10,000

48,000

PROBLEM 9.2A (CONTINUED) b. Date

Land

Feb. 7

$1,100,000

9 15 16 28 Mar. 2 July 2 Aug. 29

22,000 60,000 (16,000) 4,000

$1,170,000 c.

Land Improvements

Buildings

$48,000 $48,000

$ 72,000 2,600,000 000000000 $2,672,000

Land is not depreciated, so no depreciation is calculated on this asset. The building and land improvements would be depreciated once the asset is available for use. In the case of the building, it appears that its construction is completed on July 2 and the land improvements are available for use on August 29. If depreciation is calculated to the nearest month, then the building would be depreciated effective July 1 and the land improvements September 1.

LO 1,2 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.3A a. Invoice price ($125,000 x 4) Delivery cost

$500,000 4,000

Assembly, installation and testing Total cost

10,000

$514,000

The one-year insurance policy is not included as it benefits only the current period. It would be recorded as Prepaid Insurance and allocated to Insurance Expense throughout the period. b.

(1) Straight-line depreciation expense (per year) ($514,000 – $90,000) 4

$106,000

STRAIGHT-LINE DEPRECIATION Calculation Year

Depreciable Amount

2024 2025 2026 2027 2028

$424,0001 424,000 424,000 424,000 424,000

1 2

Depreciation Rate 2 25% × 6/12 25% 25% 25% 25% × 6/12

End of Year =

Depreciation Expense

Accumulated Depreciation

Carrying Amount

$53,000 106,000 106,000 106,000 53,000

$ 53,000 159,000 265,000 371,000 424,000

$461,000 355,000 249,000 143,000 90,000

$514,000 – $90,000 = $424,000 1 ÷ 4 years = 25%

Total depreciation over the robots‘ useful lives is $424.000

PROBLEM 9.3A (CONTINUED) b.

(2) DOUBLE-DIMINISHING–BALANCE DEPRECIATION Calculation

Year

Opening Carrying Amount

2024 2025 2026 2027 2028

$514,000 385,500 192,750 96,375 90,000

End of Year

Depreciation Rate1

Depreciation Expense

Accumulated Depreciation

Carrying Amount

50% × 6/12 50% 50% 50% 50%

$128,500 192,750 96,375 6,3752 0

$128,500 321,250 417,625 424,000 424,000

$385,500 192,750 96,375 90,000 90,000

1 ÷ 4 years = 25% × 2 = 50%

Depreciation will cease in 2027 once the total accumulated depreciation is $424,000. This makes the carrying amount $90,000 which is equal to the residual value. No depreciation is taken on assets once the carrying amount has reached the residual value.

Total depreciation over the robots‘ useful lives is $424.000

PROBLEM 9.3A (CONTINUED) b.

(3) UNITS-OF-PRODUCTION DEPRECIATION Calculation

Year

Units-ofProduction

2024 2025 2026 2027 2028

1,700 2,800 2,600 2,200 1,000

Depreciation Rate/Unit 1

$41.17 41.17 41.17 41.17 *

End of Year

Depreciation Expense

Accumulated Depreciation

Carrying Amount

$69,989 115,276 107,042 90,574 41,119

$ 69,989 185,265 292,307 382,881 424,000

$514,000 444,011 328,735 221,693 131,119 90,000

Depreciation rate per unit = ($514,000 – $90,000) ÷ 10,300 units = $41.17 per unit * (Carrying amount less residual value) $131,119 - $90,000 = $41,119 Total depreciation over the robots‘ useful lives is $424.000 Net income is lowest in the earlier years of the machine‘s useful life when the double-diminishing-balance method is used.

c. STRAIGHT-LINE DEPRECIATION Calculation Year

Depreciable Amount

2024 2025 2026 July 20263 2027 2028 2029 July 2030

$424,0001 424,000 424,000 262,000 262,000 262,000 262,000 262,000

Depreciation Rate 2 25% × 6/12 25% 25% × 6/12 25% × 6/124 25% 25% 25% 25% x 6/12

End of Year

Depreciation Expense

Accumulated Depreciation

Carrying Amount

$53,000 106,000 53,000 32,750 65,500 65,500 65,500 32,750

$ 53,000 159,000 212,000 244,750 310,250 375,750 441,250 474,000

$461,000 355,000 302,000 269,250 203,750 138,250 72,750 40,000

$514,000 – $90,000 = $424,000 1 ÷ 4years = 25% 3 ($302,000 - $40,000) = $262,000 (carrying amount less the residual value) 4 1 ÷ 4 years = 25% (extended remaining useful life by two years over remaining two years) Total depreciation for twelve months ended December 31, 2026 = $53,000 + $32,750 = $85,750 Total depreciation over the robots‘ useful lives is $474.000 2

PROBLEM 9.3A (CONTINUED) d.

Yes. The cost to recycle the machine at the end of its useful life would need to be estimated. It would be added to the cost of the machine and allocated over its useful life, increasing the annual depreciation charge.

LO 1,2 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.4A a.

(1) STRAIGHT-LINE DEPRECIATION Calculation Year

Depreciable Amount

2024 $170,0002 2025 170,000 2026 170,000 2027 170,000 2028 170,000 2029 170,000 Total 2

Depreciation Rate1

20% × 11/12 20% 20% 20% 20% 20% × 1/12

End of Year Depreciation Expense

Accumulated Depreciation

Carrying Amount

$ 31,367 65,167 99,167 133,167 167,167 170,000

$180,000 148,833 114,833 80,833 46,833 12,833 10,000

$31,167 34,000 34,000 34,000 34,000 2,833 170,000

a. 1 ÷ 5 years = 20% $180,000 – $10,000 = $170,000 (2) DOUBLE DIMINISHING–BALANCE DEPRECIATION Calculation

Year

Opening Carrying Amount

2024 $180,000 2025 114,000 2026 68,400 2027 41,040 2028 24,624 2029 14,774 Total 1 2

Depreciation Rate1

40% × 11/12 40% 40% 40% 40% 40% × 1/122

End of Year Depreciation Expense

$66,000 45,600 27,360 16,416 9,850 4,7742 170,000

Accumulated Depreciation

Carrying Amount

$ 66,000 111,600 138,960 155,376 165,226 170,000

$180,000 114,000 68,400 41,040 24,624 14,774 10,000

1 ÷ 5 years = 20% × 2 = 40% Adjusted so that carrying amount would equal residual value of $10,000 ($14,774 × 40% × 1/12 = $492; $14,774 – $4,000 = $4,774) at the end of the useful life.

PROBLEM 9.4A (CONTINUED) b. (3) UNITS-OF-PRODUCTION DEPRECIATION Calculation Year

2024 2025 2026 2027 2028 2029 Total 1

Units-ofProduction

Depreciation Rate/Unit 1

17,000 29,500 21,000 18,000 14,000 500

$1.70 1.70 1.70 1.70 1.70 1.70

End of Year =

Depreciation Expense

$28,900 50,150 35,700 30,600 23,800 850 170,000

Accumulated Depreciation

Carrying Amount

$ 28,900 79,050 114,750 145,350 169,150 170,000

$180,000 151,100 100,950 65,250 34,650 10,850 10,000

Depreciation rate per unit = ($180,000 – $10,000) ÷ 100,000 units = $1.70 per unit

Total depreciation expense Accumulated depreciation

StraightLine

Units-ofProduction

DoubleDiminishingBalance

$170,000 170,000

Total depreciation expense is equal to the depreciable cost of $180,000 $10,000 = $170,000 under all three methods. c.

The estimates used in determining the depreciation amount include the useful life of the asset, the total number of units of production expected, and the residual value when the business has completed its use of the asset. Management‘s ability to arrive at accurate estimates depends on past experience with similar assets and to some extent to what will happen in the future, particularly with respect to the continued use of the asset. If the way the asset is used changes or if management‘s intention concerning how long the asset will be used changes, the estimates will need revision.

Depreciation is a non-cash expense so the cash flows are not affected.

I would recommend the units-of-production method as it best reflects the pattern of the economic benefits produced by the equipment given the variability of usage each year.

LO 2 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.5A a.

Cost of gold mine January 1, 2022 Total production in ounces of gold Per unit depletion

$20,000,000 ÷ 25,000 $800

Depletion in units

2022 1,200 2023 1,400 Total units and accumulated depletion 2,600 x $800 = $2,080,000 The carrying amount will be $17,920,000 ($20,000,000 - $2,080,000) at January 1, 2024 Equipment Cost, January 1, 2022 $8,000,000 Less: Residual value 0 Depreciable cost 8,000,000 Useful life in years ÷ 8 Annual depreciation $1,000,000 The equipment‘s accumulated depreciation on January 1, 2024 will be $2,000,000 ($1,000,000 × 2 years) and the carrying amount will be $6,000,000 ($8,000,000 – $2,000,000).

Proceeds from cash sale Carrying amount of equipment sold * Gain on disposal *Carrying amount of equipment sold: Cost ($ 8,000,000 x ¼) Accumulated Depreciation to date of sale ($2,000,000 x ¼) Carrying amount ($ 6,000,000 x ¼)

Depreciation on remaining equipment: Depreciable cost ($8,000,000- $2,000,000) Original useful life in years Annual depreciation Depreciation for 10 months ($750,000 x 10/12) Depreciation on old equipment for 2 months ($750,000 x 2/12) Depreciation on new equipment: Cost ÷ useful life x 2/12 $1,000,000 ÷ 8 x 2/12= Total depreciation for 2 months

Total equipment depreciation for 2024 (for part f)

$1,800,000 1,500,000 $ 300,000

$2,000,000 500,000 $1,500,000

$6,000,000 ÷ 8 750,000 $625,000

$125,000

20,833 $145,833 $ 770,833

PROBLEM 9.5A (CONTINUED) f. Equipment Jan. 1, 2024 Nov. 1, 2024 Dec. 31, 2024

8,000,000 1,000,000 5,800,000

Disposal Jan. 1, 2024 (c) 2,000,000 Disposal Dec. 31, 2024 1,200,000

Accumulated Depreciation-Equipment Disposal Jan. 1, 2024 (c) Disposal Dec. 31, 2024

500,000 450,000

Jan. 1, 2024 Depreciation (e)

2,000,000 770,833

Dec. 31, 2024

1,820,833

Cost of equipment sold (derived above)................ Accumulated depreciation (derived above) ........... Net carrying amount .............................................. Loss on disposal ................................................... Proceeds from sale ...............................................

$1,200,000 450,000 750,000 _300,000 $450,000

LO 2,3 BT: AP Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.6A a.

2023 Dec.

Buildings .............................................................. Cash.............................................................

100,000 100,000

DIMINISHING–BALANCE DEPRECIATION Calculation

Year

Opening Carrying Amount

2024 $100,000 2025 93,333 2026 74,667 July 31/26 59,733 1

End of Year

Depreciation Rate 1

Depreciation Expense

Accumulated Depreciation

Carrying Amount

20% × 4/12 20% 20% 20% × 4/12

$6,667 18,667 14,933 3,982

$6,667 25,333 40,267 44,249

$93,333 74,667 59,733 55,751

1 ÷ 10 years = 10% x 2 = 20%

2024 Mar.

2025 Mar.

2026 Mar.

Depreciation Expense .......................................... Accumulated Depreciation— Buildings ........

6,667

Depreciation Expense .......................................... Accumulated Depreciation— Buildings ........

18,667

Depreciation Expense .......................................... Accumulated Depreciation— Buildings ........

14,933

6,667

18,667

14,933

PROBLEM 9.6A (CONTINUED) c. 2026 (1, 2, 3) July 31

(1) July 31

Depreciation Expense .......................................... Accumulated Depreciation— Buildings .......

3,982

Cash .................................................................... Accumulated Depreciation— Buildings ................ Gain on Disposal ........................................ Buildings .....................................................

75,000 44,249

Cash proceeds ............................................. Carrying amount ........................................... Gain on disposal ........................................... (2) July 31

(3) July 31

35,000 44,249 20,751 100,000

$35,000 55,751 $ (20,751)

Accumulated Depreciation— Buildings ................ Loss on Disposal .................................................. Buildings .....................................................

Cash proceeds ............................................. Carrying amount ........................................... Loss on disposal ...........................................

19,249 100,000

$ 75,000 55,751 $19,249

Cash .................................................................... Accumulated Depreciation— Buildings ................ Loss on Disposal .................................................. Buildings .....................................................

Cash proceeds ............................................. Carrying amount .......................................... Loss on disposal ...........................................

3,982

44,249 55,751 100,000

0 55,751 $(55,751)

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.7A a. (1)

Straight-line

Depreciation Expense = ($70,000 – $10,000) 3 2024 Mar. 1

Dec. 31

2025 Nov. 30

$20,000

Equipment............................................................................ Cash ..........................................................................

70,000

Depreciation Expense .......................................................... Accumulated Depreciation—Equipment .................... ($20,000 × 10/12 = $16,667)

16,667

Depreciation Expense .......................................................... Accumulated Depreciation—Equipment .................... ($20,000 × 11/12 = $18,333)

18,333

70,000

16,667

Cash .................................................................................... 18,000 Accumulated Depreciation—Equipment ($16,667 + $18,333) 35,000 Loss on Disposal ................................................................. 17,000 Equipment .................................................................

18,333

70,000

PROBLEM 9.7A (CONTINUED) a. (2)

Double-diminishing-balance

Depreciation Rate = 1 ÷ 3 years = 33% X 2 = 67% (note textbook convention to round rates to two decimal places) 2024 Mar. 1 2024 Dec. 31

2025 Nov. 30

Nov. 30

Equipment............................................................................ Cash ..........................................................................

70,000

Depreciation Expense .......................................................... Accumulated Depreciation—Equipment .................... ($70,000 × 67% × 10/12 = $39,083)

39,083

Depreciation Expense .......................................................... Accumulated Depreciation—Equipment .................... [($70,000 – $39,083) × 67% × 11/12 = $18,988]

18,988

70,000

39,083

Cash .................................................................................... 18,000 Accumulated Depreciation—Equipment ($39,083 + $18,988) 58,071 Gain on Disposal ....................................................... Equipment .................................................................

18,988

6,071 70,000

PROBLEM 9.7A (CONTINUED) a. (3)

Units-of-Production Depreciation rate per unit = ($70,000 – $10,000) 12,000

2024 Mar. 1

Dec. 31

2025 Nov. 30

Nov. 30

$5.00

Equipment............................................................................ Cash ..........................................................................

70,000

Depreciation Expense .......................................................... Accumulated Depreciation—Equipment .................... (4,900 × $5 = $24,500)

24,500

Depreciation Expense .......................................................... Accumulated Depreciation—Equipment .................... (5,600 × $5 = $28,000)

28,000

70,000

24,500

Cash .................................................................................... 18,000 Accumulated Depreciation—Equipment ($24,500 + $28,000) 52,500 Gain on Disposal ....................................................... Equipment .................................................................

28,000

500 70,000

PROBLEM 9.7A (CONTINUED) b. Straight

DoubleDiminishing

Units-of

-Line

-Balance

Production

2024 2025 Total depreciation for two years

$16,667 18,333

$39,083 18,988

$24,500 28,000

35,000

58,071

52,500

+ Loss (or – gain) on disposal

17,000

(6,071)

(500)

= Net expense for two years

$52,000

Depreciation expense

LO 2,3 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.8A a.

April

May

June

July

Dec. 31

Land ........................................................... Cash................................................... Mortgage Payable ..................................

4,400,000

Depreciation Expense ................................ Accumulated Depreciation—Equipment ($2,800,000 ÷ 10 × 4/12 = $93,333)

93,333

Cash ........................................................... Accumulated Depreciation—Equipment ..... Loss on Disposal ........................................ Equipment ..........................................

300,000 2,333,333 166,667

Cost Accumulated depreciation—equipment [($2,800,000 ÷ 10) × 8 + $93,333)] Carrying amount Cash proceeds Loss on disposal

$2,800,000

Cash ........................................................... Notes Receivable ....................................... Land ................................................... Gain on Disposal ................................

900,000 2,700,000

Equipment .................................................. Cash...................................................

2,200,000

Depreciation Expense ................................ Accumulated Depreciation—Equipment ($1,000,000 ÷ 10 = $100,000)

100,000

Accumulated Depreciation—Equipment ..... Equipment ..........................................

1,000,000

1,100,000 3,300,000

93,333

2,800,000

2,333,333 466,667 300,000 $ (166,667)

1,400,000 2,200,000

2,200,000

100,000

1,000,000

PROBLEM 9.8A (CONTINUED) a. (Continued) 31

Impairment Loss ($23,000,000* – $20,000,000) 3,000,000 Land ...................................................

3,000,000

*Carrying amount = $20,000,000 + $4,400,000 – $1,400,000 = $23,000,000 b.

Dec.

Depreciation Expense ................................ Accumulated Depreciation—Buildings ($97,400,000 ÷ 40 = $2,435,000)

2,435,000

Depreciation Expense ................................ Accumulated Depreciation—Equipment

14,730,000

$146,200,000* ÷ 10 $2,200,000 ÷ 10 × 6/12

$14,620,000 110,000 $14,730,000

2,435,000

14,730,000

* $150,000,000 – $2,800,000 – $1,000,000 = $146,200,000 31

Interest Expense ........................................ Interest Payable ................................. ($3,300,000 × 6% × 9/12 = $148,500)

148,500

Interest Receivable .................................... Interest Income .................................. ($2,700,000 × 5% × 7/12 = $78,750)

78,750

148,500

78,750

PROBLEM 9.8A (CONTINUED) c. YOUNGSTOWN LIMITED Statement of Financial Position (Partial) December 31, 2024 Property, plant, and equipment1 Land .................................................................. Buildings ............................................................ Less: Accumulated depreciation ........................ Equipment ......................................................... Less: Accumulated depreciation ........................ Total property, plant, and equipment .......... 1

$ 20,000,000 $97,400,000 64,635,000 148,400,000 65,590,000

32,765,000 82,810,000 $135,575,000

See T accounts on the following page.

PROBLEM 9.8A (CONTINUED) c. (continued) Land Jan. 1, 2024 April 1, 2024

20,000,000 4,400,000

Dec. 31, 2024

Bal. 20,000,000

June 1, 2024 Dec. 31, 2024

1,400,000 3,000,000

Buildings Jan. 1, 2024 Dec. 31, 2024

97,400,000 Bal. 97,400,000 Equipment

Jan. 1, 2024 July 1, 2024 Dec. 31, 2024

150,000,000 2,200,000

May 1, 2024 Dec. 31, 2024

2,800,000 1,000,000

Bal. 148,400,000 Accumulated Depreciation—Buildings Jan. 1, 2024 Dec. 31, 2024

62,200,000 2,435,000

Dec. 31, 2024

Bal. 64,635,000

Accumulated Depreciation—Equipment May 1, 2024 Dec. 31, 2024

2,333,333 1,000,000

Jan. 1, 2024 May 1, 2024 Dec. 31, 2024 Dec. 31, 2024

54,000,000 93,333 100,000 14,730,000

Dec. 31, 2024

Bal. 65,590,000

LO 2,3,5 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.9A a.

yes

Goodwill

not amortized

N/A

Not reported on the Statement of Financial Position. Rent (Lease) Expense, Statement of Income, Operating expenses.

yes

amortized

N/A

yes

Trademarks

not amortized

N/A

Not reported on the Statement of Financial Position Research Expenses, Statement of Income, Operating expenses

N/A

Not recorded or reported

N/A

Right-of-Use Asset, Statement of Financial Position, Property, plant, and equipment

yes

Patents

amortized

N/A

Professional Fees Expense, Statement of Income, Operating expenses

10.

yes

Development Costs

amortized

N/A

11.

Yes

Franchises

Amortized

N/A

LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 9.10A a.

Jan.

July

Sept.

Oct.

Dec. 31

Trademarks ............................................................ Cash ................................................................

7,000 7,000

Research Expenses ............................................... 210,000 Cash ................................................................

210,000

Development Costs ................................................ Cash ................................................................

50,000 50,000

Advertising Expense .............................................. Cash ................................................................

60,000 60,000

Copyrights .............................................................. 180,000 Cash ................................................................ Amortization Expense ($36,000 ÷ 4) ...................... Accumulated Amortization—Copyrights ..........

9,000

Amortization Expense ............................................ Accumulated Amortization—Copyrights .......... ($180,000 ÷ 6 × 3/12 = $7,500)

7,500

180,000

9,000

7,500

Amortization Expense ............................................ 1,250 Accumulated Amortization—Development Costs ($50,000 ÷ 20 × 6/12 = $1,250)

1,250

Impairment Loss..................................................... Goodwill ....................................................... ($125,000 - $90,000 = $35,000)

35,000

PROBLEM 9.10A (CONTINUED) c. GHANI CORPORATION Statement of Financial Position (Partial) December 31, 2024 Intangible assets: Finite life intangible assets Development costs .............................................. $50,000 Less: Accumulated amortization .......................... 1,250 Copyrights ............................................................ 216,0001 Less: Accumulated amortization .......................... 34,5002 Indefinite life intangible assets Trademarks ............................................................................... Total intangible assets ...................................................................... Goodwill ............................................................................................... 1

Copyrights: $36,000 + $180,000 = $216,000

Accumulated amortization Copyright (#1): $18,000 + $9,000 Copyright (#2)

Trademarks: $54,000 + $7,000 = $61,000

Goodwill: $125,000 – $35,000 = $90,000

$ 48,750 181,500 61,0003 $291,250 90,0004

$27,000 7,500 $34,500

LO 4,5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.11A a.

Canada Goose Roots (in thousands) ........................ (in thousands)

(1) Profit margin

$70,200 = 7.8% $903,700

$13,080 = 5.4 % $240,506

$903,700

(2) Asset turnover

$1,507,200 + $1,112,700

(

$240,506 )

= 0.7 times

(

$390,323 + $440,704

$1,507,200 + $1,112,700

(

= 5.4%

)

= 0.6 times

$70,200 (3) Return on assets

$13,080 )

(

$390,323 + $440,704 2

)

= 3.1%

The profit margin for Canada Goose is better than that of Roots and is above the industry average of 7.4%. Canada Goose has a lower asset turnover ratio than the industry average and exceeds that of Roots. When compared to industry averages, neither Canada Goose or Roots generate as high a return on assets.

Some additional information about long-lived assets that would assist in the comparisons include the accounting policies chosen concerning the calculation of depreciation and amortization, the estimates arrived at for the useful lives and residual values of the assets being depreciated, and details concerning the costs and accumulated depreciation or amortization recorded to date. The latter information would indicate the age of the long-lived assets and whether the company owned or leased these assets. It would also be helpful to look at the types of assets held by the two companies to see if they are using the same types of assets in the same proportion.

LO 4,6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 9.12A a. (in thousands)

Delicious ................................... Scrumptious

(1) Profit margin 2024

$350 = 11.3% $3,100

$180 = 9.5% $1,900

Profit margin 2023

$150 = 10.0% $1,500

$200 = 11.8% $1,700

$3,100 (2) Asset turnover 2024

Asset turnover 2023

$2,000 + $1,100

(

$1,900 )

)

= 2.2 times

$1,500

$1,700

$1,100 + $1,000

(

)

$900 + $1,000

(

$350

$180

$2,000 + $1,100

$800 + $900

(

)

(

)

= 21.2%

$150

$200

$1,100 + $1,000

$900 + $1,000

(

= 14.3%

)

= 1.8 times

= 22.6%

Return on assets 2023

$800 + $900

= 2.0 times

= 1.4 times

(3) Return on assets 2024

(

)

(

)

= 21.1%

PROBLEM 9.12A (CONTINUED) b.

Delicious Limited increased its profit margin from 10.0% to 11.3% and its asset turnover from 1.4 times to 2.0 times. The increases in these two ratios multiplied to generate a substantial increase in Delicious‘ return on assets (return on assets = profit margin × asset turnover).

Conversely, Scrumptious Limited suffered a decrease in its profit margin from 11.8% to 9.5%. This decrease was offset by an increase in its asset turnover from 1.8 times to 2.2 times resulting in no substantial change in the return on assets. c.

Delicious Limited has been more successful in executing its strategy. The acquisition of a competitor has allowed it to increase its profit margin and its asset turnover thereby increasing its return on assets. Scrumptious has achieved its strategy of making operations more efficient by increasing its asset turnover, but a decline in its profit margin offset this increase in efficiency thereby leaving its return on assets relatively unchanged.

LO 6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 9.1B Account Debited

Explanation

Equipment

expenditure that does not make the equipment more productive nor extend its Repairs and Maintenance Operating useful life. Likely benefits only the current period. Expense Equipment Capital expenditure, which makes the equipment more productive.

Capital expenditure, which makes the equipment more productive and/or extends its useful life.

Repairs and Maintenance Operating expenditure that does not make the equipment Expense more productive nor extend its useful life.

Training Expense

Repairs and Maintenance Operating expenditure that does not make the equipment Expense more productive nor extend its useful life. Painting is a recurring expense.

Prepaid Insurance

Operating expenditure as it benefits the current period only.

Salaries Expense

Reorganization of the warehouse is an ongoing activity so should be expensed even though efficiency should increase.

Equipment

Capital expenditure: a one-time cost that will benefit more than one period of time, and likely allows the operator to use the equipment longer and more productively.

Operating expenditure that does not increase the productivity of the equipment and current accounting policies do not recognize the cost of human capital.

10. Repairs and Maintenance Operating expenditure that does not make the equipment Expense more productive nor extend its useful life. LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 9.2B a. Jan.

Land ................................................................................ Cash .....................................................................

18,000

Land ................................................................................ Cash .....................................................................

100,000

Land ................................................................................ Cash .....................................................................

32,000

28 Cash ............................................................................... Land .....................................................................

30,000

Feb. 13

Mar. 14

Apr.

June 17

Sept. 23

Oct.

Land ................................................................................ 880,000 Cash ..................................................................... Mortgage Payable ................................................ Note: There is no intention of using the old building so the purchase price really relates to only the land.

220,000 660,000

18,000 100,000

32,000

30,000

Buildings ......................................................................... Cash .....................................................................

136,000

Buildings ......................................................................... Cash .....................................................................

68,000

136,000

68,000

Buildings ......................................................................... 1,200,000 Cash ..................................................................... Bank Loan Payable ..............................................

300,000 900,000

400,000 800,000

Land Improvements ........................................................ Cash .....................................................................

168,000

PROBLEM 9.2B (CONTINUED) b.

Date

Land

Jan. 22

$880,000

24 31 Feb. 13 28 Mar. 14 Apr. 22 June 17 Sept. 23 Oct. 1

18,000 100,000 32,000 (30,000)

00 00 000 $1,000,000

Land Improvements Buildings

$168,000 $168,000

$ 136,000 68,000 1,200,000 1,200,000 000000000 $2,604,000

Land is not depreciated, so no depreciation is calculated on this asset. The building and land improvements would be depreciated once the asset is available for use. The building would start being depreciated when construction is completed. This may not necessarily correspond with the dates the bills are received. Both the building and the land improvements would be depreciated starting on October 1, if depreciation is calculated to the nearest month.

LO 1,2 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.3B a.

Cost: Cash price Delivery costs

$187,800 1,200

Installation and testing

7,000

Total cost

$196,000

The one-year insurance policy is not included as it benefits only the current period. It would be recorded as Prepaid Insurance and allocated to Insurance Expense throughout the period. b.

Straight-line depreciation expense (per year) $196,000 = $49,000 4 STRAIGHT-LINE DEPRECIATION Calculation Year

2024 2025 2026 2027 2028 1 2

Depreciable Amount

$196,000 196,000 0, 196,000 196,000 196,000

Depreciation Rate 2

End of Year =

25% × 3/12 25% 25% 25% 25% × 9/12

Depreciation Expense

$12,250 49,000 49,000 49,000 36,750

Accumulated Depreciation

Carrying Amount

$ 12,250 61,250 110,250 159,250 196,000

$196,000 183,750 134,750 85,750 36,750 0

$196,000 cost – $0 residual value = $196,000 1 ÷ 4 years = 25%

PROBLEM 9.3B (CONTINUED) b. (continued) DOUBLE-DIMINISHING–BALANCE DEPRECIATION Calculation

Year

2024 2025 2026 2027 2028 1

Opening Carrying Amount

$196,000 171,500 85,750 42,875 21,437

Depreciation Rate1

50% × 3/12 50% 50% 50% 50% × 9/12

End of Year Depreciation Expense

$ 24,500 85,750 42,875 21,438 21,4372

Accumulated Depreciation

Carrying Amount

$ 24,500 110,250 153,125 174,563 196,000

$196,000 171,500 85,750 42,875 21,437 0

Double-diminishing-balance depreciation rate = 1 ÷ 4 = 25% × 2 = 50%

Depreciation expense in 2028 is calculated to equal $8,039 ($21,437  50%  9/12). However, this amount must be adjusted to $21,437 to make the carrying amount at the end of 2028 nil, or equal to the residual value.

PROBLEM 9.3B (CONTINUED) b. (continued) UNITS-OF-PRODUCTION DEPRECIATION Calculation Year

Units-ofProduction

2024 2025 2026 2027 2028

2,500 10,300 9,900 8,800 8,500

Depreciation Rate 1

$4.90 ……4.90 ,,,,,,,,4.90 ,,,,,,,,4.90 4.90

End of Year =

Depreciation Expense

Accumulated Depreciation

Carrying Amount

$12,250 50,470 48,510 43,120 41,650

$ 12,250 62,720 111,230 154,350 196,000

$196,000 183,750 133,280 84,770 41,650 0

Depreciation rate (per unit): $196,000 40,000

$4.90

The double-diminishing-balance depreciation causes net income to be lower in the early years of the asset‘s life because the depreciation expense is higher in 2024 and 2025 than under the other two methods. c.

Depreciation for the first nine months of 2026 = $49,000 x 9/12 = $36,750 Carrying amount on Oct. 1, 2026 = $134,750 - $36,750 = $98,000 Depreciable amount for remainder of 2026 = $98,000 - $2,000 = $96,000 Revised remaining useful life at Oct 1, 2026 = 3 remaining years. Depreciation for three months ended December 31, 2026 = $96,000 ÷ 3 x 3/12 = $8,000 Total depreciation for twelve months ended December 31, 2026 = $36,750 + $8,000 = $44,750

Yes, there would be an impact. The cost to recycle the machine at the end of its useful life would need to be estimated. The estimated cost would then be added to the cost of the machine and allocated over its useful life, increasing the depreciation charge.

LO 1,2 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.4B a.

(1)

Year

Depreciable Amount

2024 2025 2026 2027 2028

$150,0001 150,000 150,000 150,000 150,000

STRAIGHT-LINE DEPRECIATION Calculation End of Year Depreciation # of Depreciation Accumulated Carrying Rate 2 Mos. Expense Depreciation Amount 25% 25% 25% 25% 25%

$165,000 – $15,000 = $150,000

1 ÷ 4 years = 25%

1/12 12/12 12/12 12/12 11/12

$ 3,125 37,500 37,500 37,500 34,375

$ 3,125 40,625 78,125 115,625 150,000

$161,875 124,375 86,875 49,375 15,000

(2) DOUBLE-DIMINISHING-BALANCE DEPRECIATION Calculation

Year

Carrying Amount Beg. of Year

2024 2025 2026 2027 2028

$165,000 158,125 79,062 39,531 19,765

End of Year

Depreciation Rate 1

# of months

Depreciation Expense

Accumulated Depreciation

Carrying Amount

50% 50% 50% 50% 50%

1/12 12/12 12/12 12/12

$ 6,875 79,063 39,531 19,766 4,7652

$ 6,875 85,938 125,469 145,235 150,000

$158,125 79,062 39,531 19,765 15,000

1 ÷ 4 years × 2 = 25% × 2 = 50%

Adjusted so that the carrying amount at the end of the useful life equals $15,000 ($19,765 × 50% × 11/12 = $9,059 was not used as it would make the carrying amount lower than the residual value; $19,765 – $15,000 = $4,765).

PROBLEM 9.4B (CONTINUED) a.

(3) UNITS-OF-PRODUCTION DEPRECIATION Calculation Year

Units-ofProduction

2024 2025 2026 2027 2028

7,500 100,000 62,500 95,000 35,000

Depreciation Rate/Unit 1 $0.50 0.50 0.50 0.50 0.50

End of Year =

Depreciation Expense

Accumulated Depreciation

Carrying Amount

$ 3,750 50,000 31,250 47,500 17,500

$ 3,750 53,750 85,000 132,500 150,000

$161,250 111,250 80,000 32,500 15,000

Depreciation rate per unit = ($165,000 – $15,000) ÷ 300,000 km = $0.50 per kilometre Total depreciation:

Depreciation expense

Straight -Line $150,000

DiminishingBalance $150,000

DoubleUnits-ofProduction $150,000

Accumulated depreciation

150,000

Depreciation is a non-cash expense so the cash flows are not affected.

I would recommend the units-of-production method as it best reflects the pattern of the economic benefits produced by the bus, given the variability of usage each year.

LO 2 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.5B a.

Cost of silver mine January 1, 2022 Total production in ounces of silver Per unit depletion

$15,000,000 ÷ 8,000,000 $1.875

Depletion in units

2022 250,000 2023 280,000 Total units and accumulated depletion 530,000 x $1.875 = $993,750 The carrying amount will be $14,006,250 ($15,000,000 - $993,750) at January 1, 2024. b.

Equipment Cost, January 1, 2022 Less: Residual value Depreciable cost Useful life in years Annual depreciation

$6,000,000 0 6,000,000 ÷ 5 $1,200,000

The equipment‘s accumulated depreciation on January 1, 2024 will be $2,400,000 ($1,200,000 × 2 years) and the carrying amount will be $3,600,000 ($6,000,000 – $2,400,000). c.

Proceeds from cash sale $1,700,000 Carrying amount of equipment sold ($3,600,000 x 1/3)* 1,200,000 Gain on disposal $ 500,000 *Carrying amount of equipment sold: Cost ($6,000,000 x 1/3) Accumulated Depreciation to date of sale ($2,400,000 x 1/3) Carrying amount ($3,600,000 x 1/3)

$2,000,000 800,000 $1,200,000

Depreciation from Jan. 1, 2024 to Sept. 30, 2024 Annual amount of depreciation ($4,000,000 / 5) Number of months

$ 800,000 x 9/12

Depreciation expense

$ 600,000

Cost of remaining equipment Accumulated Depreciation1 Carrying amount 1 $2,400,000 - $800,000 + $600,000

$4,000,000 2,200,000 $1,800,000

PROBLEM 9.5B (CONTINUED) e.

Depreciation on new equipment: Cost ÷ useful life x 3/12 $1,000,000 ÷ 5 x 3/12 =

$ 50,000

Depreciation on remaining equipment: ($4,000,000 / 5) $800,000 Number of months x 3/12

Depreciation expense

$ 200,000

Total depreciation for Oct 1 to Dec 31 Total equipment depreciation for 2024 (for part f)

$ 250,000 $ 850,000

f. Equipment Dec. 31, 2023 Oct. 1, 2024 Dec. 31, 2024

6,000,000 1,000,000 3,800,000

Disposal Jan. 1, 2024 (c) 2,000,000 Disposal Dec. 31, 2024 1,200,000

Accumulated Depreciation-Equipment Disposal Jan. 1, 2024 (c) Disposal Dec. 31, 2024

800,000 650,000

Dec. 31, 2023 Depreciation (e)

2,400,000 850,000

Dec. 31, 2024

1,800,000

Cost of equipment sold (derived above)................ Accumulated depreciation (derived above) ........... Net carrying amount .............................................. Loss on disposal ................................................... Cash proceeds from sale ......................................

$1,200,000 650,000 550,000 _200,000 $ 350,000

LO 2,3 BT: AP Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.6B a.

2022 Jan. 1

Equipment ............................................................ 170,000 Accounts Payable ........................................

DIMINISHING–BALANCE DEPRECIATION Calculation

Year

Opening Carrying Amount

2022 2023 Aug/24

$170,000 119,000 71,400

170,000

End of Year

Depreciation Rate 1

Depreciation Expense

Accumulated Depreciation

Carrying Amount

40% × 9/12 40% 40% × 10/12

$ 51,000 47,600 23,800

$51,000 98,600 122,400

$119,000 71,400 47,600

1 ÷ 5 years = 20% x 2 = 40%

2022 Sept. 30

2023 Sept. 30

Depreciation Expense .......................................... Accumulated Depreciation—Equipment.......

51,000

Depreciation Expense .......................................... Accumulated Depreciation—Equipment.......

47,600

51,000

47,600

PROBLEM 9.6B (CONTINUED) c.

2024 (1, 2, 3) Aug. 1

(1)

Aug. 1

Depreciation Expense .......................................... Accumulated Depreciation—Equipment.......

Cash .................................................................... 60,000 Accumulated Depreciation—Equipment .............. 122,400 Equipment................................................... Gain on Disposal ........................................

Cash proceeds ................................................... Carrying amount ................................................. Gain on disposal ................................................. (2)

Aug. 1

170,000 12,400

170,000

$ 42,000 47,600 $(5,600)

Accumulated Depreciation—Equipment ............... 122,400 Loss on Disposal .................................................. 47,600 Equipment...................................................

Cash proceeds ................................................... Carrying amount ................................................. Loss on disposal .................................................

23,800

$60,000 47,600 $ 12,400

Cash .................................................................... 42,000 Accumulated Depreciation—Equipment ............... 122,400 Loss on Disposal .................................................. 5,600 Equipment...................................................

Cash proceeds ................................................... Carrying amount ................................................. Loss on disposal .................................................

(3)

23,800

170,000

0 47,600 $ (47,600)

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.7B a.

(1)

Straight-line

Depreciation Expense = ($50,000 – $10,000) 3 2024 Feb. 1

Dec. 31

2025 Oct. 31

$13,333

Equipment .............................................................. Cash ................................................................

50,000

Depreciation Expense ............................................ Accumulated Depreciation—Equipment .......... ($13,333 × 11/12 = $12,222)

12,222

Depreciation Expense ............................................ Accumulated Depreciation—Equipment .......... ($13,333 × 10/12 = $11,111)

11,111

Cash ....................................................................... Accumulated Depreciation—Equipment ($12,222 + $11,111) ............................................... Loss on Disposal. ................................................... Equipment .......................................................

12,000

50,000

12,222

11,111

23,333 14,667

50,000

PROBLEM 9.7B (CONTINUED) a.

(2)

Double-diminishing-balance

Depreciation rate = 1/3 x 2 = 67% (note textbook convention to round rates to two decimal places 0.67 or 67%) 2024 Feb. 1

Dec. 31

2025 Oct. 31

Equipment .............................................................. Cash ................................................................

50,000

Depreciation Expense ............................................ Accumulated Depreciation—Equipment .......... ($50,000 × 67% × 11/12 = $30,708)

30,708

50,000

30,708

Depreciation Expense ............................................ 9,292 Accumulated Depreciation—Equipment .......... [($50,000 – $30,708) × 67% × 10/12 = $10,771] Carrying amount would fall below residual value of $10,000 ($50,000 - $30,708 - $10,771) = $8,521 Expense is limited to ($50,000 - $30,708 - $10,000) = $9,292 Cash ...................................................................... Accumulated Depreciation—Equipment ($30,708 + $9,292) ................................................. Gain on Disposal ............................................. Equipment .......................................................

9,292

12,000 40,000

2,000 50,000

PROBLEM 9.7B (CONTINUED) a.

(3)

Units-of-Production

Depreciation rate per unit = ($50,000 – $10,000) 10,000 2024 Feb. 1

Dec. 31

2025 Oct. 31

$4.00

Equipment .............................................................. Cash ................................................................

50,000

Depreciation Expense ............................................ Accumulated Depreciation—Equipment .......... (4,000 × $4 = $16,000)

16,000

Depreciation Expense ............................................ Accumulated Depreciation—Equipment .......... (5,000 × $4 = $20,000)

20,000

Cash ....................................................................... Accumulated Depreciation—Equipment ($16,000 + $20,000) ............................................... Loss on Disposal .................................................... Equipment ..........................................................

12,000

50,000

16,000

20,000

36,000 2,000

50,000

PROBLEM 9.7B (CONTINUED) b. Straight

DoubleDiminishing

Units-of

-Line

-Balance

Production

2024 2025 Total depreciation for two years

$12,222 11,111

$30,708 9,292

$16,000 20,000

23,333

40,000

36,000

+ Loss (or – gain) on disposal

14,667

(2,000)

2,000

= Net expense for two years

$38,000

Depreciation expense

LO 2,3 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.8B a.

April

May

Land ........................................................... Cash................................................... Mortgage Payable ..............................

3,800,000

Depreciation Expense ................................ Accumulated Depreciation—Equipment ($1,500,000 ÷ 10 × 4/12 = $50,000)

50,000

700,000 650,000 150,000

Cash proceeds Cost Accumulated depreciation—equipment [($1,500,000 ÷ 10) × 4 + $50,000)] Carrying amount Loss on disposal June

July

Sept.

Dec. 31

950,000 2,850,000

50,000

1,500,000 $ 700,000 $1,500,000 650,000 850,000 $(150,000)

760,000 1,640,000

Equipment .................................................. Accounts Payable ..............................

2,000,000

Accounts Payable ...................................... Cash...................................................

2,000,000

Depreciation Expense ................................ Accumulated Depreciation—Equipment ($940,000 ÷ 10 = $94,000)

94,000

600,000 1,800,000

2,000,000

94,000

PROBLEM 9.8B (CONTINUED) a. (continued) Dec. 31

Dec.

Accumulated Depreciation—Equipment ..... Equipment ..........................................

940,000 940,000

Impairment Loss......................................... 200,000 Land ................................................... ($8,000,000 +$3,800,000 – $600,000 = $11,200,000) ($11,200,000 – $11,000,000 = $200,000)

Depreciation Expense ................................ Accumulated Depreciation—Buildings ($57,000,000 ÷ 40 = $1,425,000)

1,425,000

Depreciation Expense ................................ Accumulated Depreciation—Equipment

9,456,000

$93,560,000* ÷ 10 $2,000,000 ÷ 10 × 6/12

$9,356,000 100,000 $9,456,000

200,000

1,425,000

9,456,000

*$96,000,000 – $1,500,000 – $940,000 = $93,560,000 31

Interest Expense ........................................ Interest Payable ................................. ($2,850,000 × 6% × 9/12 = $128,250)

128,250

Interest Receivable .................................... Interest Income .................................. ($1,640,000 × 6% × 7/12 = $57,400)

57,400

128,250

57,400

PROBLEM 9.8B (CONTINUED) c.

HAMMERSMITH LIMITED Statement of Financial Position (Partial) December 31, 2024 Property, plant, and equipment* Land .................................................................. Buildings ............................................................ Less: Accumulated depreciation ........................ Equipment ......................................................... Less: Accumulated depreciation ........................ Total property, plant, and equipment ..........

$11,000,000 $57,000,000 25,625,000 $95,560,000 38,010,000

31,375,000 57,550,000 $99,925,000

*See T accounts on the following page.

PROBLEM 9.8B (CONTINUED) c. (continued) Land Jan. 1, 2024 April 1, 2024

8,000,000 3,800,000

Dec. 31, 2024

Bal. 11,000,000

June 1, 2024 Dec. 31, 2024

600,000 200,000

Buildings Jan. 1, 2024 Dec. 31, 2024

57,000,000 Bal. 57,000,000 Equipment

Jan. 1, 2024 July 1, 2024 Dec. 31, 2024

96,000,000 2,000,000

May 1, 2024 Dec. 31, 2024

1,500,000 940,000

Bal. 95,560,000 Accumulated Depreciation—Buildings Jan. 1, 2024 Dec. 31, 2024

24,200,000 1,425,000

Dec. 31, 2024

Bal. 25,625,000

Accumulated Depreciation—Equipment May 1, 2024 Dec. 31, 2024

650,000 940,000

Jan. 1, 2024 May 1, 2024 Dec. 31, 2024 Dec. 31, 2024

30,000,000 50,000 94,000 9,456,000

Dec. 31, 2024

Bal. 38,010,000

LO 2,3,4,6 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.9B a.

yes

Goodwill

not amortized N/A

N/A

Right-of-Use Asset, Statement of Financial Position, Property, plant, and equipment

yes

Software

amortized

N/A

yes

Patents

amortized

N/A

Professional Fees Expense, Statement of Income, Operating expenses

N/A

Not recorded or reported because it was internally generated and not purchased

N/A

Rent Expense, Statement of Income, Operating expenses

yes

Trademarks

not amortized N/A

yes

Trademarks

not amortized N/A

10.

N/A

11.

Yes

Franchises

Research Expenses, Statement of Income, Operating expenses not amortized N/A

LO 5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 9.10B a.

Jan.

July

Sept.

Oct.

Dec. 31

Patents ................................................................... Cash ................................................................

22,500

Research Expenses ............................................... Cash ................................................................

220,000

Development Costs ................................................ Cash ................................................................

60,000

Advertising Expense .............................................. Cash ................................................................

11,000

Copyrights .............................................................. Cash ................................................................

16,000

Impairment Loss ($175,000 – $210,000) ............... Goodwill...........................................................

35,000

Amortization Expense (given) ................................ Accumulated Amortization—Patents ...............

9,812

Amortization Expense ............................................ Accumulated Amortization—Development Costs ($60,000 ÷ 20 × 6/12 = $1,500)

1,500

Amortization Expense ............................................ Accumulated Amortization—Copyrights .......... ($48,000 ÷ 10 = $4,800)

4,800

Amortization Expense ............................................ Accumulated Amortization—Copyrights .......... ($16,000 ÷ 5 × 3/12 = $800)

800

22,500

220,000

60,000

11,000

16,000

35,000

9,812

1,500

4,800

800

PROBLEM 9.10B (CONTINUED) c. IP CORP. Statement of Financial Position (partial) December 31, 2024 Intangible assets: Finite life intangible assets Patents................................................................. Less: Accumulated amortization .......................... Copyrights ............................................................ Less: Accumulated amortization .......................... Development costs .............................................. Less: Accumulated amortization .......................... Total intangible assets .................................................. $156,788

$92,5001 23,8122 64,0003 34,4004 60,000 1,500

Goodwill ....................................................................... 1

Patents: $70,000 + $22,500 = $92,500

Accumulated amortization: $14,000 + $9,812 = $23,812

Copyrights: $48,000 + $16,000 = $64,000

Accumulated amortization Copyright (original): $28,800 + $4,800 = Copyright (additional):

$ 68,688 29,600 58,500

175,0005

$33,600 800 $34,400

Goodwill: $210,000 – $35,000 = $175,000

LO 4,5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 9.11B a. (in millions; Dollar Tree is in millions of U.S dollars) Dollarama ................................... Dollar Tree Profit margin

Asset turnover

$564 = 14.0% $4,026

(

$1,342 = 5.3% $25,509

$ 4,026

$25,509

$4,224 + $3,716

$20,696 + $19,575

)

(

= 1.0 times

Return on assets

(

$564

$1,342 $20,696 + $19,575

= 14.2%

= 1.3 times

$4,224 + $3,716 2

)

(

)

= 6.7%

Based on the profit margin we can see that Dollarama is far more profitable than Dollar Tree. Dollarama has a profit margin that is higher than the average company in the industry of 5.4%, while Dollar Tree‘s is just under the industry average. The asset turnover measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Dollarama‘s asset turnover ratio is lower than Dollar Tree‘s but neither company has a turnover in line with the average company in the industry (1.8 times). The return on assets ratio indicates that Dollarama is generating a much higher return than Dollar Tree based on the amount of assets invested in the business. Based on the industry average of 9.7%, only Dollarama is performing much better than the industry average.

Some additional information about long-lived assets that would assist in the comparisons include the accounting policies chosen concerning the calculation of depreciation and amortization, the estimates arrived at for the useful lives and residual values of the assets being depreciated, and details concerning the costs and accumulated depreciation or amortization recorded to date. The latter information would indicate the age of the long-lived assets. It would also be helpful to look at the types of assets held by the two companies to see if they are using the same types of assets in the same proportion.

LO 4,6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CM: Reporting and Finance

PROBLEM 9.12B a. (in thousands)

NAL .......................................... BRI

Profit margin 2024

$220 = 8.8% $2,500

$250 = 13.9% $1,800

Profit margin 2023

$150 = 10.0% $1,500

$2,500

$1,800

Asset turnover 2024

Asset turnover 2023

(

$2,500 + $1,100 2

)

$1,100 + $1,050

(

= 1.4 times

= 1.7 times

$1,500

$1,100 + $1,000 2

)

$1,050 + $1,000

(

= 1.4 times

Return on assets 2024

(

$220

$250 $1,100 + $1,050

)

(

= 12.2%

Return on assets 2023

(

$150

$150 $1,050 + $1,000

= 14.3% b.

)

= 23.3%

$1,100 + $1,000 2

)

= 1.5 times

$2,500 + $1,100 2

)

(

)

= 14.6%

Brew Right increased its profit margin from 10.0% to 13.9% and its asset turnover from 1.5 times to 1.7 times. The increases in these two ratios multiplied to generate a substantial increase in Brew Right‘s return on assets from 14.6% to 23.3% (return on assets = profit margin × asset turnover). Northern Ale suffered a decrease in its profit margin from 10.0% to 8.8%. The company‘s asset turnover remained the same during this time period at 1.4 times. Combining the two ratios resulted in a decrease in the return on assets.

PROBLEM 9.12B (CONTINUED) c.

Brew Right has been more successful in executing its strategy. Its strategy of cutting costs has allowed it to boost its profit margin while simultaneously increasing its sales volume. The increase in sales was proportionately higher than the increase in assets over the two-year period and resulted in an increase in the asset turnover. Streamlining operations has resulted in more efficient use of assets and a higher return on assets. Northern Ale‘s strategy of expansion has resulted in a larger asset base. While its sales volume did increase from 2023 to 2024, the net income per dollar of sale decreased, as evidenced by the decrease in profit margin. It appears to be accepting a higher volume of sales to the detriment of profit margin. While the company maintained its asset turnover due to the increase in sales volume, the decrease in profit margin resulted in a decrease in the return on assets. Given the company‘s lower return on assets ratio, this strategy does not appear to be successful.

LO 6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

ACR9.1 a.

Aug.

ACCOUNTING CYCLE REVIEW

Office Expense .................................................. Cash..........................................................

20,000

Rent Expense.................................................... Cash..........................................................

3,600

Notes Receivable .............................................. Accounts Receivable.................................

100,000

Accounts Receivable ......................................... Sales ......................................................... Refund Liability..........................................

500,000

Cost of Goods Sold ($270,000 - $27,000) ......... Estimated Inventory Returns ............................. Inventory ...................................................

243,000 27,000

Allowance for Expected Credit Losses .............. Accounts Receivable.................................

70,000

Cash ............................................................... Accounts Receivable.................................

300,000

Cash ............................................................... Accumulated Depreciation—Equipment ............ Loss on Disposal ............................................... Equipment .................................................

6,000 36,169 1,831

Cash proceeds Cost Accumulated depreciation—equipment Carrying amount Loss on disposal 14

Income Tax Expense ........................................ Cash..........................................................

20,000

3,600

100,000

450,000 50,000

270,000

70,000

300,000

44,000 $ 6,000 $44,000 36,169 7,831 $(1,831) 10,000

10,000

ACR9.1 (CONTINUED) a. (continued) Aug.

Patents .............................................................. Cash..........................................................

24,000

Refund Liability.................................................. Accounts Receivable.................................

60,000

Inventory ........................................................... Estimated Inventory Returns .....................

32,400

Cash ............................................................... Sales .........................................................

75,000

Cost of Goods Sold ........................................... Inventory ...................................................

35,000

Interest Expense ............................................... Bank Charges Expense .................................... Cash..........................................................

1,500 1,130

Credit Losses .................................................... Allowance for Expected Credit Losses ...... [$320,000 – ($300,000 - $70,000)] = $90,000

90,000

Depreciation Expense ....................................... Accumulated Depreciation—Equipment.... ($150,000 ÷ 4 × 1/12 = $3,125)

3,125

Salaries Expense .............................................. Cash..........................................................

100,000

Interest Receivable ........................................... Interest Income ......................................... ($100,000 x 8% X 1/12)

667

Amortization Expense ....................................... Accumulated Amortization—Patents ......... ($24,000 ÷ 5 X 1/12) =$400

400

24,000

60,000

32,400

75,000 35,000

2,630

90,000

3,125

100,000

667

400

ACR9.1 (CONTINUED) b. July 31, 2024 Aug. 9 Aug. 10 Aug. 31

Aug. 31 Bal.

Cash 116,000 Aug. 1 300,000 Aug. 1 6,000 Aug. 14 75,000 Aug. 21 Aug. 3 1 Aug. 3 1 336,770

Accounts Receivable July 31, 2024 2,700,000 Aug. 2 Aug. 3 500,000 Aug. 8 Aug. 9 Aug. 28 Bal. 31 Bal 2,670,000

20,000 3,600 10,000 24,000

Equipment July 31

194,000

Aug. 31 Bal.

150,000

44,000

Accumulated Depreciation—Equipment 2,630

Aug. 10

36,169 July 31

73,669

3,125

Aug. 31 Bal. 40,625

100,000

Patents 100,000 70,000 300,000 60,000

Aug. 21

24,000

Aug. 31 Bal.

24,000

Accumulated Amortization—Patents

Allowance for Expected Credit Losses Aug. 8

Aug. 10

Aug. 31

400

Aug. 31 Bal.

400

70,000 July 31

300,000

Aug. 31

90,000

Accounts Payable

Aug. 31 Bal.

320,000

July 31

909,000

Aug. 31 Bal.

909,000

Interest Receivable

July 31, 2012

260,000

Aug. 31

667

Bank Loan Payable

Aug. 31 Bal.

667

July 31

350,000

Aug. 31 Bal.

350,000

Notes Receivable 100,000

Common Shares

Aug. 31 Bal. 100,000

July 31

300,000

Aug. 31 Bal.

300,000

Aug. 2

Inventory July 31

500,000

Aug. 3

270,000

Retained Earnings

32,400

35,000

July 31

1,531,331

Aug. 31 Bal.

227,400

Aug. 31 Bal.

1,531,331

b. (Continued Estimated Inventory Returns Aug. July 31, 2024 54,000 28 Aug. 3 27,000 Bal. 31 Bal

32,400

48,600 Refund Liability

Aug. 28

60,000

July 31

100,000

Aug. 3

50,000

Aug. 31 Bal.

90,000

ACR9.1 (Continued) b. (Continued Sales Aug. 3

450,000

75,000

Aug.

31 Bal.

525,000

Aug. 31

90,000

Aug. 31 Bal.

90,000 Office Expense

Aug. 1

20,000

Aug. 31 Bal.

20,000

Interest Income

Rent Expense

Aug.

31 Bal.

667 Aug. 1 667 Aug. 31 Bal.

3,600 3,600

Cost of Goods Sold Aug. 3

243,000

Aug. 31

35,000

Aug. 31 Bal.

278,000

Bank Charges Expense Aug. 31

1,130

Aug. 31 Bal.

1,130

Depreciation Expense Aug. 31

3,125

Aug. 31 Bal.

3,125

Interest Expense Aug.

1,500

Aug.

31 Bal.

1,500

Amortization Expense Aug. 31

400

Aug. 31 Bal.

400

Loss on Disposal Aug.

1,831

Aug.

31 Bal.

1,831

Salaries Expense Aug. 31

100,000

Aug. 31 Bal.

100,000

Income Tax Expense Aug.

10,000

Aug.

31 Bal.

10,000

ACR9.1 (CONTINUED) c. COUNTRY FRENCH MODERN RETAILERS LTD. Adjusted Trial Balance August 31, 2024

Cash Accounts receivable Allowance for expected credit losses Notes receivable Interest receivable Inventory Estimated inventory returns Equipment Accumulated depreciation—equipment Patents Accumulated amortization—patents Accounts payable Refund liability Bank loan payable Common shares Retained earnings Sales Interest income Cost of goods sold Depreciation expense Amortization expense Salaries expense Credit losses Office expense Rent expense Bank charges expense Interest expense Loss on disposal Income tax expense

Debit $ 336,770 2,670,000

Credit

$ 320,000 100,000 667 227,400 48,600 150,000 40,625 24,000 400 909,000 90,000 350,000 300,000 1,531,331 525,000 667 278,000 3,125 400 100,000 90,000 20,000 3,600 1,130 1,500 1,831 10,000 $4,067,023

000000000 $4,067,023

ACR9.1 (CONTINUED) d. (1) COUNTRY FRENCH MODERN RETAILERS LTD. Statement of Income Month Ended August 31, 2024 Sales Cost of goods sold Gross profit Operating expenses Salaries expense Credit losses Office expense Rent expense Bank charges expense Depreciation expense Amortization expense Loss on disposal Total operating expenses Income from operations Other income and expenses Interest income Interest expense Total other income and expenses Income before income tax Income tax expense Net income

$525,000 278,000 247,000 100,000 90,000 20,000 3,600 1,130 3,125 400 1,831 220,086 26,914 667 (1,500) (833) 26,081 10,000 $ 16,081

ACR9.1 (CONTINUED) d. (2) COUNTRY FRENCH MODERN RETAILERS LTD. Statement of Changes in Equity Month Ended August 31, 2024

Balance, August 1 Net income Balance, August 31

Common Shares $300,000 0000 000 $300,000

Retained Earnings $1,531,331 16,081 $1,547,412

Total Equity $1,831,331 16,081 $1,847,412

ACR9.1 (CONTINUED) d. (3) COUNTRY FRENCH MODERN RETAILERS LTD. Statement of Financial Position August 31, 2024 Assets Current assets Cash Accounts receivable Less: Allowance for expected credit losses Interest receivable Notes receivable Inventory Estimated inventory returns Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Intangible assets Patents Less: Accumulated amortization Total assets

$ 336,770 $2,670,000 320,000

2,350,000 667 100,000 227,400 48,600 3,063,437

150,000 40,625 24,000 400

109,375

23,600 $3,196,412

Liabilities and Shareholders‘ Equity Liabilities Accounts payable $909,000 Refund liability 90.000 Bank loan payable 350,000 Total liabilities $1,349,000 Shareholders‘ equity Common shares 300,000 Retained earnings 1,547,412 Total shareholders‘ equity 1,847,412 Total liabilities and shareholders‘ equity $3,196,412 LO 2,3,4,5 BT: AP Difficulty: M Time: 90 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT9.1

Events Choosing diminishing-balance depreciation for equipment purchased early in the year, instead of straight-line depreciation Estimating a residual value of 10% of some recently purchased equipment's original cost instead of assuming a residual value of zero Recording an impairment loss on goodwill Estimating the useful life of a building at 30 instead of 40 years. Realizing that a research expense was actually a development cost at the beginning of the year in which production began in the last month of the year Recording an estimate of the cost to clean up a plant site when it was purchased at the beginning of this year

FINANCIAL STATEMENT IMPACT Depreciation and Amortization Expense increase

Net Income decrease

Total Assets decrease

Cash Flow no change

decrease

increase

no change

decrease

no change

increase

decrease

no change

increase

no change

increase

decrease

no change

LO 2,5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

CT9.2

FINANCIAL REPORTING CASE

The North West Company Inc. uses a straight-line method of depreciating its property and equipment. Instead of using the term depreciation, North West uses the term amortization.

($ in thousands) (1) Cost January 31, 2022 Land Buildings Leasehold improvements Fixtures and equipment Aircraft Computer equipment Construction in process

January 31, 2021 Land Buildings Leasehold improvements Fixtures and equipment Aircraft Computer equipment Construction in process

19,905 622,533 67,204 361,325 120,470 67,320 27,552 $1,286,309

(2) Accumulated Depreciation

(3) Impairment Losses

18,847 599,930 59,443 348,173 102,805 77,408 20,946 $1,227,552

(4) Carrying Amount

$349,372 37,932 267,827 34,850 41,784 87 $731,852

$ 19,905 273,161 29,272 93,498 85,620 25,536 27,465 $554,457

$325,616 34,256 253,800 26,217 55,782 87 $695,758

$ 18,847 274,314 25,187 94,373 76,588 21,626 20,859 $531,794

Net change in accumulated amortization Amortization recorded in 2022 Difference from disposals and effect of movements in foreign exchange

$36,094 64,190 $28,096

North West has a balance of Goodwill at January 31, 2022 of $48,502,000

As indicated in note 8, right-of-use assets and lease liabilities, the carrying amount of leased aircraft was $282,000.

At January 31, 2022, North West report intangibles including: Software, Store banners, and Other for a total carrying amount of $34,094,000. There were no impairment losses recorded for intangibles for the year ended January 31, 2022.

LO 2, 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic and Communication CPA: cpa-t001 Solutions Manual 10-1095 Chapter 10 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

CM: Reporting

CT9.3

FINANCIAL ANALYSIS CASE

Blaze Mountain is estimating a longer useful life for its buildings. By doing so, the amount of the depreciation expense is lower than that of Rosewood and the carrying amount is higher at $6 million compared to Rosewood‘s $5 million.

Because the fair value of Blaze Mountain‘s buildings is below the carrying amount, an impairment loss for $400,000 ($6,000,000 less $5,600,000) will need to be recorded. In the case of Rosewood, the carrying amount is lower than the fair value and so there is no impairment.

Using the original data, a calculation of profit margin and return on assets is as follows:

1. Profit Margin 2. Asset Turnover 3. Return on Assets

Rosewood

Blaze Mountain

$180,000 ÷ $2,250,000 = 8.0% $2,250,000 ÷ $9,000,000 = 0.3 times $180,000 ÷ $9,000,000 = 2.0%

$200,000 ÷ $2,500,000 = 8.0% $2,500,000 ÷ $10,000,000 = 0.3 times $200,000 ÷ $10,000,000 = 2.0%

CT9.3 (CONTINUED) c. (continued) If we take into consideration the adjustment Blaze Mountain would need to make for the impairment loss, income would now decrease by $400,000 to a loss of $200,000 while average assets would decrease by $200,000 ($400,000 ÷ 2). We are dividing this last term by two because the denominator pertains to average assets, not assets at the end of the year. The adjusted ratios for Blaze Mountain are as follows: Rosewood 1. Profit Margin 2. Asset Turnover 3. Return on Assets d.

$180,000 ÷ $2,250,000 = 8.0% $2,250,000 ÷ $9,000,000 = 0.3 times $180,000 ÷ $9,000,000 = 2.0%

Blaze Mountain (with impairment loss) $(200,000) ÷ $2,500,000 = (8.0%) $2,500,000 ÷ $9,800,000 = 0.3 times ($200,000) ÷ $9,800,000 = (2.0%)

When looking at the revised profit margin and return on assets, Rosewood is performing much better. The preliminary analysis did not account for the loss on impairment which severely affected Blaze Mountain‘s profitability.

LO 2,6 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic and Communication CPA: cpa-t001, cpat005 CM: Reporting and Finance

CT9.4

PROFESSIONAL JUDGEMENT CASE

Land – no depreciation is recorded on this asset because its useful life is infinite so the cost cannot be allocated over the useful life. Buildings – as usage of buildings is uniform over their useful life, the straight-line method would be appropriate. Drilling rigs – since the use of these rigs is seasonal in nature, it would make sense to use the units-of-production method for these assets so that depreciation would be higher during periods when the rigs are being used the most and lower in periods when the rigs are not used as much. Furniture – as usage of these assets is uniform over their useful life, the straight-line method would be the most appropriate method.

Intangible assets with definite lives should be amortized. Amortization is typically recorded using the straight-line method and is recorded over the lesser of the intangible‘s legal life and useful life. In this case, a patent has a 20-year legal life but the useful life of the patent is likely to be five years, given the length of the royalty contract with the drill bit manufacturer.

Since the company is planning to have its shares trade on a public stock exchange sometime over the next 3 years, it may be better to prepare its financial statements under IFRS now rather than converting from ASPE to IFRS when the company goes public.

When a bank lends money to a company, the bank wants security or collateral for its loan. The best collateral includes assets that can retain their value over time and are not easily moved. If the company defaulted on its loan payments, the bank could seize these assets. Therefore, the bank would want to use land and buildings for collateral. The bank would be least likely to use an intangible asset because it is difficult to determine its value and this value could fall rapidly over time. Furniture is unlikely to serve as collateral because it can be moved and would be hard for the bank to seize such an asset. In addition, furniture has little resale value.

Natural resources are wasting assets and include mineral resources in mines and oil and gas reserves. In the cases of PRD none of the long-lived assets owned fall into the category of natural resources. Although PRD operates in the oil and gas industry, it is drilling on property that include natural resources owned by other businesses.

CT9.4 (CONTINUED) f.

The asset turnover ratio is calculated by dividing sales revenue by average total assets. Next year, the numerator is not expected to change. If the company is not planning to purchase any new rigs or other assets, because these assets are depreciated each year, their carrying amounts will fall and consequently, the denominator of this ratio will decline. Therefore, the asset turnover ratio will rise. Normally an increase in this ratio would lead one to conclude that the company is generating more revenues with its assets, but in this case the increase simply means that the company has decided not to replace some of its aging assets.

LO 2,4,6 BT: E Difficulty: C Time: 20 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-e003 CM: Reporting and Comm.

CT9.5

ETHICS CASE

The stakeholders in this situation are: Benny Benson, president of Imporia Container Ltd. Yeoh Siew Hoon, controller. The shareholders and creditors of Imporia Container Ltd. Potential investors and creditors of Imporia Container Ltd.

Income before income tax in 2022 (the year of change) will increase by implementing the president‘s proposed changes because increasing the useful life and residual value will decrease the depreciation expense.

The proposed changes in useful life and residual value will increase the profit margin because the depreciation expense has been reduced, causing the increased profit. The proposed change will also cause an increase in the average assets without changing net sales. An increase in average assets decreases the asset turnover.

The intentional misstatement of the life and residual value of an asset is unethical and would represent an attempt at income manipulation. There is nothing unethical about changing the estimate of either the life of an asset or its residual value if the change is an attempt to better reflect the pattern of consumption of economic benefits. In this case, it is clear that the revisions in the life and residual value are intended only to improve income, which would be unethical.

LO 2,6 BT: E Difficulty: M Time: 15 min. AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT9.6 a.

FINANCIAL ANALYSIS CASE

In order to solve, one must work backward to calculate income before interest, taxes, and depreciation (EBITDA). For Luxor: Net income Income taxes ($175,000 / .78 x .22)

$175,000 49,359

Income before income taxes ($175,000 / .78) Add: Interest expense ($2,800,000 x 4%) $112,000 Depreciation expense ($1,700,000 ÷ 20) 85,000 Income before interest, taxes, and depreciation For Cale: Income before interest, taxes, and depreciation Less: Interest expense ($350,000 x 4%) $14,000 Depreciation expense ($100,000 ÷ 5) 20,000 Rent expense ($17,000 x 12) 204,000

224,359

197,000 $ 421,359

$421,359

238,000

Income before income taxes Income tax expense ($183,359 x 22%) Net Income

183,359 40,339 $143,020

Total assets Luxor Dec. 31, 2024 Less: Land Buildings net of accumulated depreciation ($1,700,000 – $85,000) Remaining assets Dec. 31, 2024:

$3,025,000 $800,000 1,615,000

Assets for Cale Equal to remaining assets of Luxor Add: Leasehold improvements net of accumulated Depreciation ($100,000 - $ 20,000) Total assets Cale Dec. 31, 2024:

2,415,000 $ 610,000

$610,000 80,000 $690,000

CT9.6 (CONTINUED) c.

Asset turnover Luxor

Cale

$3,000,000 = 1.0 times $3,025,000

$3,000,000 = 4.3 times $690,000

Despite the fact that the assets used by these two businesses are essentially the same, the turnover ratio is dramatically different because the land and building is owned by Luxor and leased by Cale. This example demonstrates how financial information may be misinterpreted by financial statement users. This example also demonstrates the rationale for the change in the IFRS accounting standards, implemented, for public companies. d.

Profit margin Luxor

Cale

$175,000 = 5.8% $3,000,000

$143,020 = 4.8% $3,000,000

Luxor manages to outpace Cale by a full percentage point on profit margin because, although it incurred additional interest expense, its depreciation expense was far lower than Cale‘s combined interest and rent expense. e.

Return on assets Luxor

Cale

$175,000 = 5.8% $3,025,000

$143,020 = 20.7% $690,000

Because the lease of the premises by Cale is treated as an operating lease, large amounts for land and building are not included on the Solutions Manual 10-1103 Chapter 10 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

statement of financial position as assets. Consequently, Cale has a much better return on asset ratio than Luxor.

CT9.6 (CONTINUED) f.

Because the lease of the premises by Cale is treated as an operating lease, large amounts for land and building are not included on the statement of financial position as assets. In addition, although there is a commitment to pay $17,000 per month for the next 4 years, no liability appears on the statement of financial position. Therefore, it is more difficult for readers of the financial statements to assess Cale‘s financial position and profitability.

The revaluation model under IFRS affects the amount reported for property, plant, and equipment on the statement of financial position. Cale has treated the lease as an operating lease and so the assets are not capitalized and therefore not available for revaluation. Cale‘s ratios would not change. In the case of Luxor, the change to IFRS would require Cale‘s lease to be set up as a Right-of-Use asset with the related Lease Liability. The two companies would have comparable ratios if Cale‘s leased asset had a comparable fair value to the assets owned by Luxor. The revaluation model could affect the ratios. For example, if land is revalued at a higher amount, the return on assets and asset turnover ratios would reduce and become worse, but the profit margin would remain unchanged as gains on revalued assets are recorded in other comprehensive income, not net income.

LO 1,2,5,6 BT: S Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT9.7

DATA ANALYTICS CASE

The damage to the servers from higher than recommended temperatures has already occurred. The effect of the damage is that the remaining useful life of the servers is now shorter than originally estimated in the calculation of depreciation. The treatment of the revision of the remaining useful life is prospective and will involve increasing the amount of depreciation that is recorded on the servers for the remaining useful life. The current year‘s financial statements will show an increase in depreciation expense and accumulated depreciation and a corresponding decrease in the carrying amount of the servers on the Statement of Financial Position.

Due to the difference in the level of use for the different machines, the three machines that are used 40% less than the other machines should be set up as separate components and depreciated using a revised estimate of useful life as determined by management. This change should be implemented prospectively.

Management should consider replacing the machine that is causing significantly higher repair expenses. A cost benefit analysis for the replacement should determine if this is the correct course of action. Should it be determined that the machine will be retained in operations, an analysis of the effect of the extra repairs should be performed to determine if the remaining useful life of the machine should be adjusted. Any change in the remaining useful life should be applied prospectively in the calculation of the depreciation of the machine, separately from that used for the remaining machines in the assembly line.

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT9.8

DATA ANALYTICS CASE

Manitoba – by comparing the relationship between the cost and accumulated depreciation of aircraft in each province, we can see that in Manitoba the accumulated depreciation of the aircraft is much higher relative to the cost of these aircraft. This indicates that they are older aircraft than the company operates in other provinces and the company is more likely to replace them first.

British Columbia – the buildings in this province have the smallest portion of their cost depreciated (or conversely, the largest portion of the building cost that the company has not depreciated). Therefore, it is likely that the company purchased these buildings more recently than in other provinces.

British Columbia – this province is the only one where the revenues exceed the operating costs. Operating costs such as salaries and fuel costs are probably similar in each province so for revenues to be higher than operating costs in BC, the company is likely selling tickets in BC at higher prices or flying aircraft in BC with more seats sold per flight (due to the popularity of the routes).

Alberta – this province has the most land relative to the carrying amount of its buildings. Although this can occur when buildings are old, we know that this is not the case when we look at the relationship between the cost and accumulated depreciation of buildings, so it is more likely that this province has purchased some extra land, possibly for future expansion.

CT9.9 a.

SERIAL CASE

The following costs should be capitalized: Purchase new server Purchase equipment Furniture Shipping (furniture) Total costs to be capitalized

$25,000 4,500 2,500 500 $32,500

The additional yearly software usage license for the new employees, the additional insurance, and painting the office should be expensed. b.

Jan.

Depreciation Expense .................................... Accumulated Depreciation—Equipment. ($15,000 ÷ 5 × 6/12 = $1,500)

1,500

Accumulated Depreciation—Equipment. ........ Loss on Disposal ............................................ Equipment .......................................

12,000 3,000

1,500

15,000

Accumulated depreciation—equipment: [($15,000 ÷ 5) × 4] = $12,000 The equipment has been in use for four years so on the date of disposal, its accumulated depreciation is $12,000 (4 years at $3,000 per year). c.

Jan.

Equipment ...................................................... Furniture ......................................................... Office Expense ............................................... Prepaid Insurance .......................................... Repairs and Maintenance Expense ............... Cash.......................................................

29,500 3,000 2,000 1,000 2,850 38,350

LO 1,2,3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Legal Notice

CHAPTER 10 REPORTING AND ANALYZING LIABILITIES LEARNING OBJECTIVES 1. Account for current liabilities. 2. Account for instalment notes payable. 3. Identify the requirements for the financial statement presentation and analysis of liabilities. 4. Account for bonds payable (Appendix 10A).

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO

11.

16.

21.

12.

17.

22.

2 2

13.

18.

23.

14.

19.

24.

15.

20.

25.

10.

Brief Exercises 1.

13.

17.

10.

14.

18.

2 2

11.

15.

12.

16.

10.

13.

Exercises 1.

11.

14.

12.

15.

Problems: Set A and B 1.

1,2,3

2,3

10.

3,4

1,2,3

2,3

11.

1,2,3

1,2

Accounting Cycle Review 1.

1,2,3

Cases 7.

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

Disagree. The company only serves as a collection agent for the taxing authority. It does not keep and report sales tax as revenue; it merely forwards the amount paid by the customer to the government. Therefore, until it is remitted to the government, sales tax is reported as a current liability on the statement of financial position.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Deferred revenue should be recognized when sales of season‘s ticket packages are made to customers. When the team plays one of its games, the deferred revenue is reduced and the service revenue increased whether or not the customer has used his or her ticket for the game.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

The three most common and mandatory deductions withheld from employee paycheques are: Employee income taxes, CPP and EI.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Companies are required by law to contribute to the CPP and EI programs. Contributions for CPP must be matched by the employer and EI contributions must be 1.4 times that withheld from an employee‘s paycheque.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

When determining whether an uncertain liability should be accrued as a provision, management must first assess the level of uncertainty concerning the outcome of a future event that will confirm either the existence of the liability or the amount payable or both. If the outcome of a future event is probable and a reasonable estimate can be made of the amount expected to be paid, the amount will appear as a current liability on the statement of financial position. Probable, in this case means ―more likely than not‖ which is normally interpreted to mean that there is more than a 50% probability of occurring. The details of the reasons for the accrual will also be o If the outcome is not probable or if the amount cannot be reasonably estimated, the details of the uncertain liability will be disclosed in the notes to the financial statements. An uncertain liability that is disclosed rather than recorded is known as a contingent liability.

LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

(b)

An operating line of credit, or credit facility, is used by a business to overcome short-term cash demands or temporary cash shortfalls that invariably happen during the operating cycle. It is not usually intended to be a permanent type of financing and is generally used for operations. When needed, the funds are used and then repaid as the liquidity improves and cash becomes available from operations. An operating line of credit is recorded as bank indebtedness rather than a bank loan payable because the line of credit is accessed when a company writes cheques in excess of the funds in its chequing account. This causes the bank account to have a negative balance and the Cash account to have a credit balance. Also, a bank loan payable typically requires scheduled payments of both principal and interest and has no flexibility as to when it can be borrowed from or repaid as is the case with an operating line of credit.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Accounts payable and short-term notes payable are both forms of credit used by a business to acquire the items or services they need to operate. Both represent obligations of the business to repay amounts in the future and are therefore considered to be liabilities. However, an account payable is normally for a shorter period of time (e.g., 30, 60, 90 days) than a note payable. A note payable usually provides for a longer period of time to settle the amount owing. A short-term note payable involves a more formal arrangement than an account payable. A note payable is an obligation in written form and will provide documentation if legal action is required to collect the debt. As well, a note payable often requires the payment of interest because it is generally used when credit is to be granted for a longer period of time than for an account payable.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Short-term notes payable and short-term notes receivable are similar in that the accounting for them is similar, although they are opposite to one another. Both are classified as current on the statement of financial position. Where the two differ is in the treatment of the interest that accrues on the notes. Short-term notes payable generate interest expense and short-term notes receivable generate interest income.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Current liabilities include those payments that are going to be due for payment within one year from the financial statement date. Non-current liabilities are to be paid beyond that period. Included in current liabilities would be the principal portion of any loans or debt that will be paid in the next year. Consequently, care must be taken to disaggregate balances of such non-current loans or mortgages to ensure that the current portion of the debt is properly classified as a current liability.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

Bank loans requiring equal instalment payments are similar to short-term notes in that they both provide written documentation of a debtor‘s obligation to the lender. The main difference between the two types of debt is that instalment bank loans have maturities that extend beyond one year and have principal repayments included in the periodic payments required by the loan. For both types of debt, interest expense is calculated by multiplying the outstanding principal balance by the interest rate. However, because a portion of the principal balance is usually repaid periodically throughout the term of an instalment bank loan, the outstanding principal balance will change (decrease). In contrast, the principal balance does not change throughout the term of a short-term note.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

(a)

A student choosing the floating rate loan will initially pay a lower interest rate, but if the prime lending rate changes so does the interest rate that is charged on the balance of the loan. Since the loan repayment typically takes several years, a floating interest rate reduces the risk to the financial institution and provides a market return on their loan to the student. With the fixed interest rate, the initial interest rate paid is higher, but the rate does not change over the term of the loan.

(b)

If, in the view of the student, interest rates are expected to rise, the fixed rate of interest is the better choice. On the other hand, if interest rates are expected to remain steady or fall, the variable rate loan would be the better choice.

LO 2 BT: C Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

12.

Doug is incorrect because the amount of interest paid each month will decrease as payments are made and the outstanding (remaining) principal balance decreases. The amount of interest is calculated as a percentage of the outstanding principal amount. Because the monthly cash payment remains constant, over time, greater portions of the payment will be applied to the principal thereby more rapidly reducing the balance of the mortgage.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

13.

Although the amount of interest payable in the next year can be accurately determined, it should not be recorded as a current liability on the date the loan is received. The interest expense related to the interest payable has not yet been incurred and the company does not have an obligation to pay interest until the interest has been incurred on the loan.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

Two advantages of debt financing include: 1) interest cost is an expense which reduces income but is tax deductible; 2) debt financing does not dilute the ownership as is the case with equity financing. Two disadvantages of debt financing include: 1) the company must pay back the principal and interest on debt financing, which has serious cash flow implications; 2) the company must generally pledge security for debt financing such as land and buildings.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

(a)

Current liabilities should be presented in the statement of financial position with each major type shown separately. They are normally listed in order of maturity, although other listing orders are also possible. The notes to the financial statements should indicate the terms, including interest rates, maturity dates, and other pertinent information such as assets pledged as collateral.

(b)

The nature and the amount of each non-current liability should be presented in the statement of financial position or in schedules included in the accompanying notes to the statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral.

LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

Liquidity ratios measure the short-term ability of a company to repay its maturing obligations. Ratios such as the current ratio, receivables turnover, and inventory turnover can be used to assess liquidity. In all three ratios, an increase in the ratio demonstrates an improvement. Solvency ratios measure the ability of a company to repay its total debt and survive over a long period of time. Ratios that are commonly used to measure solvency include debt to total assets and times interest earned ratios. In the case of debt to total assets ratio, an increase in the ratio is often interpreted as a deterioration in solvency, while for the times interest earned ratio, an increase demonstrates an improvement.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

17.

An operating line of credit, or credit facility, is used by a business to overcome short-term cash demands that invariably happen during the operating cycle. It is not usually intended to be a permanent type of financing and is generally used for operations. When needed, the funds are used and then repaid as the liquidity improves and cash becomes available from operations. This type of financing is extremely flexible because interest charges are only incurred for the actual amount of cash borrowed for the needed period of time when there is a cash shortfall from daily operations. As a consequence, the business does not incur the constant charge for interest on a long-term bank debt or mortgages and can save on interest costs. The liquidity issues of a business can therefore be effectively dealt with using an operating line of credit.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

18.

Covenants are conditions the borrower must meet throughout the duration of an operating lin

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

19.

A company‘s debt to total asset ratio should be analyzed in terms of its ability to manage its debt. A company may have a high debt to total asset ratio but still be able to meet its interest payments because of high income. Alternatively, a company with a low debt to total assets may find itself in financial difficulty if it does not have sufficient net income to cover required interest payments. Therefore, it is important to interpret these two ratios in conjunction with one another.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

20.

Leverage exists when borrowed funds are used to finance the purchase of assets. The objective in borrowing is that the cost of borrowing funds will be exceeded by the additional income that will be generated from the use of the asset purchased. One of the advantages to debt financing compared to equity financing is that debt financing may allow companies to grow faster without diluting the ownership of the company. The disadvantage to debt financing is that principal and interest must be repaid on certain due dates. Failure to do so could result in banks and creditors taking legal action against the company to collect the amounts owed.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*21.

(a)

A bond is a form of a long-term note payable. They are similar in that both have fixed maturity dates and require interest payments. The most significant difference between an instalment bank loan payable and a bond is that bonds are often traded publicly whereas few notes payable are. In addition, bonds tend to be issued for much larger amounts than notes payables. In the case of a note payable there is one lender. On the hand, because the amount borrowed in exchange for bonds are too large for one lender, the company borrows from the public by selling bonds in smaller denominations. Because of these differences, generally only large companies use bonds as a form of debt financing.

(b)

When it comes to large sums of money, a business would consider the issue of shares or bonds for obtaining the necessary cash. Both may be traded publicly. Bonds are classified as debt on the statement of financial position whereas common shares are classified as equity. Bonds require principal and interest payments; but the investment received from the issue of common shares does not have to be repaid. The board of directors may choose to pay or not to pay dividends to the common shareholders.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*22.

(a)

When a bond is sold at a discount, the proceeds received are less than the face value of the bond because the stated rate of interest that the bond offers is lower than the market interest rate. This has made the bond less attractive to investors who will increase the return they get from the bond by paying less than its face value. The bond discount is considered to be an additional cost of borrowing. This additional cost of borrowing should be recorded as additional interest expense over the term of the bond through a process called amortization. Initially, the discount is recorded by showing the Bond Payable at an amount lower than its face value, but over time this account is increased (credited) so that it will be equal to its face value by the time it matures. The offsetting debit is made to interest expense. This is the additional interest expense incurred by the company for selling a bond at a discount. When interest is actually paid, this amount is added to interest expense. So, interest expense will consist of a portion that is paid and a portion relating to the amortization of the discount, thereby making it greater than the cash interest paid.

(b)

When a bond is sold at a premium, the proceeds received are greater than the face value of the bond because the stated rate of interest that the bond offers is higher than the market interest rate. This has made the bond very attractive to investors who will be prepared to pay a higher price for the bond than its face value. The bond premium is considered to be a reduction in interest. This benefit should be recorded through reductions to interest expense over the term of the bond through a process called amortization. Initially, the premium is recorded by showing the Bond Payable at an amount higher than its face value, but over time this account is decreased (debited) so that it will be equal to its face value by the time it matures. The offsetting credit is made to interest expense. This lowers interest expense to reflect the benefit of the premium. When interest is actually paid, this amount is added to interest expense. So, interest expense will consist of a portion that is paid minus a portion relating to the amortization of the premium, thereby making it lower than the interest paid.

LO 4 BT: C Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*23.

The reason the bond price is lower or higher that the bond‘s face value is the market rate of interest. If, at the date of issuance, the market rate demanded by bondholders is higher than the stated rate or contractual rate of the bond, the bond‘s price will have to be lower than the face value and the bond will be issued at a discount. If the opposite is true, and at the date of issuance, the market rate demanded by bondholders is lower than the stated rate or contractual rate of the bond, the bond‘s price will have to be higher than the face value and the bond will be issued at a premium.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*24.

The amount of the amortization of the bond discount or premium is the difference between the interest expense and the interest paid. The amount of both bond discounts and premiums amortization will increase over the term of the bond. In the case of a bond issued at a discount, the carrying amount of the bond increases with each interest payment, and corresponding bond discount amortization. This causes the interest expense to increase and the amortization of the discount to increase since the bond interest payment is fixed. In the case of a bond issued at a premium, the carrying amount of the bond decreases with each interest payment and corresponding bond premium amortization. This causes the interest expense to decrease and the amortization of the premium to increase since the bond interest payment is fixed.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*25.

The price of a bond can be calculated using financial formulas, present value tables, Excel functions or a financial calculator. In all cases the key variables of the bond must be determined to perform the calculation. The price of the bond is the present value (PV) of the future cash flows of the bond at the effective interest rate (i). The remaining variables are the term in number of periods (n), the periodic interest payments (PMT), and the future value (FV) which is the face value of the bond paid at maturity.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10.1 (a) Oct.

Cash ($6,000 + $780)............................................. Sales ............................................................. Sales Tax Payable ($6,000 × 13%) ...............

6,780

Cash ($6,000 + $899)............................................. Sales ............................................................. Sales Tax Payable [($6,000 × 5%) + ($6,000 × 9.975%)] .....................................

6,899

6,000 780

(b) Oct.

6,000 899

LO 1 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.2 Cash .... 15,100 Sales ($15,100 ÷ 1.13) ...................................... Sales Tax Payable ($13,363 × 13%) .................

13,363 1,737

LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.3 (a)

(b)

(c)

(d)

Aug. 24

Aug. 31

Sept.15

Salaries Expense ................................................... 16,000 Employee Income Tax Payable ..................... CPP Payable ................................................. EI Payable ..................................................... Salaries Payable ($16,000 – $3,008 – $848 – $253) ......................................................... Employee Benefits Expense ................................... CPP Payable ................................................. EI Payable ($253 x 1.4) .................................

3,008 848 253 11,891

1,202 848 354

Salaries Payable .................................................... 11,891 Cash ..............................................................

11,891

Employee Income Tax Payable .............................. CPP Payable ($848 + $848) ................................... EI Payable ($253 + $354) ....................................... Cash ($3,008 + $1,696 + $607) .....................

5,311

3,008 1,696 607

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.4 a) Record and disclose a provision b) Not recorded, disclose only c) Not recorded nor disclosed d) Record e) Record LO 1 BT: AN Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.5 a)

The advantage of the fixed interest rate option is that the rate will not change during the 10-year period, regardless of what happens to interest rates in the future. One could view this feature as a disadvantage in that a decline in interest rates will not result in a reduction of interest costs. In order to lock in the interest rate for such a long period of time, the monthly instalment payment and the amount of interest is higher. The disadvantage of the fixed interest rate option becomes the advantage of the floating interest rate option. When interest rates decline, the loan interest and the monthly instalment payment are reduced. The disadvantage is that if interest rates increase, the opposite will occur.

Students generally have limited income upon graduation and so the additional risk of possible increases in instalment payments for student loans should be avoided. The fixed interest rate is recommended. Alternately, choosing the floating rate makes the initial monthly payments smaller, during the time when earnings may be at their lowest. As long as rates do not increase too much, it could be the less expensive alternative.

LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.6 (a)

(b) (c)

Feb. 1

Mar. 31 May 1

Inventory................................................................. 10,000 Notes Payable ............................................... Interest Expense ($10,000 × 6% × 2/12) ................ 100 Interest Payable............................................. Interest Expense ($10,000 × 6% × 1/12) ................ 50 Interest Payable .................................................... 100 Notes Payable ........................................................ 10,000 Cash ..............................................................

10,000

100

10,150

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.7 (a) (b)

(c)

July

Aug. 31

Oct.

Cash ...................................................................... 60,000 Notes Payable ............................................... Interest Expense ($60,000 × 5% × 2/12) ................ Interest Payable.............................................

60,000

500 500

Interest Expense ($60,000 × 5% × 1/12) ................ 250 Interest Payable ..................................................... 500 Notes Payable ....................................................... 60,000 Cash .............................................................

60,750

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.8 (a) (b)

July

July 31

Aug. 31 Sept. 30

(c)

Oct.

Notes Receivable ................................................... 60,000 Cash .............................................................. Interest Receivable ($60,000 × 5% × 1/12) ............ Interest Income ..............................................

250

Interest Receivable ($60,000 × 5% × 1/12) ............ Interest Income ..............................................

250

Interest Receivable ($60,000 × 5% × 1/12) ... Interest Income ..............................................

250

60,000 250

250

Cash ...................................................................... 60,750 Notes Receivable ..........................................

250

60,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.9 (a)

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]

$50,000 × 7% = $3,500 $12,195 fixed cash payment $12,195 [2] – $2,891 = $9,304 or $41,305 – $32,001 $12,195 fixed cash payment $12,195 [4] – $9,955 = $2,240 or $32,001 × 7% $32,001 – $9,955 = $22,046 $12,195 fixed cash payment $12,195 [7] – $1,543 = $10,652 or $22,046 [6] – $11,394 = $10,652 $12,195 fixed cash payment $11,394 – $11,394 = $0

(b)

The current portion of the note at the end of period 3 is the amount of principal reduction in the next year (period 4), which is $10,652 [8]. This leaves $11,394 ($22,046 [6] less current portion of $10,652) as the noncurrent portion of the debt.

LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.10 Principal and interest payment combined

Monthly Interest Period Nov. 30, 2023 Dec. 31, 2023 Jan. 31, 2024

2023 Nov. 30

Dec.

2024 Jan. 31

(A) Cash Payment

(B) Interest Expense (D) × 4% ÷ 12 mos.

$3,037 3,037

$1,000 993

(D) Principal Balance (D) – (C) $300,000 297,963 295,919 22,000

Cash .................................................................. Mortgage Payable .....................................

300,000

Interest Expense ................................................ Mortgage Payable .............................................. Cash..........................................................

1,000 2,037

Interest Expense ................................................ Mortgage Payable .............................................. Cash..........................................................

993 2,044

300,000

3,037

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

3,037

BRIEF EXERCISE 10.11 a. Non-current liability for the bank loan payable; current liability for the interest accrual for one month payable on the first of the following month. b. Current liability c. Current liability d. Neither – any unused portion is not a liability and no balance is outstanding but line of credit limits should be disclosed in the notes to the financial statements e. Current liability f. Current liability for any portion of principal due next year and the remainder is a non-current liability g. Non-current liability h. Current liability i. Current liability j. Current liability for the $5,000 due next year. The remaining $70,000 balance is a non-current liability. k. Neither – because the outcome has a remote probability, it is neither recorded nor disclosed l. Current liability m. Current liability LO 3 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.12 (in $ millions) (a)

Current ratio $1,075 = $1,200

(b) Debt to total assets (c)

0.9:1

$1,662 = $2,453

Times interest earned =

67.8%

$207 + $21 + $69 = $21

14.1 times

LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 10.13 (a)

Debt to total assets Times interest earned

Improvement Deterioration

(b)

Although Fromage‘s debt to total assets ratio improved in 2024, its times interest earned ratio deteriorated. Fromage‘s overall solvency appears to have deteriorated because even though liabilities relative to assets has fallen, the company is generating less income before income tax and interest relative to its interest expense than it did in the prior year.

(c)

The company has less leverage in 2024 compared to 2023.

LO 3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*BRIEF EXERCISE 10.14 (a)

The proceeds received from the issue of the bonds = face value of the bonds X price. $200,000 x .96 = $192,000

(b)

Interest expense on the first semi-annual interest payment = bond carrying amount x effective interest rate x 6/12 $192,000 x 7% x 6/12 = $6,720

(c)

The semi-annual interest payment based on the coupon rate of 6% x face value of the bonds x 6/12 = $200,000 x 6% x 6/12 = $6,000 The amortization of the bond discount is $6,720 less $6,000 or $720 The amortization of the bond discount is added to the bond carrying amount of $192,000 making the carrying amount after the first interest payment $192,720.

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 10.15 (a)

The proceeds received from the issue of the bonds = face value of the bonds X price. $100,000 x 1.09 = $109,000

(b)

Interest expense on the first semi-annual interest payment = bond carrying amount x effective interest rate x 6/12 $109,000 x 3% x 6/12 = $1,635

(c)

The semi-annual interest payment based on the coupon rate of 5% x face value of the bonds x 6/12 = $100,000 x 5% x 6/12 = $2,500 The amortization of the bond premium is $2,500 less $1,635 or $865 The amortization of the bond premium is deducted from the bond carrying amount of $109,000 making the carrying amount after the first interest payment $108,135.

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 10.16 (a)

Key inputs:

Future value (FV) = $500,000 Market interest rate (i) = 2.5% (5% × 6/12) Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12) Number of semi-annual periods (n) = 10 (5 years × 2)

Present value of $500,000 received in 10 periods ($500,000 × 0.78120) (n = 10, i = 2.5%) Present value of $1 5,000 received each of 10 periods ($500,000 × 3% × 8.75206) (n = 10, i = 2.5%) Present value (issue price) of the bonds (b)

Key inputs:

131,281 $521,881

Future value (FV) = $500,000 Market interest rate (i) = 3% (6% × 6/12) Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12) Number of semi-annual periods (n) = 10 (5 years × 2)

Present value of $500,000 received in 10 periods ($500,000 × 0.74409) (n = 10, i = 3%) Present value of $1 5,000 received each of 10 periods ($500,000 × 3% × 8.53020) (n = 10, i = 3%) Present value (issue price) of the bonds (rounded to $500,000) This is rounded because we know that there would be no discount or premium because the market and stated rate are equal

(c)

$390,600

$372,045 127,953 $500,000

Future value (FV) = $500,000 Market interest rate (i) = 3.5% (7% × 6/12) Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12) Number of semi-annual periods (n) = 10 (5 years × 2)

Present value of $500,000 received in 10 periods ($500,000 × 0. 70892) (n = 10, i = 3.5%) Present value of $1 5,000 received each of 10 periods ($500,000 × 3% × 8.31661) (n = 10, i = 3.5%) Present value (issue price) of the bonds

$354,460 124,749 $479,209

Note to the instructor: Rounding discrepancies may arise depending on whether present value tables, calculators, or spreadsheet programs are used to determine the present value. LO 4 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 10.17 (a)

CARVEL CORP. Bond Premium Amortization

Semiannual Interest Periods Jan. 1/24 July 1/24 Jan. 1/25

(A) Interest Payment (6% × 6/12 = 3%) $15,000 15,000

(B) Interest Expense (5% × 6/12 = 2.5%)

$13,047 12,998

(b)

(D) Unamortized Premium (D) – (C)

(E) Bond Carrying Amount ($500,000 + D)

$1,953 2,002

$21,881 19,928 17,926

$521,881 519,928 517,926

CARVEL CORP.

Semiannual Interest Periods Jan. 1/24 July 1/24 Jan. 1/25

Interest Payment (6% × 6/12 = 3%) $15,000 15,000

Interest Expense (6% × 6/12 = 3%)

Bond Carrying Amount ($500,000)

$15,000 15,000

$500,000 500,000 500,000

BRIEF EXERCISE 10.17 (CONTINUED) (c)

Semiannual Interest Periods Jan. 1/24 July 1/24 Jan. 1/25

CARVEL CORP. Bond Discount Amortization (A) Interest to Be Paid (6% × 6/12 = 3%)

(B) Interest Expense (7% × 6/12 = 3.5%)

$15,000 15,000

$16,772 16,834

$1,772 1,834

(D) Unamortized Discount (D) – (C)

(E) Bond Carrying Amount ($500,000 – D)

$20,791 19,019 17,185

$479,209 480,981 482,815

LO 4 BT: AP Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 10.18 (a) Jan.

July

Dec. 31

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

521,881

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

13,047 1,953

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

12,998 2,002

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

500,000

Interest Expense ......................................... Cash ...................................................

15,000

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

15,000

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

479,209

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

16,772

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

16,834

521,881

15,000

(b) Jan.

July

Dec. 31

500,000

15,000

July

Dec. 31

479,209

1,772 15,000

1,834 15,000

LO 4 BT: AP Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 10.1

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Assets

Liabilities

+ NE NE + NE + NE +

+ NE + + + + + +

Shareholders‘ Equity NE NE NE + NE + NE

Revenues

Expenses

NE NE NE NE + NE NE NE + NE

NE NE + NE NE + + NE NE NE

Net Income NE NE NE + NE + NE

LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 10.2 Mar. 17

Cash ............................................................ Sales .................................................... Sales Tax Payable ($2,500 + $3,500)..

Apr. 30

Sales Tax Payable ....................................... Cash ....................................................

49,000

Salaries Expense ......................................... CPP Payable ....................................... EI Payable ........................................... Employee Income Tax Payable ........... Pension Payable .................................. Cash ....................................................

80,000

Employee Benefits Expense ........................ CPP Payable ....................................... EI Payable ...........................................

6,010

CPP Payable ($4,240 + $4,240) .................. EI Payable ($1,264 + $1,770) ...................... Employee Income Tax Payable ................... Cash ....................................................

8,480 3,034 12,400

Utilities Expense .......................................... Accounts Payable ................................

50,000

Aug. 20

Sept. 15

Dec. 31

56,000 50,000 6,000

49,000

4,240 1,264 12,400 6,400 55,696

4,240 1,770

23,914

50,000

LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 10.3 a.

Since the obligation for providing maintenance on the aircraft exists at the time of acquiring the aircraft, the provision must be recorded at that time. When the provision is established (by crediting that account), the offsetting debit is recorded as an asset that is amortized over the period of the lease.

The provision for aircraft maintenance is based on estimates of the costs that are expected to be incurred when the maintenance work will be performed in the future. Consequently, the amount estimated is subject to change. In the case of accounts payable, the amounts owed are fixed and determinable.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 10.4 a.

Dougald Construction

(1)

Oct. 1, 2023

(2)

(3)

Dec. 31, 2023 Interest Expense ...................................... Interest Payable ................................ ($250,000 × 5% × 3/12) July 1, 2024

Atco Finance

(1)

Oct. 1, 2023

(2)

(3)

Cash ........................................................ 250,000 Notes Payable ................................... 3,125

3,125

Interest Expense ($250,000 × 5% × 6/12) 6,250 Interest Payable ....................................... 3,125 Notes Payable ......................................... 250,000 Cash ..................................................

259,375

Notes Receivable ..................................... 250,000 Cash ..................................................

250,000

Dec. 31, 2023 Interest Receivable .................................. Interest Income .................................. ($250,000 × 5% × 3/12) July 1, 2024

250,000

3,125

Cash ............................................................ 259,375 Interest Receivable ............................ Interest Income ($250,000 × 5% × 6/12) Notes Receivable ..............................

3,125

3,125 6,250 250,000

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 10.5 a. and b. Principal and interest payment combined

Semi-annual Interest Period

(A) Cash Payment

Dec. 31, 2023 June 30, 2024 Dec. 31, 2024

2023

(B) Interest Expense (D) × 5% × 6/12

$9,622 9,622 01

Dec.

$3,750 3,603 0 Issue of Mortgage

(D) Principal Balance (D) – (C) $150,000 144,128 138,109 22,000

$5,872 6,019 01476.73

Cash ................................................... Mortgage Payable ......................

150,000 150,000

First Instalment Payment 2024

June

Interest Expense ($150,000 × 5% × 6/12) ................... Mortgage Payable ............................... Cash ...........................................

3,750 5,872 9,622

Second Instalment Payment Dec.

Interest Expense [($150,000 – $5,872) × 5% × 6/12] ................... Mortgage Payable ............................. Cash .........................................

3,603 6,019

Interest expense is lower in the second payment because the principal balance on which the interest is calculated has been reduced by the principal portion of the June 30 payment.

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

9,622

EXERCISE 10.6 a. Annual Interest Period

(A) Cash Payment

(B) Interest Expense (D) × 4%

July 1, 2023 June 30, 2024 June 30, 2025

$7,953 7,953

$600 306

$7,353 7,647

b. (1)

(2)

(3)

(4)

2023 July 1

Dec. 31

2024 June 30

Dec. 31

(D) Principal Balance (D) – (C) $15,000 7,647 0

Cash ........................................................... Bank Loan Payable ............................

15,000

Interest Expense ($600 × 6/12) .................. Interest Payable .................................

300

Interest Expense......................................... Interest Payable ......................................... Bank Loan Payable .................................... Cash ...................................................

300 300 7,353

Interest Expense ($306 × 6/12) .................. Interest Payable .................................

153

15,000

300

7,953

At December 31, 2023 Granville would report: Current liabilities Interest payable Current portion of bank loan payable

$300 7,353

Non-current liabilities Bank loan payable

7,647

At December 31, 2024 Granville would report: Current liabilities Interest payable Bank loan payable

$153 7,647

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

153

EXERCISE 10.7 a.

The interest rate is 5% ($5,000 ÷ $100,000).

Interest Expense .................................................... Bank Loan Payable ................................................ Cash .............................................................

5,000.00 18,097.48 23,097.48

Current portion = $19,952.47 Non-current portion = $20,950.10 + $21,997.60 = $42,947.70

LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 10.8 a.

Current liabilities would likely include: Accounts payable and accrued liabilities Current portion of long-term debt Income taxes payable Dividends payable Current portion of lease liabilities Non-current liabilities would likely include: Long-term debt Deferred income taxes Lease liabilities

Depending on when the liability will become due, some items listed above under non-current could instead be current; an example: lease liabilities. In this case, however, since we have the current portion of lease liabilities reported separately, this indicates that the lease liabilities are non-current.

EXERCISE 10.8 (CONTINUED) b. DOLLARAMA INC. Statement of Financial Position (partial) January 31, 2021 (in thousands) Current liabilities Accounts payable and accrued liabilities ................. $ 278,893 Dividends payable ................................................... 14,583 Income taxes payable .............................................. 12,975 Current portion of long-term debt ............................. 832,821 Current portion of lease liabilities ............................. 181,893 Total current liabilities .................................. 1,321,165 Non-current liabilities Long-term debt ........................................................ 1,044,079 Deferred income taxes ............................................. 121,879 Lease liabilities ........................................................ 1,401,769 Total non-current liabilities ........................... 2,567,727 Total liabilities ............................................................................ $3,888,892 LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 10.9 ($ in thousands) a.

Current ratio 2024:

$4,744 $3,011

= 1.6:1

2023:

$4,298 $2,989

= 1.4:1

(1)

Based only on the current ratio, Fruition‘s liquidity is improving in 2024. There are proportionately more current assets to pay the current liabilities.

(2)

To make a proper assessment, information concerning the due dates for the liabilities and the type of current assets that make up the remaining assets would need to be scrutinized. For example, if current assets consisted mainly of cash rather than inventory, we would conclude that the company had greater liquidity. Knowing the quality of receivables and the turnover of the inventory would be useful.

Current ratio for 2024: Before: $4,744 $3,011

= 1.6:1

After: $4,744 - $1,000 = 1.9:1 $3,011 - $1,000 Paying off the $1 million improves Fruition‘s current ratio from 1.6:1 to 1.9:1. This is because $1 million represents a greater percentage of the denominator than it does the numerator. The greater percentage decrease to the denominator makes the ratio rise.

EXERCISE 10.9 (CONTINUED) c.

Having access to an operating line of credit means that cash is available on a short-term basis and therefore the assessment of the company‘s short-term liquidity is better than it first appeared. Although the ability to access cash improves the liquidity position, it does not necessarily mean that drawing down the operating line of credit will improve the current ratio. If the unused line of credit were to be fully drawn down, Fruition‘s current assets would increase by the addition of $4 million of cash. At the same time, the current liabilities would increase by the addition of a $4 million bank loan payable. As is demonstrated in the calculation below, the current ratio would deteriorate to 1.2:1. $4,744 + $4,000 $3,011 + $4,000

= 1.2:1

LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 10.10 (U.S.$ in millions) a. 2020 Debt to total assets =

$6,228 $10,235

Times interest earned =

$234 + $146 + $111 = $146

Debt to total assets =

$5,510 $9,609

Times interest earned =

$311 + $152 + $340 $152

60.9%

3.4 times

2021 =

57.3%

5.3 times

Open Text Corporation‘s debt to total assets ratio declined in 2021, with the decrease from 60.9% to 57.3%. The company‘s times interest earned ratio increased significantly from 3.4 times in 2020 to 5.3 times in 2021. This reveals an improvement in Open Text‘s solvency. b.

Having access to an operating line of credit means that cash is available on a short-term basis. None of the total line of credit available in the amount of $750 million has been drawn down at the date of the financial statements. Since no liability exists at the end of the year, only a note disclosure of the available operating line of credit will be needed.

LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 10.11 a.

The Government of British Columbia bonds are trading at a discount.

The Government of Manitoba bonds are trading at a premium.

Cash (0.989 × $100,000) ............................................ Bonds Payable ........................................................

98,900

Cash (1.0522 × $100,000) .......................................... 105,220 Bonds Payable ..................................................... d.

96,800

105,220

The major reason why the bonds are not trading at their face value is because the coupon rate and the yield rate are different.

LO 4 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 10.12 a.

2024 1. Oct.

2. Dec. 31

2025 3. Apr.

Cash ......................................................... 800,000 Bonds Payable ................................

800,000

Interest Expense ($800,000 × 5% × 3/12) Interest Payable................................

10,000 10,000

Interest Expense ($800,000 × 5% × 3/12) Interest Payable ........................................ Cash ($800,000 × 5% × 6/12) ..........

10,000 10,000 20,000

b. December 31, 2024 Current liabilities Interest payable .................................................... $ 10,000 Non-current liabilities Bonds payable, due 2034 .................................... .............................................................................

800,000

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 10.13 a.

[1] $25,000 + $2,768 = $27,768 [2] $74,387 – $2,768 = $71,619 [3] $27,851 – $25,000 = $2,851 [4] $928,381 + $2,851[3] = $931,232 or $1,000,000 – $68,768 [5] $25,000 same as previous semi-annual payments [6] $27,937 – $25,000 = $2,937 [7] $68,768 – $2,937 [6] = $65,831

$1,000,000 face value ($925,613 carrying amount plus unamortized discount $74,387 at issue date)

The bonds were issued at a discount as the carrying amount of $925,613 is lower than the $1,000,000 face value of the bond at the issue date.

Coupon interest rate: Semi-annual payments are $25,000 × 2 divided by the face value $1,000,000 = 5% per year Market interest rate: Interest expense April 30 (item [1] of part (a) $27,768) divided by carrying amount at issue date $925,613 × 2 = 3% × 2 = annual rate of 6%

The effective rate of interest of 6% is greater than the coupon rate. Interest expense is calculated using the market rate of interest and cash interest paid is calculated using the coupon rate. Therefore, interest expense is greater than cash interest paid.

Interest expense is calculated by multiplying the carrying value of the bonds by the market rate of interest. With each semi-annual payment, the carrying amount of the bonds increases, from the semi-annual amortization of the discount, and consequently, the amount of interest expense increases.

The carrying amount of the bonds will be equal to the face value of the bonds of $1,000,000 as the entire amount of the discount will have been amortized.

LO 4 BT: AP Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 10.14 a.

Jan. 1

July

Dec. 31

Jan.

Nov. 30

Jan. 1

Cash ......................................................................... Bonds Payable.................................................. Interest Expense ($925,617× 6% × 6/12) ................. Bonds Payable ($27,769 – $25,000) ................ Cash ($1,000,000 × 5% × 6/12) ........................

925,617 925,617 27,769 2,769 25,000

Interest Expense [($925,617 + $2,769) × 6% × 6/12] Bonds Payable ($27,852 – $25,000) ................ Interest Payable ($1,000,000 × 5% × 6/12) ......

27,852

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

25,000

Interest Expense [($925,617 + $2,769) × 6% × 5/12] Bonds Payable ($23,210 – $20,833) ................ Interest Payable ($1,000,000 × 5% × 5/12) ......

23,210

Interest Payable .................................. Interest Expense [($925,617 + $2,769) × 6% × 1/12] Bonds Payable ($25,000 – $20,833 – $4,642).. Cash .................................................................

20,833 4,642

2,852 25,000

25,000

2,377 20,833

475 25,000

LO 4 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 10.15 a.

Key inputs:

Future value (FV) = $1,000,000 Market interest rate (i) = 3% (6% × 6/12) Interest payment (PMT) = $25,000 ($1,000,000 × 5% × 6/12) Number of semi-annual periods (n) = 20 (10 years × 2)

Present value of $1,000,000 received in 20 periods ($1,000,000 × 0.55368) (n = 20, i = 3%) Present value of $25,000 received each of 20 periods ($1,000,000 × 2.5% × 14.87747 (n = 20, i = 3%) Present value (issue price) of the bonds b.

371,937 $925,617

One year later, January 1, 2025, the carrying amount of the bond is $925,617 + $2,769 + $2,852 = $931,238 Key inputs:

Future value (FV) = $1,000,000 Market interest rate (i) = 3% (6% × 6/12) Interest payment (PMT) = $25,000 ($1,000,000 × 5% × 6/12) Number of semi-annual periods (n) = 18 (9 years × 2)

Present value of $1,000,000 received in 18 periods ($1,000,000 × 0.58739) (n = 18, i = 3%) Present value of $25,000 received each of 18 periods ($1,000,000 × 2.5% × 13.75351 (n = 18, i = 3%) Present value (issue price) of the bonds c.

$553,680

Amount of amortization to July 1, 2024 (refer to E10.14) Amount of amortization from July 1 to December 31, 2024

$587,390 343,838 $931,228 $2,769 2,852

Total $5,621 Or Carrying amount December 31, 2024 Carrying amount December 31, 2023 Amortization amount (difference of $10)

$931,228 925,617 $5,611

Note to the instructor: Rounding discrepancies may arise depending on whether present value tables, calculators, or Excel functions are used to determine the present value. d.

The amount of the interest expense on the statement of income ($27,769 + $27,852 = $55,621) is higher than the amount of cash received by the

bondholders of ($25,000 x 2 = $50,000) by $5,621 which is the amortization of the bond discount for the year ended December 31, 2024. LO 4 BT: AP Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO PROBLEMS PROBLEM 10.1A a.

July 1

July 31

Accounts Payable .................................... Notes Payable ..................................

15,000

Cash ......................................................... Service Revenue .............................. Sales Tax Payable ($30,000 × 13%)

33,900

Cash ......................................................... Sales (derive sales: $56,500 ÷ 1.13) Sales Tax Payable ($50,000 × 13%)

56,500

Cost of Goods Sold .................................. Inventory ..........................................

33,000

Sales Tax Payable ................................... Cash.................................................

7,150

CPP Payable ($763 + $763) .................... EI Payable ($221 + $309) ........................ Employee Income Tax Payable................ Cash.................................................

1,526 530 2,800

Accounts Payable .................................... Cash.................................................

12,450

Salaries Expense ..................................... CPP Payable .................................... EI Payable ........................................ Employee Income Tax Payable........ Cash.................................................

20,000

Employee Benefits Expense .................... CPP Payable .................................... EI Payable ($316 x 1.4) ....................

1,499

Interest Expense ....................................... Interest Payable ............................... ($15,000 × 6% × 1/12)

15,000

30,000 3,900

50,000 6,500

33,000

7,150

4,856

12,450

1,057 316 2,575 16,052

1,057 442

PROBLEM 10.1A (CONTINUED) c. ALLEGRA LTD. Statement of Financial Position (partial) July 31, 2024 Current liabilities Accounts payable ($35,450 – $15,000 – $12,450) ................. Notes payable ......................................................................... Employee income tax payable ($2,800 – $2,800 + $2,575) .... Sales tax payable ($7,150 + $3,900 + $6,500 - $7,150) .................. CPP payable ($1,526 – $1,526 + $1,057 + $1,057) ................ EI payable ($530 – $530 + $316 + $442)................................ Interest payable ...................................................................... Total current liabilities .................................................

$ 8,000 15,000 2,575 10,400 2,114 758 75 $38,922

LO 1,2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.2A a.

Sept.

Oct.

Dec.

Inventory ................................................. Accounts Payable ..........................

15,000

Notes Payable......................................... Interest Expense ($12,000 × 6% × 3/12) Cash...............................................

12,000 180

Accounts Payable ................................... Notes Payable ................................

15,000

Cash ....................................................... Bank Loan Payable ........................

25,000

Interest Expense ($15,000 × 8% × 3/12) Interest Payable .............................

300

Interest Expense ($25,000 × 6% × 3/12) Interest Payable .............................

375

15,000

12,180

15,000

25,000

300

375

b. Interest Expense Sept. 30 Dec. 31 Dec. 31 Dec. 31 Bal.

180 300 375 855

Sept. 30

12,000 15,000 15,000

Bank Loan Payable

Interest Payable Dec. 31 Dec. 31 Dec. 31Bal.

Notes Payable Aug. 31 Bal. 12,000 Oct.1 Dec. 31Bal.

300 375 675

Oct. 2 Dec. 31Bal.

25,000 25,000

PROBLEM 10.2A (CONTINUED) c. CLING-ON LTD. Statement of Income (partial) Year Ended December 31, 2024 Other income and expenses Interest expense .........................................................................

$855

CLING-ON LTD. Statement of Financial Position (partial) December 31, 2024 Current liabilities Current portion of bank loan payable 1 ....................................... Notes payable ............................................................................. Interest payable ..........................................................................

$7,846 15,000 675

Current portion of bank loan payable = $3,865 + $3,981 = $7,846

Semi-annual Interest Period

Cash Payment

Interest Expense 6% × 6/12

Oct. 2, 2024 Apr. 1, 2025 Oct. 1, 2025 Apr. 1, 2026 Oct. 1, 2026 Apr. 1, 2027 Oct. 1, 2027

$4,615 4,615 4,615 4,615 4,615 4,615

$750 634 515 392 265 134

Reduction of Principal

Principal Balance

$3,865 3,981 4,100 4,223 4,350 4,481

$25,000 21,135 17,154 13,054 8,831 4,481 -

LO 1,2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.3A

Table not required but source for detailed calculations

Quarterly Interest Period

Cash Payment

Interest Expense 6% × 6/12

Reduction of Principal

Dec. 31, 2023

Principal Balance $500,000

June 30, 2024

$71,228

$15,000

$56,228

443,772

Dec. 31, 2024

71,228

13,313

57,915

385,857

June 30, 2025

71,228

11,576

59,652

326,205

2023 Dec. 31

2024 Mar. 31

June 30

Dec. 31

Cash ............................................................ 500,000 Bank Loan Payable ........................... 500,000 Interest Expense ($15,000 × 3/6) ................. Interest Payable ..................................

7,500

Interest Expense .......................................... Interest Payable ........................................... Bank Loan Payable ...................................... Cash ....................................................

7,500 7,500 56,228

Interest Expense .......................................... Bank Loan Payable ...................................... Cash ....................................................

13,313 57,915

7,500

71,228

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.4A a. Semi-annual Interest Period Sept. 30, 2024 Mar. 31, 2025 Sept. 30, 2025 Mar. 31, 2026 Sept. 30, 2026 b.

2024 Sept. 30 2025; Mar. 31

2025 Sept. 30

Cash Payment $56,889 56,889 56,889 56,889

Interest Expense 9.5% × 6/12

Reduction of Principal

Principal Balance

$14,139 14,811 15,514 16,251

$900,000 885,861 871,050 855,536 839,285

$42,750 42,078 41,375 40,638

Cash ........................................................ Bank Loan Payable .........................

900,000

Interest Expense .......................................... Bank Loan Payable ...................................... Cash ................................................

42,750 14,139

Interest Expense ...................................... Bank Loan Payable .................................. Cash ................................................

42,078 14,811

900,000

56,889

d. GARDNER GREENHOUSES LTD. Statement of Financial Position (Partial) September 30, 2025 Current liabilities Current portion of bank loan payable1 .............................

$ 31,765*

Non-current liabilities Bank loan payable ...........................................................

839,285

($15,514 + $16,251) = $31,765 OR ($871,050 – $839,285 = $31,765)

PROBLEM 10.4A (CONTINUED)

If the next loan payment is October 1, 2025, the last journal entry in part c. would be an accrual instead of a payment as follows: 2025 Sept. 30

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

42,078 42,078

GARDNER GREENHOUSES LTD. Statement of Financial Position (Partial) September 30, 2025 Current liabilities Interest payable ............................................................... Current portion of bank loan payable1 .............................

$42,078 30,325

Non-current liabilities Bank loan payable ...........................................................

855,536

($885,861 – $855,536 = $30,325) OR ($14,811 + $15,514 = $30,325) The current portion now consists of the principal that will be paid down in the second and third payments rather than the third and fourth payments in part (d) because the second and third payments will now occur in the next fiscal year.

LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.5A a.

Period

(B)

(C)

(A)

Interest

Principal

(D)

Cash

Expense

Reduction

Balance

Payment

(D) × 8% × 3/12

(A) – (B)

(D) – (C)

Apr. 30, 2024

$240,000

July 31, 2024

$22,694

$ 4,800

$17,894

222,106

Oct. 31, 2024

22,694

4,442

18,252

203,854

Jan. 31, 2025

22,694

4,077

18,617

185,237

Apr. 30, 2025

22,694

3,705

18,989

166,248

July 31, 2025

22,694

3,325

19,369

146,879

Oct. 31, 2025

22,694

2,938

19,756

127,123

Jan. 31, 2026

22,694

2,542

20,152

106,971

Apr. 30, 2026

22,694

2,139

20,555

86,416

July 31, 2026

22,694

1,728

20,966

65,450

Oct. 31, 2026

22,694

1,309

21,385

44,065

Jan. 31, 2027

22,694

881

21,813

22,252

Apr. 30, 2027

22,694

442*

22,252

$32,328

$240,000

Total *rounded

b. 2024 Apr.

Cash ............................................... Bank Loan Payable .................

240,000

Bank Loan Payable ......................... Interest Expense ............................. Cash .......................................

17,894 4,800

Bank Loan Payable ......................... Interest Expense ............................. Cash .......................................

18,252 4,442

240,000

c. July

Oct.

22,694

PROBLEM 10.5A (CONTINUED) d. BISTRO SALLY INC. Statement of Financial Position (Partial) October 31, 2024 Current liabilities Current portion of bank loan payable ....................

$76,731*

Non-current liabilities Bank loan payable, due in 2027............................ Total liabilities

127,123 $203,854

*$203,854 - $127,123 = $76,731 e. BISTRO SALLY INC. Statement of Financial Position (Partial) November 30, 2024 Current liabilities Interest payable1 ................................................... Current portion of bank loan payable2 ..................

$ 1,359 76,731

Non-current liabilities Bank loan payable, due in 2027............................ Total liabilities

127,123 $205,213

$4,077 / 3 = $1,359 $203,854 - $127,123 = $76,731

LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.6A a.

1. Current liabilities

Deferred revenue (earned next year)

2. Current liabilities

Interest payable ($200,000 × 7% × 6/12) Current portion of note payable

Non-current liabilities

$ 9,000 7,000 34,778

Notes payable ($200,000 – $34,778)

165,222

3. Current liabilities

Accounts payable

120,000

4. Current liabilities

Deferred revenue (earned in January)

10,000

5. Current liabilities

Sales tax payable ($8,000 × 13%)

1,040

6. Current liabilities

Salaries payable [($18,000 × 1/5 days) – $192 – $57 – $544] CPP payable ($192 + employer share $192) EI payable ($57 + employer share $80 (1.4 × $57) Employee income tax payable

2,807

384 137 544

7. Contingent liability

Not on statement of financial position

8. Current liabilities

Income tax payable ($50,000 – $45,000)

9. Current liabilities Non-current liabilities

Bank loans due within one year Bank loans ($250,000 – $30,000)

30,000 220,000

10. Current liabilities

Bank indebtedness

10,000

5,000

PROBLEM 10.6A (CONTINUED) b.

The notes should disclose information on the contingent liability – the lawsuit, including the fact that the amount of the loss cannot be determined. Information on the note payable should also be disclosed, including the interest rate and repayment terms and payments required in each of the next five years. Details of Wendell’s bank loans should be disclosed, including interest rates, maturity dates, payments required in each of the next five years, and any assets pledged as collateral. Details of the operating line of credit terms and maximum balance should be disclosed in the notes to the financial statements.

LO 1,2,3 BT: K Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.7A a.

(in millions) 1. Current ratio

2021 $3,948 = 1.8:1 $2,146

2. Receivables turnover

$14,294 $1,217 + $1,372 2

3. Inventory turnover

$9,575 $2,294 + $2,221 2

4. Debt to total assets

2020

= 11.0 times

= 4.2 times

$6,679 = 50.9% $13,123

5. Times interest earned $626 + $218 + $79 = 11.7 times $79

$4,069 = 1.6:1 $2,494

$14,944 $1,372 + $1,248 2

$10,181 $2,221 + $1,681 2

= 11.4 times

= 5.2 times

$7,234 = 52.4% $13,793

$583 + $217 + $96 $96

= 9.3 times

PROBLEM 10.7A (CONTINUED) b.

Saputo‘s current ratio has improved significantly and is well ahead of industry averages. The receivables turnover ratio deteriorated from 11.4 times in 2020 to 11.0 times in 2021 but exceeds the industry averages by a wide margin. The inventory turnover deteriorated significantly from 5.2 times in 2020 to 4.2 times in 2021. This ratio is well below the industry averages for both years. This means that Saputo is collecting its receivables and moving its inventory more slowly in 2021 than in 2020. The deterioration of the receivable and inventory turnover ratios likely lead to cash being collected more slowly. Overall, Saputo‘s 2020 liquidity ratios are fair. During 2021, Saputo‘s debt to total assets ratio improved from 52.4% in 2020 to 50.9% in 2021. The company‘s times interest earned ratio also improved significantly. In comparison to the industry average, Saputo is carrying more debt compared to total assets and its times interest earned ratio is slightly higher than the industry in 2021. This indicates that the company appears to be earning more than enough net income to make the required debt interest payments. Therefore, there do not appear to be any significant concerns regarding Saputo‘s solvency in 2021.

Saputo has secured a line of credit that helps it through short-term liquidity problems during its operating cycle. The fact that it has only used 3.6% of the $2.1 billion line of credit as of the end of 2021 demonstrates that it is not in need of cash to meet its obligations. Saputo is ready to take advantage of opportunities that may come up in the future that would require significant amounts of cash.

LO 3 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 10.8A a.

When reviewing the liquidity ratios for the two companies, it would appear that Sun-Oil is less liquid than Petro-Zoom. Sun-Oil has a lower current ratio than Petro-Zoom. Although it is turning its receivables over faster than Petro-Zoom, Petro-Zoom is able to move its inventory much more quickly than Sun-Oil. Furthermore, neither Petro-Zoom‘s nor Sun-Oil‘s receivables turnover ratios are of particular concern. Both are collecting their receivables within an average 30-day collection period (365 days divided by either 12 or 13 is approximately 30 days). What is of concern is Sun-Oil‘s inventory turnover of 10 times which is well below Petro-Zoom‘s of 16 times and the industry average of 19 times. This may be of concern to a lender or other creditor as a company will not be able to generate cash in the short-term if it cannot sell its inventory. Based on the concerns over Sun-Oil‘s inventory turnover, I would think that Petro-Zoom is the more liquid of the two companies. I would be more inclined to lend money to Petro-Zoom.

In reviewing the solvency of these two companies we see that PetroZoom‘s debt to total assets ratio is marginally higher (worse) than SunOil‘s ratio, indicating that Petro-Zoom has a higher percent of its assets financed by debt. Sun-Oil also appears to be in a better position to make its interest payments, as indicated by the higher times interest earned ratio (24 times for Sun-Oil compared to 21 times for Petro-Zoom). When compared to the industry, we can see that both companies have debt to total assets ratios higher than the industry average. On the other hand, these ratios are not far off the industry average and their high times interest earned ratios leave little doubt that both companies are able to make their respective interest payments on the debt.

PROBLEM 10.8A (CONTINUED) b. (Continued) Based on the debt to total assets ratio and times interest earned ratio, Sun-Oil seems to be the more solvent of the two. However, both companies appear to be generating sufficient income to cover interest payments so I would not be significantly concerned about the solvency of either company. LO 3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*PROBLEM 10.9A a. Able Limited – issued at par or 100 with coupon rate 6%: 2024 Jan. 1 Cash .................................................. Bonds Payable .......................... b. Dec. 31 Interest Expense ($100,000 × 6%) ..... Cash ..........................................

100,000 100,000 6,000 6,000

a. Beta Corp. – issued at a discount price 94 with coupon rate 4%: 2024 Jan. 1 Cash ($100,000 × .94)........................ 94,000 Bonds Payable .......................... b. Dec. 31 Interest Expense ($94,000 × 6%) ....... 5,640 Bonds Payable ($5,640 – $4,000) 1,640 Cash ($100,000 × 4%) ............... a.

Charles Inc. – issued at a premium price 105 with coupon rate 7%: 2024 Jan. 1 Cash ($100,000 × 1.05) ........................ 105,000 Bonds Payable ............................

94,000

4,000

105,000

b. Dec. 31

Interest Expense ($105,000 × 6%) ....... Bonds Payable ($7,000 – $6,300) ........ Cash ($100,000 × 7%).................

6,300 700

7,000

PROBLEM 10.9A (CONTINUED) c.

As seen in parts (a) and (b), Able is the only company that issued the bonds at par. This occurred because its coupon rate matched the market rate of interest, both at 6% and therefore the interest expense it records is equal to the interest paid. In the case of Beta Corp., since its coupon rate of 4% allows it to pay less interest than the market rate of interest, it must issue the bond at a discount and receive less than the face value of the bond at the date of issuance. The discount is the mechanism that the investor uses to obtain a return on the bond equal to the market interest rate. The difference between the $94,000 Beta received at issuance and the $100,000 that will be paid at the maturity of the bond will be allocated to interest expense over the term of the bond. This will make the interest expense greater than the amount of interest paid. In the case of Charles Inc., since its coupon rate of 7% forces it to pay more interest than the market rate of interest, it will issue the bond at a premium and receive more than the face value of the bond at the date of issuance. The difference between the $105,000 that Charles received and the $100,000 that will be paid at the maturity of the bond will be allocated to interest expense over the term of the bond and reduce the expense. This will make the interest expense less than the amount of interest paid.

Balance in Bonds Payable account December 31, 2024: Able Limited: Bond issue January 1, 2024 No premium or discount Dec. 31, 2024

$100,000 $100,000

Beta Corp: Bond issue January 1, 2024 Plus amortization of bond discount Balance Dec. 31, 2024

$94,000 1,640 $95,640

Charles Inc.: Bond issue January 1, 2024 Less amortization of bond premium Balance Dec. 31, 2024

$105,000 700 $104,300

LO 4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 10.10A a.

GLOBAL SATELLITES CORPORATION Bond Premium Amortization

Semiannual Interest Periods

(A) Interest to Be Paid (7% × 6/12 = 3.5%)

July 1/24 Jan. 1/25 July 1/25 Jan. 1/26

(B) Interest Expense to Be Recorded (6% × 6/12 = 3%)

$52,500 52,500 52,500

$48,348 48,223 48,095

(D) Unamortized Premium (D) – (C)

(E) Bond Carrying Amount ($1,500,000 + D)

$4,152 4,277 4,405

$111,587 107,435 103,158 98,753

$1,611,587 1,607,435 1,603,158 1,598,753

The amortization of the premium increases each period because, with every payment, the carrying amount of the bond decreases and therefore the amount of interest expense decreases each period. Because the interest payment is fixed at $52,500, the portion that is recorded to the amortization of the bond premium is larger each period because the interest portion is decreasing.

July

Dec. 31

2024 Cash ................................................. Bonds Payable ........................

1,611,587

2024 Interest Expense .............................. Bonds Payable ................................. Interest Payable.......................

48,348 4,152

1,611,587

52,500

e. GLOBAL SATELLITES CORPORATION Statement of Financial Position (Partial) December 31, 2024 Current liabilities Interest payable Non-current liabilities Bonds payable, due 2034

52,500

1,607,435

*PROBLEM 10.10A (CONTINUED) f.

Jan.

July

Nov. 30

Jan.

2025 Interest Payable ............................. Cash ...................................... Interest Expense .............................. Bonds Payable ................................. Cash ......................................

52,500 52,500 48,223 4,277 52,500

2024 Interest Expense ($48,348 x 5/6) ..... Bonds Payable ($4,152 x 5/6) .......... Interest Payable ($52,500 x 5/6)

40,290 3,460

2025 Interest Payable ............................. Interest Expense ($48,348 – $40,290) Bonds Payable ($4,152 – $3,460) .. Cash ......................................

43,750 8,058 692

43,750

52,500

LO 3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005CM: Reporting and Finance

*PROBLEM 10.11A a.

Key inputs:

Future value (FV) = $1,500,000 Market interest rate (i) = 3% (6% × 6/12) Interest payment (PMT) = $52,500 ($1,500,000 × 7% × 6/12) Number of semi-annual periods (n) = 20 (10 years × 2)

Present value of $1,500,000 received in 20 periods ($1,500,000 × 0.55368) (n = 20, i = 3%) Present value of $52,500 received each of 20 periods ($1,500,000 × 3.5% × 14.87747) (n = 20, i = 3%) Present value (issue price) of the bonds

$ 830,520 781,067 $1,611,587

Note to the instructor: Rounding discrepancies may arise depending on whether present value tables, calculators, or a spreadsheet program are used to determine the present value. When using a calculator, students should determine the present value to be $1,611,581. b.

Carrying amount December 31, 2024: Present value of $1,500,000 received in 19 periods ($1,500,000 × 0.57029) (n = 19, i = 3%) Present value of $52,500 received each of 19 periods ($1,500,000 × 3.5% × 14.32380) (n = 29, i = 3%) Carrying amount of the bonds

$ 855,435 752,000 $1,607,435

The amounts calculated in a. and b. above are different because the amortization and interest payment periods have reduced by one six-month period in part b. Since the amortization period is shorter by one period, the present value of the future cash flows is lower in b. Interest expense has been accrued in the six-month period between July 1, 2024 and December 31, 2024 and so the account affected besides the Bond Payable account is the Interest Expense account.

*PROBLEM 10.11A (CONTINUED) d.

Key inputs:

Future value (FV) = $1,500,000 Market interest rate (i) = 4% (8% × 6/12) Interest payment (PMT) = $52,500 ($1,500,000 × 7% × 6/12) Number of semi-annual periods (n) = 20 (10 years × 2)

Present value of $1,500,000 received in 20 periods ($1,500,000 × 0.45639) (n = 20, i = 4%) Present value of $52,500 received each of 20 periods ($1,500,000 × 3.5% × 13.59033) (n = 20, i = 4%) Present value (issue price) of the bonds

$ 684,585 713,492 $1,398,077

The difference in the amount calculated in a. of $1,611,587 and the amount calculated in d. of $1,398,077 is due to the difference in the market rate of interest. All other variables as key inputs in the calculation remain the same. In the case of a., the market rate per year was 6% which was lower than the rate paid by the bond of 7%, causing the bond to be issued at a premium. In the case of d., the market rate per year was 8% which was higher than the rate paid by the bond of 7%, causing the bond to be issued at a discount. LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005CM: Reporting and Finance

PROBLEM 10.1B a.

Jan.

Cash ....................................................................... Sales ............................................................. Sales Tax Payable [($20,000 × 5%); + ($20,000 × 7%)] .....................................

22,400

Cost of Goods Sold................................................. Inventory ........................................................

14,000

CPP Payable ($1,905 + $1,905) ............................. EI Payable ($666 + $932) ....................................... Employee Income Tax Payable .............................. Cash ..............................................................

3,810 1,598 7,700

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

18,000

20,000 2,400

14,000

13,108

18,000

Cash ....................................................................... 12,544 Service Revenue ........................................... Sales Tax Payable [($11,200 × 5%) + ($11,200 × 7%)] .......................................................................

Accounts Payable ................................................... Cash ..............................................................

32,000

Salaries Expense .................................................... CPP Payable ................................................. EI Payable ..................................................... Employee Income Tax Payable ..................... Salaries Payable ............................................

40,000

Employee Benefits Expense ................................... CPP Payable ................................................. EI Payable .....................................................

2,999

Sales Tax Payable .................................................. Cash .............................................................. Sales Tax Payable .................................................. Cash ..............................................................

11,200 1,344

32,000

2,114 632 5,740 31,514

2,114 885 7,500 7,500 10,500 10,500

PROBLEM 10.1B (CONTINUED) b.

Jan. 31

Interest Expense ($18,000 × 6% × 0.5/12) ............. Interest Payable .............................................

45 45

BURLINGTON INC. Statement of Financial Position (partial) January 31, 2024 Liabilities Current liabilities Accounts payable ($52,000 – $32,000) .................................................. Notes payable ........................................................................................ Employee income tax payable ($7,700 – $7,700 + $5,740) ................... CPP payable ($3,810 – $3,810 + $2,114 + $2,114) ............................... EI payable ($1,598 – $1,598 + $632 + $885) ......................................... Sales tax payable ($18,000 + $2,400 – $7,500 – $10,500 + $1,344) ..... Interest payable ...................................................................................... Total current liabilities .......................................................................

$20,000 18,000 5,740 4,228 1,517 3,744 45 $53,274

LO 1,2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.2B a.

Mar.

May

June

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

16,000

Notes Payable............................................. Interest Expense ($30,000 × 5% × 6/12) .... Cash...................................................

30,000 750

Cash ........................................................... Bank Loan Payable ............................

36,000

Inventory ..................................................... Notes Payable ....................................

50,000

Notes Payable............................................. Interest Expense ($16,000 × 6% × 3/12) .... Cash...................................................

16,000 240

16,000

30,750

36,000

50,000

16,240

Interest Expense ($333 + $360) .................. 693 Interest Payable ................................. ($50,000 × 8% × 1/12 = $333) ( $36,000 × 6% × 2/12 = $360)

693

PROBLEM 10.2B (CONTINUED) b. Interest Expense Mar.31 June 2 June 30 June 30 Bal.

750 240 693 1,683 Interest Payable June 30 June 30 Bal.

693 693

Notes Payable Mar. 31 Feb. 29 Bal. 30,000 30,000 June 2 16,000 Mar. 2 16,000 June 1 50,000 June 30 Bal. 50,000 Bank Loan Payable May 1 June 30 Bal.

36,000 36,000

PROBLEM 10.2B (CONTINUED) c. SPARKY‘S MOUNTAIN BIKES LTD. Statement of Income (partial) Year Ended June 30, 2024 Other income and expenses Interest expense ...............................................................

$1,683

d. SPARKY‘S MOUNTAIN BIKES LTD. Statement of Financial Position (partial) June 30, 2024 Current liabilities Current portion of bank loan payable* .............................. Notes payable ................................................................... Interest payable ................................................................

$ 8,229 50,000 693

*Current portion of bank loan payable: Total payment to be made on May 1, 2025 ........................................ Less interest portion ($36,000 × 6%) .................................................. Principal portion of loan repayment ....................................................

$10, 389 (2,160) $8,229

LO 1,2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.3B a.

Aug. 1

Cash .......................................................... Bank Loan Payable ..........................

700,000 700,000

Note that instalment schedule is not required. It is included for information only. (B) Interest (C) (D) Monthly (A) Expense Reduction Principal Interest Cash (D) × 4% × of Principal Balance Period Payment 1/12 (A) – (B) (D) – (C) Aug. 1 $700,000 Sept. 1/24 $15,805 $2,333 $13,472 686,528 Oct. 1/24 15,805 2,288 13,517 673,011 Nov. 1/24 15,805 2,243 13,562 659,449 Sept. 1

15,805 c. Sept. 30

d. Oct. 1

Interest Expense ($700,000 × 4% × 1/12) .................... Bank Loan Payable ($15,805 – $2,333) ....................... Cash...................................................................

Interest Expense [($700,000 – $13,472) × 4% × 1/12] ............................. Interest Payable ................................................. Interest Payable............................................................ Bank Loan Payable ($15,805 – $2,288) ....................... Cash...................................................................

2,333 13,472

2,288 2,288 2,288 13,517 15,805

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.4B a. Semi-annual Interest Period Dec. 31, 2023 June 30, 2024 Dec. 31, 2024 June 30, 2025 Dec. 31, 2025

2023 Dec. 31 2024 June 30

Dec. 31

Cash Payment

Interest Expense 6% × 6/12

Reduction of Principal

$67,216 67,216 67,216 67,216

$30,000 28,884 27,734 26,549

$37,216 38,332 39,482 40,667

Cash ....................................................... Mortgage Payable ..........................

1,000,000

Interest Expense ..................................... Mortgage Payable ................................... Cash ...............................................

30,000 37,216

Interest Expense ..................................... Mortgage Payable ................................... Cash ...............................................

28,884 38,332

Principal Balance $1,000,000 962,784 924,452 884,970 844,303

1,000,000

67,216

BEAUMONT BUILDING SUPPLIES LIMITED Statement of Financial Position (Partial) December 31, 2024 Liabilities Current liabilities Current portion of mortgage payable ...............................

$80,149*

Non-current liabilities Mortgage payable ............................................................

844,303

* $924,452 – $844,303 = $80,149

PROBLEM 10.4B (CONTINUED) e.

Because the next loan payment is January 1, 2025, the last journal entry in part c. would be an accrual instead of a payment as follows:

2024 Dec. 31

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

28,884 28,884

. BEAUMONT BUILDING SUPPLIES LIMITED Statement of Financial Position (Partial) December 31, 2024 Current liabilities Interest payable ............................................................... Current portion of mortgage payable1 ..............................

$28,884 77,814

Non-current liabilities Mortgage payable ............................................................

884,970

($962,784 – $884,970 = $77,814

LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.5B

Period

(B)

(C)

(A)

Interest

Principal

(D)

Cash

Expense

Reduction

Balance

Payment

(D) × 8%

(A) – (B)

(D) – (C)

April 1, 2023

$200,000

March 31, 2024

$ 60,384

$16,000

$ 44,384

155,616

March 31, 2025

60,384

12,449

47,935

107,681

March 31, 2026

60,384

8,614

51,770

55,911

March 31, 2027

60,384

4,473

55,911

$241,536

$41,536

$200,000

Total

b. April 1/23

Cash ................................................... Bank Loan Payable......................

200,000

Bank Loan Payable ............................. Interest Expense .................................. Cash ............................................

44,384 16,000

Bank Loan Payable .............................. Interest Expense .................................. Cash ............................................

47,935 12,449

200,000

c. March 31/24

March 31/25

60,384

PROBLEM 10.5B (CONTINUED) d.

ALPINE GOLF COURSE LTD. Statement of Financial Position (Partial) March 31, 2024

Liabilities

Current liabilities Current portion of bank loan payable

$47,935

Non-current liabilities Bank loan payable ($51,770 + $55,911)

107,681

ALPINE GOLF COURSE LTD. Statement of Financial Position (Partial) April 30, 2024

Liabilities Current liabilities Interest payable ($12,449 x 1/12) Current portion of bank loan payable

$1,037 47,935

Non-current liabilities Bank loan payable ($51,770 + $55,911)

107,681

LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.6B a.

1. Current liabilities

Deferred revenue

2. Current liabilities

Interest payable ($30,000 × 6% × 1/12) Bank loan payable ($35,000 – $5,000)

$ 12,000 150 30,000

3. Current liabilities

Accounts payable

7,000

4. Current liabilities

Sales tax payable ($15,000 × 5%)

750

5. Current liabilities

Deferred revenue

25,000

6. Current liabilities

Salaries payable [($40,000 × 1/5 days) – $426 – $126 – $2,208] CPP payable ($426 + employer share $426) EI payable [$126 + employer share $176 (1.4 × $126)] Employee income tax payable

5,240

7. Not a liability (contingent liability)

8. Current liabilities

302 2,208

Not reported on statement of financial position. Disclosed only in the notes to the financial statements Income tax payable ($95,000 – $80,000)

9. Current liabilities Bank loan payable due within one year Non-current liabilities Bank loan payable ($150,000 – $15,000) 10. Current liabilities

852

15,000 15,000 135,000

Bank indebtedness

5,000

PROBLEM 10.6B (CONTINUED) b. The notes should disclose information on the bank loan payable, including the interest rate, repayment terms, maturity dates, payments required in each of the next five years, and any assets pledged as collateral. The notes should also disclose pertinent details regarding the environmental lawsuit, including management‘s assessment of the likely outcome. Details of Iq aluit‘s non-current debt should be disclosed including interest rates, maturity dates, conversion privileges, and any assets pledged as collateral. Details of the operating line of credit terms and maximum balance should be disclosed in the notes to the financial statements. LO 1,2,3 BT: K Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.7B a. 2021

(in USD millions) 1. Current ratio

$7,122 $5,950

2. Receivables turnover

$45,760 $1,772 + $1,256 2

3. Inventory turnover

$35,645 $1,768 + $1,237 2

4. Debt to total assets

$16,214 $28,395

5. Times interest earned

$2,706 + $654 + $357 $357

2020

= 1.2:1

= 30.2 times

= 23.7 times

= 57.1%

= 10.4 times

$6,431 $3,744

$54,132 $1,256 + $1,864 2

$44,489 $1,237 + $1,468 2

$15,613 $25,680

$2,358 + $546 + $342 $342

= 1.7:1

= 34.7 times

= 32.9 times

= 60.8%

= 9.5 times

During the year Couche-Tard‘s liquidity has deteriorated. It has a lower current ratio (1.7:1 in 2020 compared to 1.2:1 in 2021). The company‘s receivables are being collected more slowly as evidenced by the receivables turnover ratio which decreased from 34.7 times in 2020 to 30.2 times in 2021. In addition, the inventory turnover ratio deteriorated from 32.9 times in 2020 to 23.7 times in 2021 indicating that inventory is not selling as quickly as it did in the prior year. When compared to the industry average, Couche-Tard has a lower current ratio in 2021, a higher receivables turnover ratio, and its inventory turnover ratio is significantly ahead of the industry average.

PROBLEM 10.7B (CONTINUED) b. (continued) In 2021, the company‘s solvency improved because the debt to total assets ratio decreased from 60.8% in 2020 to 57.1% in 2021. This ratio remains significantly higher (worse) than other companies in the industry as the industry average is only 47.9%. Couche-Tard showed a strong times interest earned ratio of 10.4 times in 2021 which is well ahead of its industry peers for that year. In spite of the fact that this company has a higher proportion of debt than its peers, its times interest earned ratio is above average. c.

A bank would be willing to provide a line of credit to a company if it believed that the company had sufficient income to pay the interest on the line of credit. In this case, with an increasing times interest earned ratio, Alimentation Couche-Tard would likely have no problem getting a bank to offer such a form of financing. A line of credit helps the business through short-term liquidity problems during its operating cycle. The fact that none of the $3 billion line of credit has been used by Couche-Tard as of the end of 2021 demonstrates that it is not in great need of cash to meet its obligations. The company is ready to take advantage of opportunities that may come up in the future that would require significant amounts of cash. The bank understands the purpose of the line of credit and expects it to be used for short periods of time and for the purposes described above. Should the line of credit be used for immediate large transactions, those transactions can later be refinanced with more permanent type financing, either by issuing bonds, shares, or by borrowing using term loans with the bank.

LO 3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 10.8B a.

When reviewing the liquidity ratios for the two companies, we can see that the current ratios are similar although slightly lower than the industry average. The receivables turnover ratio shows that Grab ‘N Gab is turning its receivables over faster than Chick ‘N Lick, which indicates that the company is able to convert sales to cash more quickly. However, Chick ‘N Lick is moving its inventory faster than Grab ‘N Gab, as indicated by the inventory turnover ratio. I would be more likely to lend money to Chick ‗N Lick because of its higher inventory turnover. In a fast food industry, inventory turnover is the most important ratio. This is especially true when you note that a receivables turnover ratio of 38 times (365 ÷ 38 = 10 days) is still excellent, even if it is lower than that of its competition. Fast food businesses are, after all, primarily cash businesses.

In reviewing the solvency of these two companies, we see that Chick ‘N Lick‘s debt to total assets ratio is the better of the two companies. However, although Grab ‘N Gab has a higher debt to total assets ratio, its higher times interest earned ratio of 10 times indicates that the company is able to support this level of debt. Chick ‘N Lick‘s times interest earned ratio is significantly lower than Grab ‘N Gab‘s and somewhat lower than the industry average. Nonetheless, the company does not appear to be having solvency problems as it is carrying less debt and still has reasonable interest coverage. Based on this analysis, I would not be significantly concerned about the solvency of either business.

LO 3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*PROBLEM 10.9B a.

Delta Limited – issued at par or 100 with coupon rate 5%: 2024 Jan. 1 Cash ...................................................... 200,000 Bonds Payable ..............................

200,000

b. Dec. 31

Interest Expense ($200,000 × 5%) ......... Cash ..............................................

10,000 10,000

Founders Corp. – issued at a discount price 94 with coupon rate 3%: 2024 Jan. 1 Cash ($200,000 × .94)............................ 188,000 Bonds Payable ..............................

188,000

b. Dec. 31

Interest Expense ($188,000 × 5%) ......... Bonds Payable ($9,400 – $6,000) . Cash ($200,000 × 3%)...................

9,400 3,400 6,000

Grand Inc. – issued at a premium price 108 with coupon rate 7%: 2024 Jan. 1 Cash ($200,000 × 1.08) .......................... 216,000 Bonds Payable ..............................

216,000

b. Dec. 31

Interest Expense ($216,000 × 5%) ......... Bonds Payable ($14,000 – $10,800) ...... Cash ($200,000 × 7%)...................

10,800 3,200 14,000

*PROBLEM 10.9B (CONTINUED) c.

As seen in parts (a) and (b), Delta is the only company that issued bonds at par. This occurred because its coupon rate matched the market rate of interest, both at 5% and therefore, the interest expense it records is equal to the interest paid. In the case of Founders, since its coupon rate of 3% allows it to pay less interest than the market rate of interest, it must issue the bond at a discount and receive less than the face value of the bond at the date of issuance. The discount is the mechanism that the investor uses to obtain a return on the bond equal to the market interest rate. The difference between the $188,000 Founders received and the $200,000 that will be paid at the maturity of the bond will be allocated to interest expense over the term of the bond. This will make the interest expense greater than the amount of interest paid. In the case of Grand, since its coupon rate of 7% forces it to pay more interest than the market rate of interest, it will issue the bond at a premium and receive more than the face value of the bond at the date of issuance. The difference between the $216,000 Grand received and the $200,000 that will be paid at the maturity of the bond will be allocated to interest expense over the term of the bond and reduce the expense. This will make the interest expense less than the amount of interest paid.

Balance in Bonds Payable account December 31, 2024: Delta Limited: Bond issue January 1, 2024 No premium or discount Dec. 31, 2024

$200,000 $200,000

Founders Corp: Bond issue January 1, 2024 Plus amortization of bond discount Balance Dec. 31, 2024

$188,000 3,400 $191,400

Grand Inc.: Bond issue January 1, 2024 Less amortization of bond premium Balance Dec. 31, 2024

$216,000 3,200 $212,800

LO 4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 10.10B a.

PONASIS CORPORATION Bond Discount Amortization

(A) Interest to Be Paid (6% × 6/12 = 3%)

Semiannual Interest Periods July 1/24 Jan.1/25 July 1/25 Jan.1/26 b.

$30,000 30,000 30,000

$32,513 32,601 32,692

$2,513 2,601 2,692

(D) Unamortized Discount (D) – (C)

(E) Bond Carrying Amount ($1,000,000 – D)

$71,062 68,549 65,948 63,256

$928,938 931,451 934,052 936,744

The amortization of the discount increases each period because, with every payment, the carrying amount of the bond increases and therefore the amount of interest expense increases each period. Because the interest payment is fixed at $30,000, and is lower than the growing interest expense, the portion that is recorded to the amortization of the bond discount is larger each period.

c. July

(B) Interest Expense (7% × 6/12 = 3.5%)

Dec. 31

2024 Cash .............................................. Bonds Payable ...................... 2024 Interest Expense ............................ Bonds Payable ...................... Interest Payable.....................

928,938 928,938

32,513 2,513 30,000

*PROBLEM 10.10B (CONTINUED) e. PONASIS CORPORATION Statement of Financial Position (Partial) December 31, 2024 Liabilities

Current liabilities Interest payable .......................................................

$ 30,000

Non-current liabilities Bonds payable, due 2034 ....................................... Total liabilities .................................................

931,451 $961,451

2025 Interest Payable ........................ Cash .................................

30,000

Jan.

July

g. Nov. 30

h. Jan. 1

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

2024 Interest Expense ($32,513 x 5/6) ... Bonds Payable ($2,513 x 5/6) Interest Payable ($30,000 x 5/6) 2025 Interest Payable ............................. Interest Expense ($32,513 x 1/6) ... Bonds Payable ($2,513 x 1/6) Cash ......................................

30,000

32,601 2,601 30,000

27,094 2,094 25,000

25,000 5,419 419 30,000

LO 3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 10.11B a.

Key inputs:

Future value (FV) = $1,000,000 Market interest rate (i) = 3.5% (7% × 6/12) Interest payment (PMT) = $30,000 ($1,000,000 × 6% × 6/12) Number of semi-annual periods (n) = 20 (10 years × 2)

Present value of $1,000,000 received in 20 periods ($1,000,000 × 0.50257) (n = 20, i = 3.5%) Present value of $30,000 received each of 20 periods ($1,000,000 × 3% × 14.21240) (n = 20, i = 3.5%) Present value (issue price) of the bonds

$502,570 426,372 $928,942

Carrying amount December 31, 2024: Present value of $1,000,000 received in 19 periods ($1,000,000 × 0.52016) (n = 19, i = 3.5%) Present value of $30,000 received each of 19 periods ($1,000,000 × 3% × 13.70984) (n = 19, i = 3.5%) Carrying amount of the bonds

$520,160 411,295 $931,455

The amounts calculated in a. and b. above are different because the amortization and interest payment periods have reduced by one six-month period in part b. Since the amortization period is shorter by one period, the present value of the future cash flows is higher in b. Interest expense has been accrued in the six-month period between July 1, 2024 and December 31, 2024 and so the account affected besides the Bond Payable account is the Interest Expense account.

*PROBLEM 10.11B (CONTINUED) d.

Key inputs:

Future value (FV) = $1,000,000 Market interest rate (i) = 2.5% (5% × 6/12) Interest payment (PMT) = $30,000 ($1,000,000 × 6% × 6/12) Number of semi-annual periods (n) = 20 (10 years × 2)

Present value of $1,000,000 received in 20 periods ($1,000,000 × 0.61027) (n = 20, i = 2.5%) Present value of $30,000 received each of 20 periods ($1,000,000 × 3% × 15.58916) (n = 20, i = 2.5%) Present value (issue price) of the bonds

$610,270 467,675 $1,077,945

The difference in the amount calculated in a. of $928,942 and the amount calculated in d. of $1,077,945 is due to the difference in the market rate of interest. All other variables as key inputs in the calculation remain the same. In the case of a., the market rate per year was 7% which was higher than the rate paid by the bond of 6%, causing the bond to be issued at a discount. In the case of d., the market rate per year was 5% which was lower than the 6% rate paid by the bond, causing the bond to be issued at a premium. LO 4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

ACR10.1

ACCOUNTING CYCLE REVIEW

a. and c.

Dec. 31 #9

Bal.

Dec. 31 #8 Bal.

Cash 70,000 #1 780,000 #3 #5 #6 #7 #13 #17 140,921

12,000 24,000 92,000 218,079 9,000 350,000 4,000 #13

Accounts Receivable 480,000 #9 800,000 #10 #16 448,000

780,000 16,000 #1 36,000

Accumulated Depreciation—Equipment Dec. 31 480,000 #4 44,000 Bal. 524,000

Allowance for Expected Credit Losses Dec. 31 24,000 #5 #10 16,000 #11 22,000 Bal. 30,000 Dec. 31 #12 #16 Bal.

Inventory 356,000 #8 250,000 #15 9,000 413,750

Estimated Inventory Returns Dec. 31 10,000 #16 #8 10,000 Bal. 11,000 Prepaid Insurance Dec. 31 0 #3 24,000 # 3 Bal. 22,000 Dec. 31

Accounts Payable Dec. 31 350,000 #12 #12 Bal.

281,000 250,000 49,000 230,000

Interest Payable 4,000 Dec. 31 #2 Bal.

4,000 3,973 3,973

Employee Income Tax Payable 52,000 Dec. 31 52,000 #6 42,700 Bal. 42,700

200,000 1,250 #5

CPP Payable 28,000 Dec. 31 #6 #6 Bal.

28,000 14,797 14,797 29,594

9,000

EI Payable 12,000 Dec. 31 #6 #6 Bal.

12,000 4,424 6,194 10,618

2,000

Equipment 1,800,000

ACR10.1 (CONTINUED) a. and c. (continued) Provisions Dec. 31 #14 Bal.

#16

#15

Refund Liability 36,000 Dec. 31 #8 Bal. Deferred Revenue 5,000 Dec. 31 Bal.

Bank Loan Payable 8,000 Dec. 31 Bal. Common Shares Dec. 31 Retained Earnings Dec. 31

#16

35,000 20,000 55,000

#8 #15 Bal.

#12 40,000 #1 40,000 4 44,000 B al. 12,000 7,000 #6

Administrative Expenses 49,000 20,000 69,000 Salaries Expense 280,000

Employee Benefits Expense 20,991

Insurance Expense 2,000

Depreciation Expense 44,000

#11

Credit Losses 22,000

Interest Expense 3,973

1,200,000 1,192,000

60,000

488,000

Dividends Declared 4,000 Sales #8 #15 Bal.

Cost of Goods Sold 190,000 1,250 191,250

760,000 5,000 #7 765,000

Income Tax Expense 9,000

ACR10.1 (CONTINUED) b. Transactions: Item 1

Account Titles

Debit

Interest Payable ........................................................ Bank Loan Payable ................................................... Cash ................................................................. *(1,200,000 x .04 x 1/12 = 4,000)

4,000* 8,000

Prepaid Insurance ..................................................... Cash .................................................................

24,000

CPP Payable ............................................................. EI Payable ................................................................. Employee Income Tax Payable ................................ Cash .................................................................

28,000 12,000 52,000

Salaries Expense ...................................................... CPP Payable .................................................... EI Payable ........................................................ Employee Income Tax Payable........................ Cash .................................................................

280,000

Employee Benefits Expense ..................................... CPP Payable .................................................... EI Payable ........................................................

20,991

Income Tax Expense ................................................ Cash .................................................................

9,000

Accounts Receivable................................................. Refund Liability (5% x $800,000) ..................... Sales ................................................................

800,000

190,000 10,000

Credit

12,000

24,000

92,000

14,797 4,424 42,700 218,079

14,797 6,194

9,000

40,000 760,000

200,000

ACR10.1 (CONTINUED) a. and c. (continued) Transactions: Item 9

Account Titles

Debit

Cash ......................................................................... Accounts Receivable ........................................

780,000

Allowance for Expected Credit Losses ...................... Accounts Receivable ........................................

16,000

Credit Losses ............................................................ Allowance for Expected Credit Losses .............

22,000

Credit

780,000

16,000

22,000

[$30,000 - ($24,000 – $16,000)] 12

Inventory ................................................................... Accounts Payable ............................................

250,000

Administrative Expenses ........................................... Accounts Payable ............................................

49,000

Accounts Payable ..................................................... Cash .................................................................

350,000

Refund Liability ......................................................... Accounts Receivable ........................................

36,000

Inventory ($36,000 x 25%) ........................................ Estimated Inventory Returns ............................

9,000

Dividends Declared ................................................... Cash .................................................................

4,000

250,000

49,000

350,000

36,000

9,000

4,000

ACR10.1 (CONTINUED) Adjusting Entries 2

Interest Expense ....................................................... Interest Payable ............................................... ($1,200,000 – $8,000) x 4% x 1/12

3,973

Insurance Expense ($24,000 ÷ 12) ........................... Prepaid Insurance ............................................

2,000

Depreciation Expense ............................................... Accumulated Depreciation—Equipment .......... ($1,800,000 – $480,000) x 40% x 1/12

44,000

Administrative Expenses ........................................... Provisions.........................................................

20,000

Deferred Revenue ($12,000 – $7,000)...................... Sales ................................................................

5,000

Cost of Goods Sold ($5,000 x 25%) .......................... Inventory ..........................................................

1,250

3,973

2,000

44,000

20,000

5,000

1,250

ACR10.1 (CONTINUED) d. WASCANA LTD. Adjusted Trial Balance January 31, 2024 Cash Accounts receivable Allowance for expected credit losses Inventory Estimated inventory returns Prepaid insurance Equipment Accumulated depreciation–equipment Accounts payable Interest payable Employee income tax payable CPP payable EI payable Provisions Refund liability Deferred revenue Bank loan payable Common shares Retained earnings Dividends declared Sales Cost of goods sold Administrative expenses Salaries expense Employee benefits expense Insurance expense Depreciation expense Credit losses Interest expense Income tax expense

$140,921 448,000 $30,000 413,750 11,000 22,000 1,800,000 524,000 230,000 3,973 42,700 29,594 10,618 55,000 44,000 7,000 1,192,000 60,000 488,000 4,000 765,000 191,250 69,000 280,000 20,991 2,000 44,000 22,000 3,973 9,000 $3,481,885

____ ____ $3,481,885

ACR10.1 (CONTINUED) e. (1) WASCANA LTD. Statement of Income Month Ended January 31, 2024 Sales ......................................................................... Cost of goods sold ...................................................... Gross profit ................................................................ Operating expenses Administrative expenses .................................... Salaries expense ............................................... Employee benefits expense ............................... Insurance expense ............................................ Depreciation expense ........................................ Credit losses ...................................................... Income from operations .............................................. Other income and expenses ... Interest expense ................................................ Income before income tax .......................................... Income tax expense ................................................... Net income .................................................................

$765,0 191,250 573,750 $ 69,000 280,000 20,991 2,000 44,000 22,000

437,991 135,759 3,973 131,786 9,000 $122,786

e. (2) WASCANA LTD. Statement of Changes in Equity Month Ended January 31, 2024

Common Shares Balance, December 31, 2022 ........................ $60,000 Net income .................................................... Dividends declared ........................................ 00 000 Balance, January 31, 2023 ............................ $60,000

Retained Earnings $488,000 122,786 (4,000) $606,786

Total Equity $ 548,000 122,786 (4,000) $666,786

ACR10.1 (CONTINUED) e. (3)

WASCANA LTD. Statement of Financial Position January 31, 2024 Assets

Current assets Cash ................................................................... Accounts receivable............................................ $448,000 Less: allowance for expected credit losses......... 30,000 Inventory ............................................................. Estimated inventory returns ................................ Prepaid insurance ............................................... Total current assets .............................................. Property, plant, and equipment Equipment .......................................................... $1,800,000 Less: Accumulated depreciation—equipment.... 524,000 Total assets ............................................................................

$ 140,921 418,000 413,750 11,000 22,000 1,005,671

1,276,000 $2,281,671

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable .......................................................... Employee income tax payable ....................................... CPP payable .................................................................. EI payable...................................................................... Provisions* ..................................................................... Interest payable ............................................................. Deferred revenue ........................................................... Refund liability ............................................................... Current portion of bank loan payable ............................. Total current liabilities ........................................... Non-current liabilities Bank loan payable ......................................................... Total liabilities ....................................................... Shareholders‘ equity Common shares ............................................................ Retained earnings.......................................................... Total shareholders‘ equity ..................................... Total liabilities and shareholders‘ equity .................................

$ 230,000 42,700 29,594 10,618 55,000 3,973 7,000 44,000 98,106 520,991 1,093,894 1,614,885 60,000 606,786 666,786 $2,281,671

* The provisions could potentially be classified as non-current depending on when management anticipates having to settle the obligation. LO 1,2,3 BT: AP Difficulty: C Time: 75 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT10.1

FINANCIAL STATEMENT IMPACT Current Assets

Current Liabilities

NonCurrent Liabilities

No change

Understated

No change

Understated

No change

Understated

No change

Understated

No change

Overstated

No change

Overstated

No change

Understated

Overstated

No change

Overstated

No change

Understated

No change

f. Failed to record employee benefits expense for a payroll accrual

No change

Understated

No change

Understated

AACSB:

Error a. Failed to accrue a provision for estimated repairs on products with a one-year warranty b. Did not accrue interest on note payable due in two months c. Recorded a mortgage payment by debiting the full amount paid to the bank to interest expense d. Reported the current portion of a mortgage payable as a non-current liability e. Failed to record revenue for a completed job where the company collected a deposit in advance from the customer

1,2,3

BT:

Difficulty:

Time:

min.

Revenues

Expenses

Analytic

CPA:

cpa.t001

CM:

Reporting

CT10.2 a.

FINANCIAL REPORTING CASE

The North West Company Inc. shows the following current and noncurrent liabilities on its consolidated balance sheet at January 31, 2022: Current liabilities: Accounts payable and accrued liabilities Current portion of long-term debt Current portion of lease liabilities Income tax payable Non-current liabilities: Long-term debt Lease liabilities Deferred benefit plan obligation Deferred tax liabilities Other long-term liabilities

The current portion for long-term debt at January 31, 2022 is $46,262,000. Of this amount $45,107,000 is for the revolving loan facility and $1,155,000 is for non-interest bearing promissory notes that are secured by certain assets of North West.

North West has chosen both fixed and floating interest rates when negotiating terms for their long-term senior notes payable. A floating rate loan will initially pay less interest, but as the prime lending rate changes so does the amount of interest that is charged on the balance owed on the notes. Since the senior notes repayment is typically several years in length, this changing of interest rate reduces the risk to the financial institution to get a proper return on their loan to North West. With the fixed interest rate, the initial interest rate paid is higher, but the rate does not change over the term of the loan. Using this strategy, North West has protected itself to some degree, against the effects of changing interest rates.

LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

CT10.3

FINANCIAL REPORTING CASE

a. Ratios 1. Current ratio

2. Receivables turnover

3. Inventory turnover

4. Debt to total assets

5. Times interest earned

North West ($ in thousands) $403,358 $294,490

= 1.4:1

$2,248,796 = 23.6 times $99,241 + $91,443 2

$1,511,045 = 6.4 times $247,988 + $226,962 2

$639,069 $1,219,273

= 52.4%

$157,451 + $49,916 + $13,058 = 16.9 times $13,058

Sobeys ($ in millions) $3,185.8 $4,153.3

$30,164.2 $558.8 + $547.0 2

= 0.8:1

= 54.6 times

$22,502.7 = 14.6 times $1,591.5 + $1,500.1 2

$11,245.6 $15,366.1

$754.6 + $257.2 + $280.8 $280.8

= 73.2%

= 4.6 times

CT10.3 (CONTINUED) b.

Liquidity: Based on the current ratio, North West is more liquid than Sobeys. For the receivable and inventory turnover ratios, Sobeys is substantially higher than North West. North West must be offering terms on some of their sales, which is not the case for Sobeys. This may in part be due to higher amounts of accounts receivable for North West as indicated by its lower receivables turnover. North West‘s inventory turnover is much lower than Sobeys. Compared to the industry average, both North West and Sobeys have lower current ratios than the industry average. The same is true for the receivables turnover. In the case of the inventory turnover ratios, Sobeys‘ ratios are higher than the industry while North West‘s are lower. All of the ratios are important for the assessment. Solvency: The higher a company‘s percentage of debt to total assets is, the greater the risk that this company may be unable to meet its maturing obligations. North West‘s debt to total assets ratio of 52.4% is higher (worse) than that of the industry average of 47.9%, as is Sobeys at 73.2%. North West has a times interest earned ratios that is well ahead of the industry average of 6.7 times, while Sobeys falls short of the industry average. The companies are very able to make their interest payments but Sobeys appears to have a higher solvency risk since its debt ratio is very high and its times interest earned is low. Both ratios are important.

LO 3 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT10.4

FINANCIAL ANALYSIS CASE

2024 $ 2,000 20,000 30,000 52,000

2023 $10,000 5,000 7,500 22,500

Property, plant and equipment, net Total assets

60,000 $112,000

50,000 $72,500

Current liabilities: Accounts payable Non-current liabilities Total liabilities

$ 30,930 40,000 $ 70,930

$16,550 30,000 $46,550

$24,000 (1)

$20,000 (2)

Income before taxes and interest (1) $100,000 – $50,000 – $26,000 (2) $50,000 – $20,000 – $10,000

Average $6,000 12,500 18,750 37,250

CT10.4 (CONTINUED) a. (continued) Please note that when calculating turnover ratios, amounts from the current year statement of financial position are used as given in the instructions. 2024

in thousands

2023

1. Current ratio

$52,000 $30,930

2. Receivables turnover

$100,000 $20,000

3. Inventory turnover

$50,000 $30,000

= 1.7 times

$20,000 $7,500

= 2.7 times

4. Debt to total assets

$70,930 $112,000

= 63.3%

$46,550 $72,500

= 64.2%

5. Times interest earned

$24,000 $2,400

= 1.7:1

= 5.0 times

= 10.0 times

$22,500 $16,550

$50,000 $5,000

$20,000 $1,500

= 1.4:1

= 10.0 times

= 13.3 times

Although Jim might conclude that profitability and liquidity has improved, a closer scrutiny of all ratios reveals issues with the liquidity and solvency of Atlas Limited. The current ratio has increased from 1.4:1 to 1.7:1 in 2024 but this was due to the high levels of accounts receivable and inventory. The receivables turnover has deteriorated substantially from 10 times in 2023 to only 5 times in 2024. The inventory turnover has also deteriorated, from 2.7 times to 1.7 times. Atlas needs to improve its collection of receivables and its inventory turnover. Furthermore, Jim needs to keep in mind that some cash has been retained by negotiating an interest-only loan that will end in 2026. This advantage will not continue forever.

CT10.4 (CONTINUED) b. (continued) From a solvency point of view, Atlas has a very similar debt to total assets ratio in both years but the ratio remains rather high given that more than 60% of the company‘s assets have been purchased with debt financing. In addition, Atlas‘ times interest earned ratio had diminished from 13.3 times in 2023 to 10 times in 2024, indicating a strong, but reduced, capability to pay the interest on the loan. Furthermore, it is likely that the existing loan is secured by the plant and equipment. The loan now represents 67% of the plant and equipment balance, up from 60% of the year before. This increase arises because the carrying value of plant and equipment is declining. c.

Some of the underlying causes for the slowdown in the turnover of accounts receivable might be that Atlas has given its customers too generous terms for payment, possibly to improve sales or there has been a lack of attention paid to delinquent accounts. In looking at the statement of income, the banker will notice that gross profit did not rise as much as sales. This is due in part to the fact that cost of goods sold is now 50% of sales in 2024 compared to 40% of sales in 2023. Also, although sales have doubled, operating expenses more than doubled and lastly, it appears that the interest rate on the loan has risen to 6% from 5%. These factors that have decreased profitability will concern the banker. A final area of concern for the banker will be the future settlement of the contingent liability stemming from the lawsuit launched against Atlas. Although no amount could be accrued for this contingency as no reasonable estimate could be arrived at, the mere mention of this looming potential obligation will rightly bring doubt as to Atlas‘ ability to deal with any related payments in the near future.

LO 3 BT: S Difficulty: C Time: 40 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT10.5

ETHICS CASE

a. 1. Debt to total assets

$45,000 $100,000

45%

2. Times interest earned

$120,000 $20,000

6 times

b. Error Error description

Accounts affected

Direction

Amount

Interest not accrued

Interest Expense Interest Payable

Understated Understated

$2,500 2,500

Posting of interest payment

Interest Expense Bank Loan Payable

Understated Understated

1,800 1,800

Sale of gift cards

Sales Deferred Revenue

Overstated Understated

2,700 2,700

Effect of error on income before taxes (net) Overstatement of Sales $2,700 Understatement of Interest Expense 2,500 Understatement of Interest Expense 1,800 Total overstatement of income before taxes 7,000 Income taxes at 30% 2,100 Net income effect $(4,900) Income Tax Expense overstated by Income Tax Payable overstated by

2,100 2,100

CT10.5 (CONTINUED) d.

All of the errors identified above will affect the calculation of debt but none of the errors affect assets. Therefore, the revised debt is:

As originally determined Correct error #1 – interest not accrued Correct error #2 – loan payment not allocated to interest Correct error #3 – deferred revenue understated Correct error #4 – overstatement of income tax Corrected balance

$45,000 2,500 1,800 2,700 (2,100) $49,900

Only error #3 will affect the numerator (net income before interest and income tax) of the times interest earned ratio because this ratio excludes interest and income tax from the numerator and errors #1, #2, and #4 affect interest or income tax. Therefore, the revised numerator is $120,000 – the effect of error #3 of $2,700 = $117,300. Interest expense (the denominator in the times interest earned ratio) will be revised as follows: As originally determined Correct error #1 – interest not accrued Correct error #2 – loan payment not allocated to interest Corrected balance

1. Debt to total assets

2. Times interest earned

$20,000 2,500 1,800 $24,300

$49,900 = 49.9% $100,000

$120,000 – $2,700 $20,000 + $2,500 + $1,800

= 4.8 times

Based on the revised calculations, ABC is close to breaching the covenant pertaining to debt to total assets, and below the requirement for times interest earned.

CT10.5 (CONTINUED) f.

Although all the errors affected the elements in the two ratios in adverse ways, it is unlikely that the errors were intentional. An indication of this conclusion is that the errors were detected by Jennifer Woo.

LO 1,2,3 BT: S Difficulty: C Time: 10 min. AACSB: Analytic, Communication and Ethics CPA: cpa-t001, cpa-t005, cpa-e001 CM: Reporting, Finance and Ethics

CT10.6

DATA ANALYTICS CASE

Ratios are used by financial institutions in assessing the liquidity and solvency of a company. These ratios are also used in some conditions of loans. Covenants concerning the maintenance of a certain current ratio might be a condition of a loan. Software can continuously monitor the current ratio of a company, alerting management in the case where the ratio is approaching the limits set in a loan. Once alerted, management can take action to avoid defaulting on the loan from a breach in the covenant.

Information concerning the number of days between a purchase invoice date and the date of the payment can be used to compare to the terms of payment of that specific purchase invoice. Should the terms of the invoice not be met, management can be alerted to the potential damage of supplier relationships and take corrective action. In the case where a discount is offered for early payment, any missed discounts can also be followed up by management to ensure that missed discounts do not occur in the future.

Data analytics can be a strong internal control tool in the verification of authorized transactions. Checking that the price quoted and approved on a purchase should be the same as the invoiced price. Any variation in the price should be followed up to ensure that the change has been properly authorized by a designated person.

Companies can use data analytics to estimate provisions in a variety of ways. The provision for warranty liabilities is based on the best estimate available at the time of the sale. Subsequent transactions involving the actual work to satisfy a warranty will play a significant role in assessing the validity of the original estimate. Once measurable, the estimate for the provision for warranties can be adjusted to report a fairer estimate of the future obligation under the warranty.

If a company has debt that carry variable rates of interest, it will be susceptible to additional interest changes if interest rates were to rise. Projections of additional interest expense and additional cash outflows can be made based on the assumption of changes in interest rates.

LO 1,2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT10.7 a.

The balance of the mortgage payable at November 25, 2024 is $45,372 as calculated below.

Monthly Interest Period June July Aug. Sept. Oct. Nov.

SERIAL CASE

25, 2024 25, 2024 25, 2024 25, 2024 25, 2024 25, 2024

(A) Cash Payment Balance $667 667 667 667 667

(B) Interest Expense (D) × 5% × 1/12

$199 197 195 193 191

$468 470 472 474 476

(D) Principal Balance (D) – (C) $47,732 47,264 46,794 46,322 45,848 45,372

The $45,372 balance of the mortgage payable at November 25, 2024 will increase by $25,000 to a total of $70,372 after the mortgage is renegotiated. Nov. 25, 2024 25,000

Cash..................................................... Mortgage Payable ........................

25,000

CT10.7 (CONTINUED) c.

Monthly Interest Period

(A) Cash Payment

(B) Interest Expense (D) × 4% × 1/12

(D) Principal Balance (D) – (C)

Nov. Dec.

25, 2024 25, 2024

Balance $1,296

$235

$1,061

$70,372 69,311

Jan. Feb.

25, 2025 25, 2025

1,296 1,296

231 227

1,065 1,069

68,246 67,177

Mar. Apr. May June July Aug. Sept. Oct.

25, 2025 25, 2025 25, 2025 25, 2025 25, 2025 25, 2025 25, 2025 25, 2025

1,296 1,296 1,296 1,296 1,298 1,296 1,296 1,296

224 220 217 213 210 206 202 199

1,072 1,076 1,079 1,083 1,086 1,090 1,094 1,097

66,105 65,029 63,950 62,867 61,781 60,691 59,597 58,500

Nov. Dec. Jan. Feb. Mar. Apr.

25, 2025 25, 2025 25, 2026 25, 2026 25, 2026 25, 2026

1,296 1,296 1,296 1,296 1,296 1,296

195 191 188 184 180 177

1,101 1,105 1,108 1,112 1,116 1,119

57,399 56,294 55,186 54,074 52,958 51,839

May June

25, 2026 25, 2026

1,296 1,296

173 169

1,123 1,127

50,716 49,589

CT10.7 (CONTINUED) d. First Instalment Payment 2024 Dec. 25 Interest Expense ............................................ Mortgage Payable .......................................... Cash .............................................

235 1,061 1,296

Second Instalment Payment 2025 Jan. 25 Interest Expense ............................................ Mortgage Payable .......................................... Cash .............................................

231 1,065 1,296

ANTHONY BUSINESS COMPANY LTD. Statement of Financial Position (Partial) June 30, 2025

Liabilities Current liabilities Current portion of mortgage payable ($62,867 – $49,589) Non-current liabilities Mortgage payable, due in 2026 Total liabilities

$13,278

49,589 62,867

LO 1,2 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic and Communication CPA: cpa-t001 CM: Reporting

Legal Notice

CHAPTER 11 REPORTING AND ANALYZING SHAREHOLDERS’ EQUITY LEARNING OBJECTIVES 1. Identify and discuss the major characteristics of a corporation. 2. Record share transactions. 3. Prepare the entries for cash dividends, stock dividends, and stock splits, and understand their financial impact. 4. Discuss how shareholders‘ equity is reported. 5. Evaluate dividend and earnings performance.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO BT Item LO 1. 2.

1 1

C AP

7. 8.

2 2

BT Item LO BT Item LO Questions

BT Item LO BT

C K

K C

13. 14.

2 3

C K

19. 20.

4 4

25. 26.

5 5

AN C

3. 4.

1 1

C C

9. 10.

2 2

K C

15. 16.

3 3

C C

21. 22.

4 4

C C

27. 28.

5 5

C AN

11.

17.

23.

12.

18.

24.

K 17. 18.

5 5

AP AP

13. 14. 15.

5 5 5

AN AN AN

Brief Exercises 1. 2.

1 2

C AP

5. 6.

2 3

AN AP

9. 10.

3 4

AN AN

13. 14.

5 5

AN AN

11.

15.

12.

16.

10. 11. 12.

4 5 5

AP AN AP

5 5

AN AN

2,3,4

Exercises 1. 2. 3.

1 2 2

AN AP AN

4. 5. 6.

2 2,3 3

AN AP AP

7. 8. 9.

2,3,4 4 4

AN C AP

Problems: Set A and B 1. 2. 3.

2,3,4 2,3,4 2,3,4

AN AN AN

2,3,4

1. 2.

2,3 4,5

C C

4. 5. 6.

2,3,4 2,3,4 3

AP AP AN

7. 8. 9.

3,4 5 5

AP AP AN

10. 11.

Accounting Cycle Review Cases 3. 4.

1,5 2,3,4,5

C S

5. 6.

3 5

C E

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

(a) (1) Separate legal existence. A corporation is separate and distinct from its shareholders (owners) and acts in its own name rather than in the name of its shareholders. In addition, the acts of the shareholders do not bind the corporation unless the shareholder is a duly appointed agent of the corporation. This is an advantage to the corporate form of organization. (2) Limited liability of shareholders. Because of its separate legal existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of shareholders is normally limited to their investment in the corporation. This is an advantage to the corporate form of organization. (3) Transferable ownership rights. Ownership of a corporation is shown in shares, which are transferable. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is entirely at the discretion of the shareholder. This is an advantage to the corporate form of organization. (4) Ability to acquire capital. Corporations can raise capital quite easily by issuing shares. Public corporations have an almost unlimited ability to acquire capital. Investors find shares of corporations to be attractive since they need not invest large sums of money to become shareholders. In addition, shareholders benefit from limited liability. This is an advantage to the corporate form of organization. (5) Continuous life. Since a corporation is a separate legal entity, its continuance as a going concern is not affected by the withdrawal, death, or incapacity of a shareholder, employee, or officer. This is an advantage to the corporate form of organization.

(a) (continued) (6) Separation of management and ownership. Although the shareholders of a corporation are its owners, it is the board of directors that decides on the operating policies of the company. The shareholders seldom get involved in the company‘s day-today activities. This is normally seen to be an advantage to the corporate form of organization. (7) Government regulations. Corporations in Canada may incorporate federally or provincially. Government regulations usually provide guidelines for issuing shares, distributing net income, and reacquiring shares. Provincial securities commissions also govern the sale of share capital to the general public. When a corporation‘s shares are listed or traded on a stock exchange, it must adhere to the reporting requirements of that exchange. This may be a disadvantage to the corporate form of organization because it adds extra cost and complexity to the organization. (8) Income tax. Corporations must pay federal and provincial income tax as separate legal entities. However, corporations usually benefit from more favourable tax rates than do the owners of partnerships or proprietorships. The shareholders of the corporation do not pay tax on the corporation‘s net income unless they receive dividends from the corporation. This is often seen to be an advantage to the corporate form of organization. (b)

While public corporations have an almost unlimited ability to acquire capital, this is not the case for private corporations. In addition, transferring ownership rights can be much more limited given that private corporation shares are not publicly traded. Private companies do not have as stringent reporting and disclosure requirements as public companies.

LO 1 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

(a)

Letson has 60,000 shares issued and is eligible to issue an additional 40,000 shares (100,000 – 60,000).

(b)

Only issued shares are recorded in the general journal. The number of authorized shares is disclosed but not recorded until issued.

LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

When Richard purchased the original shares as part of Aritzia Inc.‘s initial public offering, he purchased these shares directly from the corporation. The $1,600 (100 × $16) he spent to buy the shares went directly to Aritzia and increased the company‘s assets (Cash) and shareholders‘ equity (Common Shares). There was no impact on the company‘s liabilities. In the subsequent purchase, Richard bought shares in the secondary market from another investor or investors. The proceeds from this sale went to the seller and not to Aritzia. Therefore, there was no impact on Aritzia‘s assets, liabilities, or shareholders‘ equity as a result of the second purchase.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Market capitalization is the measure of the fair value of a corporation‘s equity. It is calculated by multiplying the number of shares issued by the share market price at any given date. It should not be confused with a corporation‘s legal capital which represents the amount paid to the corporation on the initial and any subsequent issue of shares and consequently is the amount that appears on the statement of financial position. The market price of Dollarama‘s shares rose between 2021 and 2022 causing a corresponding rise in market capitalization. Dollarama Inc.‘s market capitalization increased in 2022. There are two primary reasons for a change in the market capitalization of a company, which may happen separately or in combination and can also offset one another. First, the number of shares decreased because the company repurchased some of its shares. This would cause the market capitalization to decrease. In this case, assets (Cash) and shareholders‘ equity (Common Shares) decrease as a result of the repurchase. Liabilities would be unaffected.

4. (continued) The second and more likely reason for the change in the market capitalization is the increase in the market price of the shares. In this case the market capitalization increased to a larger extent than the decrease caused by the repurchase of shares. Increases in the market price of the shares can result from a number of reasons but are most likely due to the market‘s perception of the future ability of the corporation to earn income. As a result, investors bid up the price paid for the shares on the market. This second possible reason for the change in market capitalization does not affect any element on the statement of financial position. LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Legal capital is the portion of a company‘s share capital that cannot be distributed to shareholders. Legal capital is created largely for the protection of creditors. (b) The proceeds received by the company when issuing shares determine the carrying amount of the shares recorded in the accounts. The proceeds are considered to be legal capital that must remain invested in the company for the protection of corporate creditors. (c) Legal capital is kept separate from retained earnings because retained earnings may be distributed to shareholders in the form of dividends, whereas legal capital may not be distributed to shareholders until the company is liquidated.

(a)

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

Preferred shareholders have priority over common shareholders with respect to the distribution of dividends and, in the event of liquidation, over the distribution of assets. Preferred shareholders do not usually have the voting rights that the common shareholders have.

(b)

Companies issue preferred shares for a permanent type of equity financing for the company. They issue preferred shares to appeal to a larger segment of investors. Also, issuing preferred shares (which are usually non-voting) does not dilute ownership interest of common shareholders.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

When shares are issued for a consideration other than cash, such as goods or services, IFRS requires that the transaction be recorded at the fair value of the consideration received. If the fair value of the consideration received cannot be reliably determined, then the fair value of the consideration given up (for example, shares) can be used. When shares are issued for a noncash consideration in a private company following ASPE, the valuation of the shares can be slightly different than that described above for a publicly traded company following IFRS. The shares of a private company should be recorded at the most reliable of the two values—the fair value of the consideration (such as goods or services) received or fair value of the consideration given up (such as shares). Quite often, the fair value of the consideration received is the more reliable value because a private company‘s shares seldom trade and therefore do not have a ready market value.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

A normal course issuer bid is synonymous with the repurchase of shares. In a normal course issuer bid, a company is allowed to repurchase up to a certain percentage of its shares subject to regulatory approval. It can purchase the shares gradually over a period of time, such as one year. This repurchasing strategy allows the company to buy when its shares are favourably priced.

(b)

A corporation may acquire its own shares (1) to increase trading of the corporation's shares in the stock market, in the hopes of enhancing its market value, (2) to reduce the number of shares issued and increase basic earnings per share and return on equity ratios, (3) to eliminate hostile shareholders by buying their shares, and (4) to have additional shares to issue if required to compensate employees using stock options, or to acquire other businesses.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Because companies cannot realize a gain or incur a loss from share transactions with their own shareholders, these amounts are not reported on the statement of income. They are seen instead as an excess or deficiency that belongs to the remaining shareholders and are recorded directly into the shareholders‘ equity accounts such as Contributed Surplus or Retained Earnings.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

When reacquiring shares, if the amount paid by the company is less than the average cost of the shares on hand, the difference is credited to Contributed Surplus, increasing it. If the opposite is true (i.e., the amount paid to reacquire the shares is greater than the average cost of the shares on hand), the difference is applied to reduce (debit) Contributed Surplus, but because that account cannot have a negative (debit) balance, if the debit arising from the repurchase is greater than the balance in the Contributed Surplus account, then the remainder of the debit is applied against the Retained Earnings account, reducing it.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

David should expect to receive a dividend in the amount of $478.13 (1,500 shares × $1.275 ÷ 4) each quarter. When the Bank of Montreal resets the dividend rate, it will be adjusted to more closely reflect market interest rates. If David invested in the preferred shares because he hoped to earn a more attractive return from dividends compared to the rate of return he could receive from interest earned on a debt investment, he may be disappointed when the dividend rate is reset at the lower market interest rate. On the other hand, because the resetting of the dividend rate occurs only periodically, if David believes that interest rates will fall, he may be very pleased to own these preferred shares (at least until the dividend rate is reset at the same level as the lower interest rates). Furthermore, if David believes that the interest rates will be volatile in the future, the reset feature will make the investment in the preferred shares more appealing because at least until the next reset, David will know what his rate of return will be.

LO 2 BT: AP Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

12.

(a)

Redeemable (or callable) preferred shares give the issuing corporation the right to purchase these shares from shareholders at specified future dates and prices. Retractable preferred shares are similar to redeemable or callable preferred shares, except that it is at the shareholder‘s option, rather than the corporation‘s option, that the shares are redeemed. This usually occurs at an arranged price and date.

(b)

Preferred shares are cumulative or noncumulative with respect to their dividend provisions. Cumulative preferred shares entitle the shareholder to any previous years‘ dividends that have not yet been paid, as well as their current dividend, before common shareholders can receive any dividends.

(c)

Dividends in arrears can only arise from cumulative preferred shares. If a dividend is not declared for a noncumulative preferred share, the dividend entitlement is erased and does not carry forward into the future. On the other hand, if a dividend is not declared for a cumulative preferred share, the amount of the dividend shortfall becomes dividends in arrears which must be paid first from any dividend declared in the future.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

Rate reset preferred shares give the company the right to reset the dividend rate periodically, usually every five years. Fixed-rate preferred shares do not provide for the option to change the dividend rate. Investors would prefer the rate reset preferred shares on the assumption that interest rates are predicted to rise over the long term. The reason shareholders would find rate reset preferred shares more attractive is that they will be able to receive higher dividends in the future when the dividend rate is adjusted to a higher rate caused by the rise in interest rates.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

Cash dividends cannot exceed the balance of the Retained Earnings account. For a cash dividend to be paid, a corporation must meet a solvency test to ensure that it has sufficient cash to be able to pay its liabilities as they become due after the dividend is declared and paid. The test essentially requires the net realizable value of the assets of a company to exceed the total of its liabilities and share capital. In addition, a formal dividend declaration by the board of directors is required. Also, any required preferred dividends must be paid before common dividends are paid.

LO 3 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

On the declaration date, the board of directors formally authorizes the cash dividend and announces it to shareholders. The declaration of a cash dividend commits the corporation to a binding legal obligation. On the record date, ownership of the shares is determined. On the payment date, dividends are paid to the shareholders. The table below demonstrates the effect of three events on the financial statement elements.

(1) (2) (3) (4) (5) (6)

Assets Liabilities Share capital Retained earnings Total shareholders' equity Number of shares

(a) Declaration date No effect Increase No effect Decrease Decrease No effect

(b) Record date No effect No effect No effect No effect No effect No effect

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

(1) (2) (3) (4) (5) (6)

Assets Liabilities Share capital Retained earnings Total shareholders' equity Number of shares

(a) Cash dividend Decrease No effect No effect Decrease Decrease No effect

(b) Stock dividend No effect No effect Increase Decrease No effect Increase

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

(a)

In a stock split, the number of shares issued is increased. In the case of Bella Corporation, the number of shares issued will increase from 10,000 to 30,000 (10,000 × 3).

(b)

The effect of a split on market value is generally inversely proportional to the size of the split. In this case, the market price would fall to approximately $40 per share ($120  3).

LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Cash and stock dividends are recorded in the general journal because the financial position of the company changes. In the case of a cash dividend, the account Dividends Declared is increased, which in turn decreases retained earnings. Cash is also reduced when a cash dividend is paid. In the case of a stock dividend, the Dividends Declared account is increased, which in turn decreases retained earnings. Common Shares are increased in the case of a stock dividend when the distribution date is reached. In the case of stock splits, there is no change in the financial position of the company. No accounts are affected. Only the number of shares held by shareholders will change, typically by a multiple (for example, 2 for 1).

LO 3 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

19.

(a)

All six accounts appear individually on the statement of changes in equity, along with the details of the transactions that increased and decreased the accounts during the year being reported.

(b)

The first three accounts (preferred shares, common shares, and stock dividends distributable) would be reported under the subheading of share capital in the shareholders‘ equity section of the statement of financial position with balances at the reporting date. The remaining accounts would be reported separately in the shareholders‘ equity section of the statement of financial position, after the total share capital.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

The purpose of a retained earnings restriction is to indicate that a portion of retained earnings is currently unavailable for dividends. Restrictions may result from the following causes: legal, contractual, or voluntary. Although not reported separately on the statement of changes in equity or statement of financial position, the portion of retained earnings that is restricted is disclosed in a note to the financial statements.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Comprehensive income is the sum of net income (loss) and other comprehensive income and appears on the statement of comprehensive income. Other comprehensive income (or loss) is made up of temporary accounts added to, or deducted from, the opening balance of accumulated other comprehensive income by closing entries at the end of the year. These changes to the accumulated other comprehensive income account are detailed on the statement of changes in equity. Accumulated other comprehensive income is a permanent equity account and its ending balance appears in the shareholders‘ equity section of the statement of financial position.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

22.

(a)

The statement of retained earnings shows all of the changes to retained earnings for the accounting period being reported. The statement of retained earnings must be prepared by private companies following ASPE. The statement of changes in equity shows the changes in retained earnings, similar to the statement of retained earnings. However, it also shows the changes in amounts in share capital, as well as the changes in all of the remaining equity accounts. This is a required statement for companies following IFRS.

(b)

The statement of retained earnings shows the changes that determine the ending balance of retained earnings, which is only one of the accounts that appears in the shareholders‘ equity section of the statement of financial position. The statement of changes in equity shows the changes that determine each of the shareholders‘ accounts (for example, preferred shares, common shares, retained earnings, and accumulated other comprehensive income). Each of these accounts appears in the shareholders‘ equity section of the statement of financial position.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

(a)

Private companies that report using ASPE usually have a simpler capital structure than publicly traded companies who use IFRS. Consequently, the shareholders‘ equity section of the statement of financial position has fewer accounts with ASPE. For example, private companies are not required to report accumulated other comprehensive income, which publicly traded companies are required to report.

(b)

Private companies using ASPE would prepare the following financial statements: statement of financial position, statement of income, statement of retained earnings, and statement of cash flows. For companies using ASPE, fewer equity account transactions occur that need to be explained and consequently there is no requirement to prepare a statement of changes in equity. Rather, only a statement of retained earnings is required, linking the statement of income to the Retained Earnings account shown in the shareholders‘ equity section of the statement of financial position. Publicly traded companies using IFRS would prepare the following financial statements: statement of financial position, statement of income and/or statement of comprehensive income, statement of changes in equity, and statement of cash flows. Under IFRS, a statement of comprehensive income is required (in combination with, or along with the statement of income) when there is other comprehensive income during the year.

LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

24.

If the investor is seeking income: (a) Unfavourable (b) Favourable (c) Unfavourable (d) Favourable If the investor is seeking growth: (a) Favourable (b) Unfavourable (b) Unfavourable (c) Favourable

LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

25.

Pepsi had the higher share price. The market price of the share can be determined by dividing the dividend per share by its dividend yield.

Ratio

Coca-Cola

Pepsi

Dividend per share Dividend yield

$1.76 2.72%

$4.28 2.50%

Market price per share

$64.71

$171.20

LO 5 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

26.

The weighted average number of shares is a more realistic measure of the number of shares that the corporation had throughout the year and the use of the assets generated from these shares. The net income generated on the share issue proceeds during the year, or reduced by the shares repurchased during the year, is for only part of the year so the number of shares should be weighted by a partial year factor. Given that companies routinely issue and retire shares, using the number of shares at a specific point in time (such as year end) may not provide a true representation of the company‘s basic earnings per share.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

27. Companies must use the income available to common shareholders (net income – preferred dividends) in the calculation of their basic earnings per share figures because preferred shareholders receive preferential treatment with respect to the distribution of the company‘s dividends. That is, common shareholders would not receive any dividends before the preferred shareholders receive theirs. Similarly, the preferred shareholders‘ entitlement must be subtracted from both the numerator (net income – preferred dividends) and denominator (total shareholders‘ equity – preferred shares) in the calculation of return on common shareholders‘ equity. Consequently, both ratios use income available to common shareholders in their numerators. LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

28.

(a)

Company B pays out the higher proportion of its net income in dividends and these dividends give shareholders the higher dividend yield, when compared to Company A. Therefore, Company B is the better choice for an investor interested in a steady dividend income.

(b)

If an investor had purchased the shares for growth, Company A would have been preferred by the investor as Company A is not using up as much cash to pay dividends and is reinvesting more of its net income back into the business to grow operations.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

29.

Two companies can have the same return on assets but a different return on common shareholders‘ equity for a number of reasons. Since neither company has issued preferred shares, both ratios will have the same numerator, so any difference in these two ratio values will arise from differences in the denominator. The difference between a company‘s assets (the denominator in the return on assets ratio) and a company‘s common shareholders‘ equity (the denominator in the return on common shareholders‘ equity ratio) consists of either liabilities or preferred shares but in this case will consist of only liabilities. Therefore, a company that has a significant amount of liabilities will tend to have a more significant difference between its return on assets and its return on common shareholders‘ equity. Company A likely has a higher portion of its assets financed with liabilities than Company B has. In taking on more liabilities, Company A can become more profitable and have a higher return on common shareholders‘ equity only if the after-tax rate of interest paid to creditors is lower than the return on assets that were purchased with funds borrowed from creditors. The difference between the return on these assets and the after-tax interest paid on the funds borrowed to buy these assets will go (be attributed to) to the common shareholders, increasing the return on common shareholders‘ equity.

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11.1 a.

At Farmers Edge Inc.‘s initial public offering, the shares issued were purchased from the corporation. The $17.00 per share received goes directly to Farmers Edge and increases assets (cash) and shareholders‘ equity (share capital).

At the August 10, 2021 date, the market price of $9.00 per share is a result of the buying and selling of shares occurring in the secondary market. The proceeds from the sale of shares go to the seller and not to Farmers Edge. Therefore, there is no impact on Farmers Edge Inc.‘s financial position as a result of the trading occurring on the stock market subsequent to the IPO.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.2 a. May

June 15 Nov.

Dec. 15

Cash ............................................................. Common Shares (2,000 × $15) ............

30,000

Cash ............................................................. Common Shares (1,000 × $17) ............

17,000

Cash ............................................................. Preferred Shares (200 × $30) ..............

6,000

Cash ............................................................. Preferred Shares (200 × $35) ..............

7,000

30,000

17,000 6,000

7,000

(1) Preferred shares (2) Common shares

Number of shares authorized 200,000 Unlimited

Number of shares issued (200 + 200) 400 (2,000 + 1,000) 3,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.3 a.

Average cost of common shares on: Balance Common Number of Date Shares Shares June 8

$300,000

Aug. 19 Bal.

$90,000 $390,000

Average Cost

30,000

$10.00

7,500 37,500

$10.40

Nov. 2

$(31,200) (1)

(3,000)

Bal.

$358,800

34,500

$10.40

Dec. 7

$(41,600) (2)

(4,000)

Bal.

$317,200

30,500

$10.40

(1) 3,000 shares x average cost $10.40 = $31,200 (2) 4,000 shares x average cost $10.40 = $41,600 b. June 8 Aug. 19 Nov. 2

Dec. 7

Cash .................................................................. Common Shares ........................................ Cash .................................................................. Common Shares ........................................ Common Shares (1) above .................................. Contributed Surplus ($31,200 – $ 28,800) . Cash ..........................................................

300,000

Common Shares (2) above .................................. Contributed Surplus (balance).............................. Retained Earnings ................................................ Cash ..........................................................

41,600 2,400 8,000

300,000 90,000 90,000 31,200 2,400 28,800

52,000

LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.4 a. Mar. 8

April 20

150,000

Land ................................................................. Preferred Shares (3,000 shares) ..............

110,000

150,000

110,000

If the fair value of the land could not be determined, the fair value of the consideration given up ($35 per share multiplied by 3,000 shares or $105,000) would be used. The journal entry would be as follows:

April 20

Cash ................................................................. Preferred Shares (5,000 × $30) ................

Land ................................................................. Preferred Shares (3,000 × $35) ................

105,000 105,000

If Daschen Inc. was a private company using ASPE, the value of the shares would not be as easily obtained since they do not trade on a stock exchange. Consequently, the amount recorded on the exchange of preferred shares for land will more likely be determined by the value of the consideration received, which is the fair value of the land. In this case, the entry would not change since the fair value of the land is the more clearly determinable value in the exchange.

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.5 a.

Dividends in arrears at the end of the current year would be = 20,000 × $2 = $40,000

Dividends in arrears are not accrued as liabilities. The amount of the dividends in arrears is disclosed in the notes to the financial statements.

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.6 May 15

June 10 30

Dividends Declared (110,000 × $1.50 ÷ 4) ....... Dividends Payable ...................................

41,250 41,250

No entry required Dividends Payable ........................................... Cash .........................................................

41,250 41,250

LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.7 Dec.

Jan.

Dividends Declared (100,000 × 5% × $15) Stock Dividends Distributable ..............

No entry required

Stock Dividends Distributable ....................... Common Shares ..................................

75,000 75,000

(Stock Dividends = Number of shares issued × Market price per share when declared) LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.8 a.

Before the stock split: 100 shares After the stock split: 100 × 5 = 500 shares

Likely stock price after the stock split: $487.27 ÷ 5 = $97.45

There would be no journal entry recorded for the stock split. Details of the stock split would be discussed in the notes to the financial statements.

LO 3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.9 Transaction

Assets

Liabilities

Shareholders‘ Equity

(a) (b) (c) (d) (e)

NE NE NE NE

+ NE NE NE

NE NE NE NE

Number of Shares NE NE NE + +

LO 3 BT: AN Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.10 [1] [2] [3] [4] [5] [6] [7] [8]

$2,050,000 – $1,500,000 – $110,000 = $440,000 $440,000 same as [1] $3,505,000 – $3,000,000 + $135,000 – $750,000 = $(110,000) or same as the amount of increase in Common Shares $0 $750,000 (same amount as increase in Retained Earnings) $125,000 – $100,000 = $25,000 $500,000 (no change from beginning balance) $5,100,000 + $440,000 [2] – $135,000 + $750,000 [5] + $25,000 = $6,180,000 or taken from ending balances $2,050,000 + $500,000 [7] + $3,505,000 + $125,000 = $6,180,000

LO 4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.11 LUXAT CORPORATION Statement of Financial Position (Partial) December 31, 2024 Shareholders' equity Share capital Common shares, unlimited number of shares authorized, 550,000 issued ..................................................... Contributed surplus ..................................................................... Retained earnings ....................................................................... Accumulated other comprehensive income ................................ Total shareholders' equity ..................................................................

$2,050,000 500,000 3,505,000 125,000 $6,180,000

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.12 a.

STIRLING FARMS LIMITED Statement of Retained Earnings Year Ended December 31, 2024

Retained earnings, December 31, 2023 .................................... Add: Net income ...................................................................... Less: Dividends declared.......................................................... Retained earnings, December 31, 2024 ....................................

$510,000 323,000 833,000 115,000 $718,000

(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)

If Stirling were a publicly traded corporation, a statement of changes in equity would be required instead of a statement of retained earnings. It would report the changes in each of the shareholders‘ equity accounts, not just retained earnings.

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.13 a. last year

Payout ratio 

$60,000 $600,000

= 10%

(Payout ratio = Cash dividends declared ÷ Net income)

Dividends paid this year = $2,000,000 × 10% = $200,000 (assuming the same payout ratio).

(Not required) Dividends paid next year = $700,000 × 10% = $70,000 (assuming the same payout ratio). Maintaining a constant dividend payout ratio may or may not be a sound business practice. Many factors, including the corporation‘s cash flow and the type of investor involved would have to be taken into consideration. Because dividend amounts are relatively fixed (or with small increases), the payout ratio tends to fluctuate with profits. Maintaining a constant dividend payout ratio when net income fluctuates will result in variable dividend amounts being paid to shareholders, which may not be wise from a cash flow or growth perspective. It is also difficult to determine in advance exactly what the net income for the year will be. Trying to keep exactly the same payout ratio is therefore not always possible.

LO 5 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.14 a. Dividend yield

Canadian National Railway

Canadian Pacific Railway

$2.93 $151.08 = 1.9%

$0.76 $93.97 = .8%

(Dividend yield = Dividends declared per share ÷ Market price per share)

Investors would prefer Canadian National Railway because of its higher dividend yield if they wished to purchase shares for the purpose of earning dividend income.

LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.15 Weighted average number of shares: January 1 May 1 August 31 November 30

a. b.

34,000 × 12/12 = (3,000) x 8/12 = 9,000 × 4/12 = 6,000 × 1/12 = 46,000

34,000 (2,000) 3,000 500 35,500

The number of common shares issued at December 31, 2024 is 46,000. The weighted average number of common shares for 2024 is 35,500.

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.16 Basic earnings per share

$370,000 – $20,000* 35,500

= $9.86

*10,000 × $2 = $20,000 (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number of common shares) LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.17 a. Basic earnings per share

$800,000 – $100,000* = $2.33 300,000

*50,000 × $2 = $100,000 (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number of common shares)

b. Basic earnings per share c.

$800,000 300,000

= $2.67

Same amount as in a. $2.33

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 11.18 a.

Return on common shareholders‘ equity:

$14,000  12.4% ($104,000  $122,000)  2 (Return on common shareholders‘ equity = (Net income – preferred dividends) ÷ Average common shareholders‘ equity)

Had Salliq issued preferred shares and paid dividends to the preferred shareholders, the amount of income available to common shareholders would be reduced by the amount of the preferred dividend, reducing the return on common shareholders‘ equity ratio.

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO EXERCISES EXERCISE 11.1 a.

High Low Increase

$73.54 $55.50 $18.04 x 100 shares = $1,804.00 gain

$1.10 per share. 1,000 shares x $1.10 = $1,100

1,000 × $70.61 = $70,610

$70.61 + $0.07 = $70.68

417,117 shares

LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.2 a.

June 12 Cash (50,000 × $6) .................................... Common Shares ................................

300,000

July 11 Cash (1,000 × $25) .................................... Preferred Shares ...............................

25,000

Oct.

1 Cash ........................................................... Common Shares (10,000 shares) ......

70,000

Nov. 15 Cash (25,000 × $28) .................................. Preferred Shares ...............................

700,000

300,000

25,000

70,000

700,000

Preferred: 2,500 + 1,000 + 25,000 = 28,500 shares $55,000 + $25,000 + $700,000 = $780,000 Common: 140,000 + 50,000 + 10,000 = 200,000 shares $700,000 + $300,000 + $70,000 = $1,070,000

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.3 a.

Jan.

Cash ............................................................. Common Shares (200,000 × $1.50)......

300,000

Cash ............................................................. Common Shares (50,000 × $1.75) .......

87,500

Cash ............................................................. Preferred Shares (10,000 × $25) ..........

250,000

Cash ............................................................. Common Shares (500,000 × $2.00)......

1,000,000

Common Shares (200,000 × $1.85) ............. Retained Earnings ($380,000 – $370,000).... Cash (200,000 × $1.90) ........................

370,000* 10,000

Professional Fees Expense........................... Common Shares (10,000 shares) .........

15,000

300,000

87,500

250,000

1,000,000

380,000

15,000

*Refer to part (b) $1,387,500 ÷ 750,000 = $1.85; $1.85 x 200,000 = $370,000

EXERCISE 11.3 (CONTINUED) b.

For preferred shares, there was only the one transaction on January 17 and so the number of shares is 10,000 and the average cost is $25.00 at January 31. For common shares: Number of shares Date issued

Share Capital

January 6

200,000

$1.50

$300,000

January 12

50,000

$1.75

87,500

January 18

500,000

$2.00

1,000,000

Sub. Total

750,000

January 24

(200,000)

January 31

10,000

15,000

560,000

$1,032,500

Balance

Issue price

1,387,500 $1.85

Average cost

$1.85

(370,000)

$1.844

If Moosonee were a publicly traded company, the per-share value of the shares issued in exchange for the legal services would be easily obtained as they are traded every business day. When shares are issued for a consideration other than cash, such as goods or services, IFRS requires that the transaction be recorded at the fair value of the consideration received. If the fair value of the consideration received cannot be reliably determined, then the fair value of the consideration given up (shares in this case) can be used. In this case, the value of the services was given so the journal entry would not be any different under IFRS.

LO 2 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.4 a.

Total annual preferred dividend should be 900,000 × $1.10 per share or $990,000.

Dividends in arrears can only arise from cumulative preferred shares. If a dividend is not declared for a noncumulative preferred share, the dividend entitlement does not carry forward into the future. If the shares are cumulative, dividends in arrears at the end of Year 1 are $340,000 ($990,000 annual dividend less dividends declared of $650,000). By the end of Year 2, the dividends paid of $550,000 are first allocated to the $340,000 dividends in arrears from Year 1 and the remaining $210,000 is for Year 2. Consequently, by the end of Year 2, dividends in arrears at that time are $780,000. ($990,000 – $210,000)

Dividends in arrears are not accrued as a liability. Rather, the amount of any dividends in arrears is disclosed in the notes to the financial statements.

Marsh is required to pay annual dividends of $990,000 to its preferred shareholders before paying dividends to the common shareholders. If the preferred shares the common shareholders.

LO 2 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.5 a.

Apr.

June 15 July 10 Aug. 21

Cash ............................................................... Common Shares (5,000 × $20) ..............

100,000

Dividends Declared (85,000 × $0.25) ............. Dividends Payable ................................

21,250

Dividends Payable ......................................... Cash.......................................................

21,250

Dividends Declared ........................................ Stock Dividends Distributable ................ ((80,000 + 5,000) × 5% x $22 = 4,250 × $22))

93,500

100,000 21,250 21,250 93,500

(Stock Dividends = Number of shares issued × Market price per share on declaration date)

Sept. 20 Nov.

Dec. 20

Stock Dividends Distributable......................... Common Shares ...................................

93,500

Cash ............................................................... Common Shares (3,000 × $25) ..............

75,000

93,500 75,000

Dividends Declared ........................................ 27,675 Dividends Payable ................................. 27,675 ((80,000 + 5,000 + 4,250 + 3,000) x $0.30 = 92,250 × $0.30)

Number of common shares at the end of the year: 80,000 + 5,000 + 4,250 + 3,000 = 92,250

LO 2,3

BT: AP

Difficulty: M

Time: 20 min.

AACSB: Analytic

CPA: cpa-t001

CM: Reporting

EXERCISE 11.6 Before Action

(1) After Cash Dividend

(2) After Stock Dividend

(3) After Stock Split

Total assets

$1,250,000

$1,200,000

$1,250,000

Total liabilities

$ 250,000

Common shares Retained earnings Total shareholders' equity Total liabilities and shareholders‘ equity

600,000 400,000 1,000,000

600,000 350,000 950,000

670,000* 330,000 1,000,000

600,000 400,000 1,000,000

$1,250,000

$1,200,000

$1,250,000

Number of common shares

100,000

105,000

200,000

* $600,000 + (100,000 shares × 5% × $14) = $670,000 (Share capital is increased by the total amount of the stock dividend) LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.7

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Assets + NE + + NE NE NE NE +

Liabilities NE + NE NE NE NE NE NE NE

Share Capital + NE NE + + NE + +/NE NE

Shareholders‘ Equity Accumulated Other Total Retained Comprehensive Shareholders‘ Earnings Income Equity NE NE + NE NE NE NE NE NE + NE NE + NE NE NE NE +/NE NE +/NE NE NE NE + +

LO 2,3,4 BT: AN Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.8 Statement of Changes in Equity Share Capital Common shares NE

Retained Earnings NE

AOCI NE

OCI: Revaluation gain

5. Preferred shares 6. Retained earnings 7. Gain on disposal

Preferred shares NE

8. Dividends declared 9. Stock split 10. Stock dividends distributable

Account 1. Common shares 2. Cash

3. Other comprehensive income– Revaluation gain from revaluing property, plant, and equipment to fair value 4. Long-term investments

NE Common shares*

Other Financial Statement NE

Classification NE

Statement of financial position NE

Current assets

Non-current assets

Statement of financial position NE

Retained earnings NE

Statement of Income

Retained earnings NE NE

Operating expenses (reduction of) NE

NE NE

EXERCISE 11.8 (CONTINUED) Legend: AOCI: Accumulated Other Comprehensive Income OCI: Other Comprehensive Income * Note to instructors: Preferred shares is also an acceptable answer here although common shares are more often issued as stock dividends. LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.9 OZABAL INC. Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital $1.40 Preferred shares, noncumulative, 100,000 authorized, 10,000 shares issued ............................ Common shares, unlimited number of shares authorized, 300,000 shares issued .......................... Stock dividends distributable ................................... Total share capital .......................................................... Contributed surplus .......................................................... Retained earnings (Note R)................................................. Accumulated other comprehensive income......................... Total shareholders‘ equity............................................................

$250,000 750,000 90,000 $1,090,000 61,000 1,340,000 48,500 $2,539,500

Note R: Retained earnings restricted for plant expansion, $450,000. LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.10 a. TAKAYA CANOE LIMITED Statement of Changes in Equity Year Ended December 31, 2024

Balance Dec. 31, 2023 Issued common shares Common shares reacquired Net income Dividends declared Other comprehensive loss Balance Dec. 31, 2024

Common Shares $800,000 180,000

Contributed Surplus $540,000

(200,000)

(40,000)

Retained Earnings $1,500,000

Accumulated Other Comprehensive Income $90,000

(240,000) 400,000 (70,000)

400,000 (70,000)

$780,000

$500,000

$1,830,000

Total $2,930,000 180,000

(25,000)

$65,000

$3,175,000

b. TAKAYA CANOE LIMITED Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital Common shares .......................................................... Contributed surplus .............................................................

$780,000 500,000

Retained earnings ............................................................... Accumulated other comprehensive income......................... Total shareholders‘ equity............................................................

1,830,000 65,000 $3,175,000

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 11.11 a.

(1) Payout ratio

Loblaw (in millions of $ for part 1) $472 ÷ $1,976 = 23.9%

Empire (in millions of $ for part 1) $139.44 ÷ $764.2 = 18.2%

(2) Dividend yield

$1.40 ÷ $102.73 = 1.4%

$0.52 ÷ $38.66 = 1.3%

(Payout ratio = Cash dividends declared ÷ Net income) (Dividend yield = Dividends declared per share ÷ Market price per share)

Investors would likely prefer Loblaw for dividend income purposes because of its higher dividend yield. If investors are investing for growth, they may prefer Empire because its lower payout ratio indicates that it retains a larger portion of its income to foster future growth.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 11.12 a.

Income available to common shareholders = Net income – Preferred share dividends = $963,750 – (60,000 × $1 × ¼) = $948,750

Weighted average number of common shares Dec. 1 180,000 × 12/12 = 180,000 Feb. 28 45,000 × 9/12 = 33,750 Nov. 1 18,000 × 1/12 = 1,500 215,250

Basic earnings per share = Income available to common shareholders ÷ Weighted average number of common shares = $948,750 ÷ 215,250 = $4.41

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 11.13 a. ($ in millions) (1) Payout ratio

(2) Dividend yield

2021 $2,622 + $158 = $6,446

2020 43.1%

$5.84 = 3.9% $150.17

$2,592 + $122 = $3,792

71.6%

$5.82 = 5.9% $99.38

$6,446 – $158 = $13.94 451

$3,792 – $122 = $8.21 447.1

Return on common (4) $6,446 – $158 = 16.5% shareholders' ($40,254 + $36,144) ÷ 2 equity

$3,792 – $122 = 10.4% ($36,144 + $34,688) ÷ 2

(3)

Basic earnings per share

(1) (Payout ratio = Cash dividends declared ÷ Net income) (2) (Dividend yield = Dividends declared per share ÷ Market price per share) (3) (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number of common shares) (4) (Return on common shareholders‘ equity = (Net income – preferred dividends) ÷ Average common shareholders‘ equity)

EXERCISE 11.13 (CONTINUED) b.

The dividends paid by CIBC in 2021 increased in absolute amount. However, when dividends are expressed as a percentage of the net income, the result—the payout ratio—decreased dramatically from 71.6% to 43.1%. The dividend yield decreased from 5.9% in 2020 to 3.9% in 2021. The yield decreased because dividends grew by a smaller percentage than did the market price of a share. [($5.84 – $5.82) / $5.82 = 0.3% increase in dividends; ($150.17 – $99.38) / $99.38 = 51.1% increase in share price] CIBC‘s net income improved in 2021 both in total amount and on a pershare basis. Its return on common shareholders‘ equity increased from 8.21% to 13.94%. The bank‘s shareholders are willing to pay a much higher market price for the common shares in 2021 ($150.17) compared to 2020 ($99.38). It should be noted however that the 2020 net income and market price were lower than 2019. A more thorough analysis would compare all three years of information to achieve a better trend analysis. The large decrease in the payout ratio and dividend yield between 2021 and 2020 show a smaller decrease from 2019, when compared to 2021.

LO 5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 11.14 As an investor interested in an income-oriented investment, the dividend ratios will carry a great deal of weight when choosing between Stanley and Snap-On. The dividend payout of Snap-On is more than 3% higher than that of Stanley. On the other hand, Stanley has a slight edge over Snap-On and is a better choice based on the dividend yield ratio. The choice between the two companies should not be based on the basic earnings per share, which are not comparable between companies. The earnings per share can only be interpreted in conjunction with the market price of the share (for example, the price-earnings ratio) or the dividends paid per share (for example, the dividend payout ratio). The return on common shareholders‘ equity ratio, while a profitability ratio of interest, would not be a primary ratio relied upon to assess whether to purchase a company‘s shares for income (dividend) purposes. For investors seeking future price appreciation in the shares of these companies, Snap-On has a better chance for future price appreciation. Its return on common shareholders‘ equity is higher. LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 11.15 a.

Income from operations

No-Debt Option $80,000

Interest expense (4%)

10,000

[7]

Income before income tax

$80,000

[1]

$70,000

[8]

Income tax expense (30%)

24,000

[2]

21,000

[9]

Net income

$56,000

[3]

$49,000

[10]

Average total assets

$500,000

Average common shareholders‘ equity

$500,000

$250,000

Number of common shares

50,000

25,000

Basic earnings per share

$1.12

[4]

$1.96

[11]

$56,000

[3]

$49,000

[10]

Payout ratio

100%

[5]

100%

[12]

Return on common shareholders‘ equity

11.2%

[6]

19.6%

[13]

Dividends declared

[1] [2] [3] [4] [5] [6]

Debt Option $80,000

$80,000 - $0 = $80,000 $80,000 x 30% = $24,000 $80,000 – $24,000 = $56,000 $56,000 ÷ 50,000 = $1.12 Given as 100% of Net Income [3] above $56,000 ÷ $500,000 = 11.2%

[7] [8] [9] [10] [11] [12] [13]

$250,000 x 4% = $10,000 $80,000 – $10,000 = $70,000 $70,000 x 30% = $21,000 $70,000 – $21,000 = $49,000 $49,000 ÷ 25,000 = $1.96 Given as 100% of Net Income [10] above $49,000 ÷ $250,000 = 19.6%

EXERCISE 11.15 (CONTINUED) b.

One main factor affecting the ratio results is the interest expense for the debt option and the resulting tax savings from the deductible interest expense. The other main factor affecting the ratios is the number of shares issued to obtain the financing needed. In this scenario, a higher rate of return was earned on the assets compared to the after-tax rate of borrowing the $250,000. Other scenarios, with different proportions of debt and equity financing, different interest rates, and different tax rates will provide different results. The only ratio that remains unchanged is the payout ratio, which is based on the assumptions given.

LO 5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO PROBLEMS PROBLEM 11.1A

Shareholders‘ Equity Share Capital

1. 2. 3. 4. 5.

Assets +$130,000 -240,0001 +72,5004 +100,000 -121,5005 1 2

3 4 5

Liabilities NE NE NE NE NE

Preferred Shares NE NE NE +$100,000 NE

Common Shares +$130,000 -162,0002 +72,500 NE NE

Contributed Surplus NE -$50,000 NE NE NE

Retained Earnings NE $28,0003 NE NE -121,500

Accumulated Other Comprehensive Income NE NE NE NE NE

20,000 × $12 = $240,000 ($4,000,000 + $130,000) ÷ (500,000 + 10,000) = $8.10; $8.10 x 20,000 = $162,000 $240,000 – $162,000 – $50,000 = $28,000 5,000 × $14.50 = $72,500 (50,000 + 4,000) × $2.25 = $121,500

LO 2,3,4 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.2A a.

Transaction entries: May July Sept. Oct.

5 1 1 1

Nov. 16

Cash (750,000 × $4) ............................................ Common Shares ..........................................

3,000,000

Cash (35,000 × $40) ............................................ Preferred Shares .........................................

1,400,000

Cash .................................................................... Common Shares (45,000 shares) ................

270,000

Cash (250,000 × $5) ............................................ Common Shares ..........................................

1,250,000

Common Shares (25,000 x $4.33 below) ............. Cash (25,000 x $4) ...................................... Contributed Surplus ($108,250 – $100,000)

108,250

Date May 5 Sept. 1 Oct. 1

Jan.

Balance Common Shares $3,000,000 270,000 1,250,000 $4,520,000

Number of Shares 750,000 45,000 250,000 1,045,000

Cash (15,000 × $7) .............................................. Common Shares .........................................

3,000,000 1,400,000 270,000 1,250,000 100,000 8,250

Average Cost

$4.33

105,000 105,000

a. (continued) Mar.

Mar.

Apr.

Common Shares (10,000 x $4.36 below) ............. Contributed Surplus (balance from Nov. 16) ........ Retained Earnings * ............................................. Cash (10,000 x $6.00) ................................. *($60,000 – $43,600 – $8,250) = $8,150 Balance Common Number of Date Shares Shares May 5 $3,000,000 750,000 Sept. 1 270,000 45,000 Oct. 1 1,250,000 250,000 Nov. 16 (108,250) (25,000) Jan. 5 105,000 15,000 $4,516,750 ÷ 1,035,000 =

60,000

Average Cost

$4.36

Cash (6,000 × $60) .............................................. Preferred Shares .........................................

360,000

Dividends Declared .............................................. Dividends Payable ([35,000 + 6,000] x $2) ..

82,000

360,000

82,000

No entry required

Closing entries: Apr. 30 Retained Earnings................................................ Dividends Declared ...................................... 30

43,600 8,250 8,150

Income Summary ................................................. Retained Earnings .......................................

82,000 82,000 6,000,000 6,000,000

PROBLEM 11.2A (CONTINUED) b. Preferred Shares July 1 1,400,000 Mar. 25 360,000 Apr. 30 Bal. 1,760,000 Common Shares 108,250 May 5 3,000,000 43,600 Sept. 1 270,000 Oct. 1 1,250,000 Jan. 5 105,000 Apr. 30 Bal. 4,473,150

Nov. 16 Mar. 1

Mar. 1 Apr. 30 Bal. c.

Contributed Surplus 8,250 Nov. 16 0

Apr. 15 Apr. 30 Bal.

Dividends Declared 82,000 Apr. 30 CE 0

82,000

Retained Earnings 8,150 82,000 Apr. 30 CE 6,000,000 Apr. 30 Bal. 5,909,850 CE: Closing entry Mar. 1 Apr. 30 CE

8,250

Number of preferred shares: 35,000 + 6,000 = 41,000 Number of common shares: 750,000 + 45,000 + 250,000 – 25,000 + 15,000 – 10,000 = 1,025,000 GRASSLANDS BREWERY CORPORATION Statement of Financial Position (Partial) April 30, 2025 Shareholders‘ equity Share capital $2 Preferred shares, noncumulative, unlimited number authorized, 41,000 shares issued ................... Common shares, unlimited number authorized, 1,025,000 shares issued .............................................. Total share capital ............................................................. Retained earnings ............................................................. Total shareholders‘ equity ......................................................

$ 1,760,000 4,473,150 6,233,150 5,909,850 $12,143,000

LO 2,3,4 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.3A a.

Transaction entries: Jan. 4 Cash ............................................................... Common Shares (30,000 shares) ..........

300,000

Apr.

Cash ............................................................... Preferred Shares (12,000 shares) ..........

960,000

Common Shares (10,000 x $8.50 below) ....... Cash (10,000 x $7.50) ........................... Contributed Surplus ($85,000 – $75,000)

85,000

Apr.

15 29

Date Jan. 1 Bal. Jan. 4

May

Balance Common Shares $720,000 300,000 $1,020,000

Number of Shares 90,000 30,000 120,000

Dividends Declared ........................................ Dividends Payable [(6,000 + 12,000) × $3 × 6/12]................

300,000 960,000 75,000 10,000

Average Cost

$8.50 27,000 27,000

June 14

No entry required

July

Dividends Payable ......................................... Cash.......................................................

27,000

Cash ............................................................... Common Shares (25,000 shares) ..........

175,000

Aug.

Dec.

5 13

175,000

No entry required

Closing entries: Dec. 31 Income Summary ........................................... Retained Earnings.................................. 31

27,000

Retained Earnings.......................................... Dividends Declared ................................

972,000 972,000 27,000 27,000

PROBLEM 11.3A (CONTINUED) b. Preferred Shares Jan. 1 Bal. 420,000 Apr. 15 960,000 Dec. 31 Bal. 1,380,000

Dividends Declared 27,000 Dec. 31 CE

May 17

Dec. 31 Bal.

Common Shares 85,000 Jan.1 Bal. Jan. 4 Aug. 13 Dec. 31 Bal.

720,000 300,000 175,000 1,110,000

Retained Earnings Jan. 1 Bal.

600,000

Dec. 31 CE 27,000 Dec. 31 CE Dec. 31 Bal.

972,000 1,545,000

Apr. 29

27,000

Accumulated Other Comprehensive Income Jan. 1 Bal. 5,000 Dec. 31 Bal. 5,000

Contributed Surplus Jan. 1 Bal. Apr. 29 Dec. 31 Bal. CE:

15,000 10,000 25,000 Closing

entry

PROBLEM 11.3A (CONTINUED) c. FURNITURE2GO CORPORATION Statement of Changes in Equity Year Ended December 31, 2024

Contributed Surplus

Retained Earnings

Accumulated Other Comprehensive Income

$720,000

$15,000

$ 600,000

$5,000

475,000 (85,000)

10,000 (27,000) 972,000 $1,545,000

$5,000

Share Capital Preferred Common Shares Shares Balance Dec. 31, 2023 Issued preferred shares Issued common shares Repurchased common shares Dividends declared Net income Balance Dec. 31, 2024

$ 420,000 960,000

$1,380,000

$1,110,000

$25,000

Total $1,760,000 960,000 475,000 (75,000) (27,000) 972,000 $4,065,000

PROBLEM 11.3A (CONTINUED) d.

Number of preferred shares: 6,000 + 12,000 = 18,000 Number of common shares: 90,000 + 30,000 – 10,000 + 25,000 = 135,000 FURNITURE2GO CORPORATION Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital $3 Preferred shares, cumulative, 500,000 shares authorized, 18,000 issued ............................... Common shares, unlimited number of shares authorized, 135,000 issued ....................................................... Total share capital ........................................................................... Contributed surplus ......................................................................... Retained earnings ........................................................................... Accumulated other comprehensive income..................................... Total shareholders‘ equity ....................................................................

$1,380,000 1,110,000 2,490,000 25,000 1,545,000 5,000 $4,065,000

Note: Dividends of $27,000 (18,000 × $3 × 6/12) are in arrears on the cumulative preferred shares. LO 2,3,4 BT: AN Difficulty: C Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.4A a.

Transaction entries: Jan. 5 Cash .......................................................... Preferred Shares (300,000 × $30) .... Feb. Mar.

April

11 9

July Sept.

Oct.

9,000,000

Buildings .................................................. Common Shares (50,000 shares) .....

200,000

Dividends Declared (300,000 × $1.75 × 3/12) Dividends Payable ............................

131,250

200,000 131,250

No entry required

Dividends Payable .................................... Cash .................................................

131,250

Cash (500,000 × $4.50) ............................ Common Shares ...............................

2,250,000

Dividends Declared (300,000 × $1.75 × 3/12) Dividends Payable ............................

131,250

June

9,000,000

131,250 2,250,000

131,250

No entry required

Dividends Payable .................................... Cash .................................................

131,250

Dividends Declared (300,000 × $1.75 × 3/12) Dividends Payable ............................

131,250

131,250 131,250

No entry required

Dividends Payable .................................... Cash .................................................

131,250

Cash ......................................................... Preferred Shares (100,000 × $30) ....

3,000,000

131,250

3,000,000

PROBLEM 11.4A (CONTINUED) a. (continued) Dec.

Dec.

Dividends Declared (400,000* × $1.75 × 3/12) 175,000 Dividends Payable ............................ *300,000 + 100,000 = 400,000 shares

175,000

Dividends Declared (2,550,000* × $0.25) . 637,500 Dividends Payable ............................ *2,000,000 + 50,000 + 500,000 = 2,550,000 shares

637,500

No entry required

Closing entries: Dec. 31 Income Summary ...................................... Retained Earnings............................. 31

Retained Earnings..................................... Dividends Declared ...........................

1,900,000 1,900,000 1,206,250 1,206,250

b. Preferred Shares Jan. 5 9,000,000 Oct. 13 3,000,000 Dec. 31 Bal. 12,000,000 Retained Earnings Jan. 1 Bal. 6,700,000 Dec. 31 CE 1,206,250 Dec. 31 CE 1,900,000 Dec. 31 Bal. 7,393,750

Common Shares Jan. 1 Bal. 8,000,000 Feb. 11 200,000 April 28 2,250,000 Dec. 31 Bal. 10,450,000 Dividends Declared Dec. 31 CE Mar. 9 131,250 June 15 131,250 Sept. 5 131,250 Dec. 6 175,000 Dec. 18 637,500 Dec. 31 Bal. 0

1,206,250

CE: Closing entry

PROBLEM 11.4A (CONTINUED) c. TOPLEY LTD, Statement of Retained Earnings Year Ended December 31, 2024 Retained earnings, December 31, 2023 .................................. Add: Net income .................................................................... Less: Dividends declared.......................................................... Retained earnings, December 31, 2024 .....................................

$6,700,000 1,900,000 8,600,000 1,206,500 $7,393,750

(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)

d. TOPLEY LTD. Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital $1.75 Preferred shares, noncumulative, unlimited number authorized, 400,000 shares issued ........................ Common shares, unlimited number authorized, 2,550,000 shares issued ................................................... Total share capital ......................................................................... Retained earnings ......................................................................... Total shareholders‘ equity......................................................................

$12,000,000 10,450,000 22,450,000 7,393,750 $29,843,750

If Topley Ltd. were reporting under IFRS, the transaction concerning the purchase of the land on February 11 would still be recorded at the fair value of the building of $200,000 even if the shares had a reliable value. As well, under IFRS requirements, Topley would report a statement of changes in equity rather than a statement of retained earnings.

PROBLEM 11.4A (CONTINUED) TOPLEY LTD. Statement of Changes in Equity Year Ended December 31, 2024 Share Capital Preferred Common Shares Shares Balance Dec. 31, 2023 Issued preferred shares Issued common shares Dividends declared Net income Balance Dec. 31, 2024

$8,000,000

Retained Earnings $6,700,000

$12,000,000 2,450,000

$12,000,000

$10,450,000

(1,206,250) 1,900,000 $7,393,750

Total $14,700,000 12,000,000 2,450,000 (1,206,250) 1,900,000 $29,843,750

LO 2,3,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.5A a. Preferred Shares Jan. 1 Jan. 1 Dec. 31

Balance Issue Balance

500,000 500,000 1,000,000

Common Shares Jan. 1 Oct. 1 Dec. 31

Balance Issue Balance

2,700,000 1,000,000 3,700,000

Dividends Declared During year Cash dividend* 100,000 Dec. 31 Stock dividend declared** 407,000 Dec. 31 CE Dec. 31 Balance 0 Stock Dividends Distributable Dec. 31 Declaration** Retained Earnings Jan. 1 Dec. 31 CE Dividends declared 507,000 Dec. 31 Dec. 31 * 20,000 × $5 = $100,000 ** 370,000 × 5% × $22 = $407,000

Balance CE Net income Balance

507,000

407,000

2,980,000 872,000 3,345,000

PROBLEM 11.5A (CONTINUED) b.

ROBICHAUD CORPORATION Statement of Financial Position (Partial) December 31, 2024

Shareholders‘ equity Share capital $5 Preferred shares, noncumulative, unlimited number of shares authorized, 20,000 issued ............ Common shares, unlimited number of shares authorized, 370,000 issued .................................... $3,700,000 Stock dividends distributable, 18,500 common shares 407,000 Total share capital .......................................................... Retained earnings (Note A) ............................................ Total shareholders‘ equity ..................................................... (Share capital is increased by the total amount of the stock dividend)

$1,000,000

4,107,000 5,107,000 3,345,000 $8,452,000

Note A: On December 31, 2024, the Board of Directors authorized a $500,000 restriction of retained earnings for a plant expansion. LO 2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.6A a. Stock Split No effect $14,000,000

Cash Dividend Decrease $14,000,000 – $400,000a = $13,600,000 No effect $2,000,000 No effect $5,000,000

(1)

Assets

(2)

Liabilities

(3)

Common shares

No effect $2,000,000 No effect $5,000,000

(4)

Retained earnings

No effect $7,000,000

Decrease $7,000,000 – $400,000 = $6,600,000

(5)

Total No effect shareholders‘ $12,000,000 equity

Decrease $12,000,000 – $400,000 = $11,600,000

(6)

Number of shares

a b c

200,000c increase (200,000 + 200,000 = 400,000)

No effect 200,000

Stock Dividend No effect $14,000,000 No effect $2,000,000 Increase $5,000,000 + $400,000b = $5,400,000 Decrease $7,000,000 – $400,000 = $6,600,000 No effect $12,000,000 + $400,000 – $400,000 = $12,000,000 8,000 increase (8,000 + 200,000 = 208,000)

200,000 × $2.00 = $400,000 (200,000 × 4%) x $50 = 8,000 × $50 = $400,000 200,000 × 2 = 400,000 after the 2-for-1 stock split

PROBLEM 11.6A (CONTINUED) b. Stock Split Advantages:  Share price reduces significantly making shares more affordable to a broader number of investors  Share price generally starts increasing after split

Cash Dividend  Share price will likely fall slightly (in proportion to dividend). May make shares slightly more affordable and attract new investors  Makes shares attractive for investors wanting dividend income

Stock Dividend  



Retains cash Share price will fall in proportion to the number of shares issued. This would make shares more affordable and attract new investors Converts retained earnings to share capital

Disadvantages:  

Reduces cash It may discourage investors looking for growth where cash is reinvested in the company.

LO 3 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.7A a.

Transaction entries: Jan. 15 Dividends Declared (55,000 × $1.25)............. Dividends Payable .................................

Feb. Apr.

68,750 68,750

No entry required

Dividends Payable ......................................... Cash ......................................................

68,750

Dividends Declared (5,500* × $12) ................ Stock Dividends Distributable ................ *(55,000 × 10% = 5,500)

66,000

68,750 66,000

(Stock Dividends = Number of shares issued × Market price per share at date of declaration)

May Oct.

No entry required

Stock Dividends Distributable ........................ Common Shares ....................................

66,000

No journal entry (memorandum entry only: 60,500 (55,000 + 5,500) common shares × 2 = 121,000 common shares)

Closing entries: Dec. 31 Income Summary ........................................... Retained Earnings ................................. 31

66,000

Retained Earnings.......................................... Dividends Declared................................ ($68,750 + $66,000 = $134,750)

628,000 628,000 134,750 134,750

PROBLEM 11.7A (CONTINUED) b.

CE: Closing entry Common Shares Jan. 1 Bal. 2,200,000 May 15 66,000 Dec. 31 Bal. 2,266,000

Dividends Declared Jan. 15 68,750 Dec. 31 CE Apr. 16 66,000 Dec. 31 Bal. 0

134,750

Retained Earnings Jan. 1 Bal. 1,420,000 Dec. 31 CE 134,750 Dec. 31 CE 628,000 Dec. 31 Bal. 1,913,250

Accumulated Other Comprehensive Income Jan. 1 68,000

Stock Dividends Distributable May 15 66,000 Apr. 16 66,000 Dec. 31 Bal. 0

PROBLEM 11.7A (CONTINUED) c. WIRTH CORPORATION Statement of Changes in Equity Year Ended December 31, 2024

Balance Dec. 31, 2023 Dividends declared Declared and issued stock dividends Net income Balance Dec. 31, 2024

Common Shares

Retained Earnings

$2,200,000

$1,420,000 (68,750)

66,000

(66,000) 628,000 $1,913,250

$2,266,000

Accumulated Other Comprehensive Income $68,000

$68,000

Total $3,688,000 (68,750) 0 628,000 $4,247,250

(A stock dividend reduces retained earnings by the number of shares issued × market price per share) Note that some companies may combine the information above pertaining to cash and stock dividends and report them on a single line on this statement with a breakdown between the amount of the stock and cash dividends shown in a note to the financial statements.

PROBLEM 11.7A (CONTINUED) d.

Number of common shares: 55,000 + 5,500 + 60,500 = 121,000 WIRTH CORPORATION Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital Common shares, unlimited number of shares authorized, 121,000 issued .................................... Retained earnings............................................................... Accumulated other comprehensive income ........................ Total shareholders‘ equity ..........................................

$2,266,000 1,913,250 68,000 $4,247,250

LO 3,4 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.8A a.

Weighted Average Number of Shares Aug. 1 Oct. 1 Dec. 1 Feb. 1

350,000 × 12/12 = (24,000) × 10/12 = 60,000 × 8/12 = 10,000 × 6/12 = 396,000

350,000 (20,000) 40,000 5,000 375,000

Basic Earnings per Share = Income available to common shareholders ÷ Weighted average number of common shares = ($1,280,000 – $100,000*) ÷ 375,000 = $3.15 *Preferred dividend: $1 × 100,000 = $100,000

A weighted average number of shares is used in the basic EPS calculation because the issue of shares and other activities affecting the number of shares issued during the period changes the amount of net assets upon which net income can be earned. Using the number of shares at a point in time such as year end to calculate basic earnings per share does not take into account the year‘s economic activity and other factors that might have impacted the number of shares issued during the period.

LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 11.9A a.

The common dividends per share can be calculated as follows:

A. Basic EPS (U.S. $) B. Payout ratio

2021 $4.81 7.2%

2020 $1.32 19.4%

Common dividends per share (A × B)

$0.35

$0.26

As demonstrated by the basic earnings per share ratio, net income had a strong increase in 2021, possibly due to an acquisition. Hardwood had a lower payout ratio in 2021, likely because management wanted to retain some of the additional income. The reduction in the payout ratio as a percentage of net income in 2021 leads to a reduction in the dividend yield percentage but not to the same extent as the decline in the payout ratio. It appears that the market price of the shares has increased in 2021, which would cause a decrease in the dividend yield. b.

A decline in the payout ratio would be looked at favourably by creditors. This means that more cash is retained in the business so it is available to improve liquidity and the ability of Hardwood to meet day to day payment obligations and repay debt on time.

c. A. Common dividends per share B. Dividend yield

2021 $0.35 0.9%

2020 $0.26 1.3%

Market price per share (A ÷ B)

$38.89

$20.00

When the basic earnings per share increased by 264% [($4.81 – $1.32) ÷ $1.32] in 2021, the share price increased by 94% [($38.89 – $20.00) ÷ $20.00]. The increase in the share price was not in line with the increase in the earnings per share. This inconsistency cannot be determined with the given data. LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 11.10A a.

(in millions, except per-share information) 2021

Ratio

2020

1. Payout ratio

$958 $3,177

= 30.2%

$953 $2,083

= 45.8%

2. Dividend yield

$2.84 $102.46

= 2.8%

$2.84 $63.94

= 4.4%

3. Basic earnings per share

$3,054 340.861

= $8.96

$1,923 337.580

= $5.70

4. Return on common shareholders' equity

$3,054 $14,892

= 20.5%

$1,923 $12,930

= 14.9%

PROBLEM 11.10A (CONTINUED) b.

National Bank‘s payout ratio declined in 2021 because the slight dividend increase was lower than the 53% increase in income. The board of directors made the decision to keep the amount of the dividends the same in 2021 compared to 2020 and they must have felt that it was prudent to do so in spite of the rise in income. Despite keeping the dividend at the same amount, the bank‘s share price rose 60% in 2021 causing the dividend yield to decline that year. The payout ratio and the dividend yield were below the industry average. The basic earnings per share increased because income increased (the denominator in this ratio, which is the weighted average number of common shares, did not change significantly enough to affect basic EPS). Return on common shareholders‘ equity increased due to the increase in income because shareholders‘ equity rose by a smaller percentage than the net income did. Compared to its industry, National Bank‘s 2021 return on common shareholders‘ equity is higher than the industry average.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 11.11A a.

Together, the profit margin and the asset turnover explain the return on assets ratio. When multiplying the profit margin by the asset turnover, we obtain the return on assets ratio. For example, in the case of Petro-Boost, profit margin x asset turnover = 10.0% x 1.1 times = 11.0% return on assets ratio. For World Oil, the much higher asset turnover overcomes the lower profit margin, compared to Petro-Boost, to come up with the higher return on assets ratio.

World Oil has the largest difference between its return on shareholders‘ equity and its return on assets. The most likely reason is that World Oil has proportionately the least amount of equity and the highest amount of liabilities. Whenever the after tax-cost of borrowing is lower than the income earned on the borrowed money, the difference increases the return on common shareholders‘ equity.

Petro-Boost would be the better investment for someone interested in generating a regular income from their investment. Petro-Boost has a higher payout ratio (27% [1.9% Dividend yield x 14.2 PE ratio] versus 12% [0.07% Dividend yield x 17.1 PE ratio] for World Oil) and dividend yield (1.9% versus 0.7% for World Oil), which is good for an investor who needs a regular income from their investment.

The higher price-earnings ratio of 17.1 times indicates that investors have higher expectations of future profitability for World Oil than Petro-Boost. Therefore, an investor interested in experiencing a return in the form of future capital gains would have a better chance of attaining those gains by investing in World Oil.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 11.1B

Shareholders‘ Equity

Share Capital Assets +$150,000 -585,0001 +500,0003 +160,000 -84,0004

1. 2. 3. 4. 5.

1 2 3 4

Liabilities NE NE NE NE NE

Preferred Shares NE NE +$500,000 NE NE

Common Shares +$150,000 -372,1502 NE +160,000 NE

Contributed Surplus

Retained Earnings

Accumulated Other Comprehensive Income

NE NE NE NE NE

NE -$212,850 NE NE -84,000

NE NE NE NE NE

45,000 × $13 = $585,000 ($2,000,000 + 150,000) ÷ (250,000 + 10,000) = $8.269; $8.27 x 45,000 = $372,150 20,000 × $25 = $500,000 (40,000 + 20,000) × $1.40 = $84,000

LO 2,3,4 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.2B a.

Transaction entries: June Aug.

5 21

Sept. 15 Oct.

Date June 5 Sept. 15

Nov.

Mar.

Cash (240,000 × $4) ................................. Common Shares ...............................

960,000

Cash (15,000 × $100) ............................... Preferred Shares ..............................

1,500,000

Cash (60,000 x $4.25) .............................. Common Shares ...............................

255,000

Common Shares (20,000 x $4.05 below) .. Cash (20,000 x $4.00) ...................... Contributed Surplus ($82,000 – $80,000)

81,000

Balance Common Shares $ 960,000 255,000 $1,215,000

Number of Shares 240,000 60,000 300,000

960,000 1,500,000 255,000 80,000 1,000

Average Cost

$4.05

Cash (220,000 × $4.95) ............................ Common Shares ...............................

1,089,000

Common Shares (25,000 x $4.45 below) .. Contributed Surplus (balance from Oct. 20) Retained Earnings * .................................. Cash (25,000 x $5.00) ...................... *($125,000 – $111,250 – $1,000) = $12,750

111,250 1,000 12,750

1,089,000

125,000

PROBLEM 11.2B (CONTINUED) a. (continued)

Date June 5 Sept. 15 Oct. 20 Nov. 20

April May

May

16 15

Balance Common Shares $ 960,000 255,000 (81,000) 1,089,000 $2,223,000 ÷

Number of Shares 240,000 60,000 (20,000) 220,000 500,000

$4.45

Cash (6,000 × $100) ................................. Preferred Shares ..............................

600,000

Dividends Declared [(15,000 + 6,000) × $4] . Dividends Payable ...........................

84,000

600,000 84,000

No entry required

Closing entries: May 31 Retained Earnings..................................... Dividends Declared ........................... 31

Average Cost

Income Summary ...................................... Retained Earnings.............................

84,000 84,000 250,000 250,000

PROBLEM 11.2B (CONTINUED) b.

Oct. 20 Mar.9

Mar. 9

May 15 May 31 Bal.

Mar. 9 May. 31 CE

Preferred Shares Aug. 21 Apr. 16 May 31 Bal.

1,500,000 600,000 2,100,000

Common Shares 81,000 June 5 111,250 Sept. 15 Nov. 20 May 31 Bal.

960,000 255,000 1,089,000 2,111,750

Contributed Surplus 1,000 Oct. 20 Dec. 31 Bal.

1,000 0

Dividends Declared 84,000 May 31 CE 0 Retained Earnings 12,750 84,000 May 31 CE May 31 Bal.

84,000

250,000 153,250

CE: Closing entry

PROBLEM 11.2B (CONTINUED) c.

Number of preferred shares: 15,000 + 6,000 = 21,000 Number of common shares: 240,000 + 60,000 – 20,000 + 220,000 – 25,000 = 475,000 WETLAND CORPORATION Statement of Financial Position (Partial) May 31, 2024

Shareholders‘ equity Share capital $4 Preferred shares, noncumulative, unlimited number authorized, 21,000 shares issued ................ Common shares, unlimited number authorized 475,000 shares issued ........................................... Total share capital .......................................................... Retained earnings ........................................................... 9 Total shareholders' equity .....................................................

$ 2,100,000 2,111,750 4,211,750 153,250 $4,365,000

LO 2,3,4 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.3B a.

Transaction entries: Feb. 28 Cash .......................................................... Preferred Shares (1,500 shares) ....... April May

11 25

Nov. 26

Jan.

3,500,000

Cash .......................................................... Common Shares (2,500 shares) .......

87,500

Common Shares (10,000 x $26.88 below) Contributed Surplus*......................... Cash (10,000 x $24.00) .................... *($268,800 – $240,000) = $28,800

268,800

Balance Common Shares $ 1,050,000 3,500,000 87,500 $4,637,500

Number of Shares 70,000 100,000 2,500 172,500

3,500,000 87,500

28,800 240,000

Average Cost

$26.88

Dividends Declared ................................... Dividends Payable ............................ (4,400 + 1,500) × $5.00 = $29,500

29,500 29,500

No entry required

Closing entries: Jan. 31 Retained Earnings..................................... Dividends Declared ........................... 31

150,000

Cash .......................................................... Common Shares (100,000 shares) ...

Date Feb. 1 Bal. April 11 May 25

Dec.

150,000

Retained Earnings..................................... Income Summary ..............................

29,500 29,500 5,000 5,000

PROBLEM 11.3B (CONTINUED) b.

CE: Closing entry Preferred Shares Feb. 1 Bal. Feb. 28 Jan. 31 Bal.

Nov. 26

Common Shares 268,800 Feb.1 Bal. 1,050,000 April 11 3,500,000 May 25 87,500 Jan. 31 Bal. 4,368,700 Contributed Surplus Feb. 1 Bal. Nov. 26 Jan. 31 Bal

Jan. 31 CE Jan. 31 CE

440,000 150,000 590,000

75,000 28,800 103,800

Retained Earnings Feb. 1 Bal. 1,000,000 29,500 5,000 Jan. 31 Bal. 881,250

Accumulated Other Comprehensive Income Feb. 1 Bal. 65,000 Jan. 31 Bal. 65,000

Dec. 31 Jan. 31 Bal.

Dividends Declared 29,500 Jan. 31 CE 0

29,500

PROBLEM 11.3B (CONTINUED) c. UJJAL CORPORATION Statement of Changes in Equity Year Ended January 31, 2025 Share Capital Preferred Common Shares Shares Balance Jan. 31, 2024

$440,000

Issued preferred shares Issued common shares Repurchased common shares Dividends declared Net loss Balance Jan. 31, 2025

150,000

$1,050,000

3,587,500 (268,800)

$590,000

$4,368,700

Contributed Surplus

Retained Earnings

Accumulated Other Comprehensive Income

$75,000

$1,000,000

$65,000

$2,630,000

$65,000

150,000 3,587,500 (240,000) (29,500) (5,000) $6,093,000

28,800

$103,800

(29,500) (5,000) $965,500

Total

PROBLEM 11.3B (CONTINUED) d.

Number of preferred shares: 44,000 + 1,500 = 45,500 Number of common shares: 70,000 + 100,000 + 2,500 – 10,000 = 162,500

UJJAL CORPORATION Statement of Financial Position (Partial) January 31, 2025 Shareholders‘ equity Share capital $5 Preferred shares, noncumulative, unlimited number of shares authorized, 5,900 issued ................................ Common shares, unlimited number of shares authorized, 162,500 issued ......................................................... Total share capital ........................................................................... Contributed surplus ........................................................................... Retained earnings ................................................................................ Accumulated other comprehensive income.......................................... Total shareholders‘ equity ...........................................................................

$ 590,000 4,368,700 4,958,700 103,800 965,500 65,000 $6,093,000

LO 2,3,4 BT: AN Difficulty: C Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.4B a.

Transaction entries: Jan. 2 Cash .......................................................... Preferred Shares (50,000 × $25) ...... Mar.

April June

July Aug.

Dividends Declared (50,000 × $1.80 × 3/12) Dividends Payable ............................

1,250,000 22,500 22,500

No entry required

Dividends Payable .................................... Cash..................................................

22,500

Dividends Declared (50,000 × $1.80 × 3/12) Dividends Payable ............................

22,500

22,500 22,500

No entry required

Dividends Payable .................................... Cash..................................................

22,500

Cash .......................................................... Common Shares (10,000 × $7.30) ....

73,000

Dividends Declared (50,000 × $1.80 × 3/12) Dividends Payable ............................

22,500

Sept. 10 Sept. 22

No entry required

Oct.

Dividends Payable .................................... Cash..................................................

Oct.

1,250,000

1 8

22,500 73,000 22,500

22,500

Cash .......................................................... 500,000 Preferred Shares (10,000 shares x $50)

22,500 500,000

PROBLEM 11.4B (CONTINUED) a. (continued) Oct.

Equipment ................................................. Common Shares (2,000 shares) .......

154,000 154,000

The value of the equipment is a more reliable amount to measure the value of this transaction rather than the value the shares traded at in the past. Closing entries: Dec. 31 Retained Earnings..................................... Income Summary .............................. 31

Retained Earnings..................................... Dividends Declared ...........................

68,000 68,000 67,500 67,500

PROBLEM 11.4B (CONTINUED) b. Preferred Shares Jan. 2 Oct. 8

1,250,000 500,000 1,750,000

Retained Earnings Jan. 1 Bal. Dec. 31 CE 68,000 Dec. 31 CE 67,500 Dec. 31 Bal.

990,000

854,500

Common Shares Jan. 1 Bal. Aug. 12 Oct. 15 Dec. 31 Bal.

300,000 73,000 154,000 527,000

Dividends Declared Dec. 31 CE Mar. 10 22,500 June 10 22,500 Sept. 10 22,500 Dec. 31 Bal. 0

67,500

CE: Closing entry c. SCHIPPER LTD. Statement of Retained Earnings Year Ended December 31, 2024 Retained earnings, December 31, 2023 .................................... Less: Loss ............................................................................... Less: Dividends declared ........................................................ Retained earnings, December 31,2024 .....................................

$990,000 68,000 922,000 67,500 $854,500

(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)

PROBLEM 11.4B (CONTINUED) d. SCHIPPER LTD. Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital $1.80 Preferred shares, noncumulative, unlimited number authorized, 60,000 issued ............................................. Common shares, unlimited number authorized, 230,000* issued .......................................... Total share capital ............................................................. Retained earnings ............................................................. Total shareholders‘ equity .................................................

$ 1,750,000 527,000 2,277,000 854,500 $3,131,500

*Number of common shares: 200,000 + 10,000 + 20,000 = 230,000

PROBLEM 11.4B (CONTINUED) e.

If Schipper Ltd. was a public company, the transaction concerning the purchase of the equipment on October 15 would still be recorded at the fair value of the equipment of $154,000 even if the shares had a reliable value. As well, under IFRS requirements, Schipper would report a statement of changes in equity rather than a statement of retained earnings. The statement of changes in equity follows (optional):

SCHIPPER LTD. Statement of Changes in Equity Year Ended December 31, 2024 Share Capital Preferred Common Shares Shares Balance Dec. 31, 2023 Issued preferred shares Issued common shares Dividends declared Net loss Balance Dec. 31, 2024

$300,000

Retained Earnings $990,000

(67,500) (68,000)

$1,290,000 1,750,000 227,000 (67,500) (68,000)

$854,500

$3,131,500

$1,750,000 227,000

$1,750,000

$527,000

Total

LO 2,3,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.5B a.

Mar. 30 Jun. 30 Aug. 18 Sept. 30 Dec. 31 Dec. 31

Balance

750,000 750,000

Common Shares Jan. 1 Balance Mar. 1 Sept. 25 Dec. 31 Balance

3,210,000 350,0001 297,000 3,857,000

Dividends Declared 15,0002 15,000 297,0003 15,000 15,000 Dec. 31 CE 0

357,000

Stock Dividends Distributable 297,000 Aug. 18 Dec. 31 Balance

Sept. 25

Dec. 31

Preferred Shares Jan. 1 Balance Dec. 31 Balance

CE Dividends

Retained Earnings Jan. 1 357,000 Dec. 31 Dec. 31

Balance CE Net income Balance

297,0003 0 980,000 750,000 1,373,000

Common Shares: 20,000 × $17.50 = $350,000 Preferred Shares:15,000 × $4 × ¼ = $15,000 3 Common Shares: (255,000 + 20,000) × 6% x $18 = 16,500 × $18 = $297,000. Note that the stock dividend was declared on August 18 (thus the debit to Dividends Declared) and distributed on September 25 (thus the credit to Common Shares). 2

PROBLEM 11.5B (CONTINUED) b. MAGGIO CORPORATION Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital $4 Preferred shares, cumulative, unlimited number of shares authorized, 15,000 issued ............................ Common shares, unlimited number of shares authorized, 291,500 issued .......................................... Total share capital .................................................................. Retained earnings (Note X) .................................................... Total shareholders‘ equity .............................................................

$ 750,000 3,857,000 4,607,000 1,373,000 $5,980,000

(A stock dividend reduces retained earnings by the number of shares issued × market price per share)

Note X: $200,000 of retained earnings are restricted by a debt covenant. LO 2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.6B a. (1)

Assets

(2)

Liabilities

(3)

Common shares

(4)

Retained earnings

(5)

Total shareholders‘ equity

(6)

Number of shares

a b

Cash Dividend Decrease $9,000,000 – $500,000a = $8,500,000 No effect = $2,500,000 No effect = $3,000,000

Decrease $3,500,000 – $500,000 = $3,000,000 Decrease $6,500,000 – $500,000 = $6,000,000 No effect = 500,000

Stock Dividend No effect = $9,000,000

Stock Split No effect = $9,000,000

No effect = $2,500,000 Increase $3,000,000 + $375,000b = $3,375,000 Decrease $3,500,000 – $375,000 = $3,125,000 No effect ($6,500,000 + $375,000 – $375,000 = $6,500,000) 25,000 increase (25,000 + 500,000 = 525,000)

No effect = $2,500,000 No effect = $3,000,000

No effect = $3,500,000

No effect = $6,500,000

500,000 increase (500,000 × 2 = 1,000,000)

500,000 × $1.00 = $500,000 500,000 × 5% × $15 = $375,000

PROBLEM 11.6B (CONTINUED) b. Cash Dividend Advantages:  Share price will likely fall slightly (in proportion to dividend). May make shares slightly more affordable and attract new investors  Makes shares attractive for investors wanting dividend income

Stock Dividend  



Retains cash Share price will fall in proportion to the number of shares issued. This would make shares more affordable and attract new investors Converts retained earnings to share capital

Stock Split 



Share price reduces significantly, making shares more affordable to a broader number of investors Share price generally starts increasing after split

Disadvantages:  Reduces cash  It may discourage investors looking for growth where cash is reinvested in the company. LO 3 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.7B a.

Transaction entries: Feb. 1 Dividends Declared (400,000 × $0.45)........... Dividends Payable .................................

Mar.

No entry required

Dividends Payable ......................................... Cash ......................................................

180,000 180,000

Apr.

No journal entry required (memorandum entry only)

July

Dividends Declared (60,000* × $17.50) ......... 1,050,000 Stock Dividends Distributable ............... *400,000 shares × 3 x 5% = 1,200,000 × 5% = 60,000

1,050,000

(Stock Dividends = Number of shares issued × Market price per share)

July

No entry required

Stock Dividends Distributable ........................ 1,050,000 Common Shares ....................................

Closing entries: Dec. 31 Income Summary ........................................... Retained Earnings ................................. 31

1,050,000

766,000

Retained Earnings.......................................... 1,230,000 Dividends Declared................................ ($180,000 + $1,050,000 = $1,230,000)

766,000 1,230,000

PROBLEM 11.7B (CONTINUED) b. Common Shares Jan. 1 Bal. July 31 Dec. 31 Bal.

3,400,000 1,050,000 4,450,000

Stock Dividends Distributable July 31 1,050,000 July 2 Dec. 31 Bal. Dividends Declared Feb. 1 180,000 Dec. 31 CE July 2 1,050,000 Dec. 31 Bal. 0

Retained Earnings Jan. 1 Bal. 2,320,000 Dec. 31 CE 1,230,000 Dec. 31 CE 766,000 Dec. 31 Bal. 1,856,000

Accumulated Other Comprehensive Loss Jan. 1,050,000 1 223,000 0

1,230,000

PROBLEM 11.7B (CONTINUED) c. STENGEL CORPORATION Statement of Changes in Equity Year Ended December 31, 2024

Balance Dec. 31, 2023 Dividends declared Stock dividends declared and distributed Net income Balance Dec. 31, 2024

Common Shares

Retained Earnings

$3,400,000

$2,320,000 (180,000)

1,050,000

(1,050,000) 766,000 $1,856,000

$4,450,000

Accumulated Other Comprehensive Loss $(223,000)

$(223,000)

Total $5,497,000 (180,000) 0 766,000 $6,083,000

(Ending retained earnings = Beginning retained earnings + Net income – (Stock dividends + Dividends declared) Note that some companies may combine the information above pertaining to cash and stock dividends and report them on a single line on this statement with a breakdown between the amount of the stock and cash dividends shown in a note to the financial statements.

PROBLEM 11.7B (CONTINUED) d.

Number of common shares: (400,000 × 3 = 1,200,000) + 60,000 = 1,260,000 STENGEL CORPORATION Statement of Financial Position (Partial) December 31, 2024 Shareholders‘ equity Share capital Common shares, unlimited number of shares authorized, 1,260,000 issued ........................... Retained earnings..................................................... Accumulated other comprehensive loss ................... Total shareholders‘ equity .................................................

$4,450,000 1,856,000 (223,000) $6,083,000

LO 3,4 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 11.8B a.

Weighted Average Number of Shares April 1 May 1 June 1 July 1

500,000 × 12/12 = (12,000) × 11/12 = 6,000 × 10/12 = 50,000 × 9/12 = 544,000

500,000 (11,000) 5,000 37,500 531,500

Basic Earnings per Share = ($1,016,750 – $78,000*) ÷ 531,500 = $1.77 *Preferred dividend: 78,000 × $1 = $78,000 (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number of common shares)

It is important to use the income available to common shareholders because the preferred shareholders must receive any dividends to which they are entitled before the common shareholders receive their dividends. The corporation‘s preferred shareholders also have a prior claim on the corporation‘s assets in the event of its liquidation.

LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 11.9B a.

We can derive the dividend per share by taking the basic earnings per share and multiplying it by the payout ratio as follows:

Basic EPS (A) Payout ratio (B)

2021 $1.12 103.6%

2020 $1.32 87.7%

2019 $1.04 111.7%

Dividends per share (A x B)

$1.16

The amount of dividends per share that a company pays out is based entirely upon the discretion of the board of directors and their assessment of whether the shareholders should receive this distribution of income, taking into consideration how much cash needs to be retained in the business for future growth. EPS decreased 15% in 2021 while the payout ratio increased 15.9% resulting in no change to the dividends per share. In 2020, EPS increased 27% and the payout ratio decreased 24%, resulting in no change to the cash dividends. b.

A company may or may not decrease their dividends when net income falls. For example, if the decline in net income is from recording an impairment of goodwill, this reduction in net income will not bring about a decline in cash generated from operating activities. In that case, the company may decide to keep the dividend at the same levels in spite of a decline in the basic earnings per share because cash has been unaffected by the decline in net income. If, on the other hand, the decline in net income has a corresponding decline in cash generated from operating activities, a company would be far more inclined to reduce or even suspend dividends, depending on the seriousness of the liquidity position of the business. In this case, the dividends per share stayed the same, so the board must have felt that the company has sufficient cash to do so. The market generally does not respond favourably to dividend cuts, so the company would try not to reduce the dividend.

PROBLEM 11.9B (CONTINUED) c.

We can derive the share price by dividing the dividends per share by the dividend yield as follows 2021 2020 2019 Dividends per share (A) $1.16 $1.16 $1.16 Dividend yield (B) 6.1% 7.2% 7.0% Market share price (A÷B)

$19.02

$16.11

$16.57

The dividend yield decreased 15% in 2021 because the dividends per share did not change while the market price of the company‘s shares increased 19%. d.

Investors seeking dividend income would likely be happy with the corporation‘s dividend policy. Investors looking for dividend income like stable or increasing dividends. Despite the decline in the dividend yield, investors would still be happy with the dividend yield as many investors could not have earned that type of return with a fixed income investment like a GIC or term deposit. However, the high dividend yield is a result of the extremely high payout ratio. Net income is distributed in dividends to the shareholders instead of being retained in the business to finance growth.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 11.10B a.

(in millions, except for per share information) Ratio

2021

2020

1. Payout ratio

$4,371 $9,955

= 43.9%

$4,363 $6,853

= 63.7%

2. Dividend yield

$3.60 $81.14

= 4.4%

$3.60 $55.35

= 6.5%

3. Basic earnings per share

$9,391 1,214

= $7.74

$6,582 1,212

= $5.43

4. Return on common shareholders' equity

$9,391 $63,785

= 14.7%

$6,582 $63,229

= 10.4%

PROBLEM 11.10B (CONTINUED) b.

During 2021, Bank of Nova Scotia (BNS)‘s payout ratio decreased primarily because the dollar amount of the dividends per share remained the same at $3.60 while the net income increased 45%. The dividend yield decreased 32% driven by the increase in the market price per common share. The trend showing a decrease in the dividend yield from 2020 to 2021 is very consistent with the industry average. The basic earnings per share for BNS increased, in line with the increase in net income from 2020 to 2021. BNS‘s return on common shareholders‘ equity increased by 4.3% in 2021. This increase in the ratio occurred because of the 43% increase in income available to common shareholders. BNS‘s return on common shareholders‘ equity is consistent with the industry average.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 11.11B a.

Together, the profit margin and the asset turnover explain the return on assets ratio. By multiplying the profit margin with the asset turnover, we obtain the return on assets ratio. For example, in the case of Discount Paradise, profit margin x asset turnover = 3.5% x 2.5 times = 8.8% return on assets ratio. For Bargain Hunters, the much higher profit margin overcomes the lower asset turnover, compared to Discount Paradise, to come up with the higher return on assets ratio. Bargain Hunters has the largest difference between its return on common shareholders‘ equity and its return on assets because it is using the advantage of leverage. When a company increases its liabilities by taking on more debt (rather than issuing shares and increasing equity), as long as the resulting increase in income exceeds the after-tax interest cost of the debt, the excess income accrues to the shareholders, increasing the ROE.

Discount Paradise would be the better investment for someone interested in generating a regular income from their investment. Discount Paradise has a much higher payout ratio than Bargain Hunters (25% versus 9.4% for Bargain Hunters), indicating that it has a policy of paying out more net income as dividends, which is good for an investor who needs a regular income from their investment. The dividend yield provided by Discount Paradise is also superior to Bargain Hunters, at about three times the amount.

Even though Discount Paradise is paying out more of its net income as dividends than Bargain Hunters, it has the higher price-earnings ratio. This indicates that investors have higher expectations for future growth for Discount Paradise but this may not be the case given its high payout ratio. Bargain Hunters may have greater growth in the future and its lower price-earnings ratio indicates that Bargain Hunters‘ share price is cheaper relative to its earnings. There is no clearly superior choice here.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

ACR11.1

ACCOUNTING CYCLE REVIEW

a. Summary Transaction Entries: 1.

Cash .............................................................................. Preferred Shares ......................................................

50,000

Cash .............................................................................. Common Shares ......................................................

30,000

Accounts Receivable ..................................................... Cash .............................................................................. Sales ........................................................................

320,000 100,000

Cost of Goods Sold ....................................................... Inventory ..................................................................

250,000

Cash .............................................................................. Accounts Receivable ................................................

296,000

Supplies ......................................................................... Accounts Payable ....................................................

35,100

Inventory ........................................................................ Accounts Payable ....................................................

330,000

Accounts Payable .......................................................... Inventory (2% × $322,000) ....................................... Cash .........................................................................

322,000

Salaries Expense ........................................................... Cash .........................................................................

88,200

Allowance for Expected Credit Losses .......................... Accounts Receivable ................................................

1,700

50,000

30,000

420,000

250,000

296,000

35,100

330,000

6,440 315,560

88,200

1,700

ACR11.1 (CONTINUED) 10. Interest Expense ............................................................ Mortgage Payable ......................................................... Cash .........................................................................

4,000 2,000

11. Dividends Declared ($1,400 + $4,200) .......................... Dividends Payable ...................................................

5,600

6,000

5,600

c. Adjusting Entries: 1. Dec.31

Supplies Expense ($4,400 + $35,100 – $5,900) ....... Supplies ...........................................................

33,600

Credit Losses ($1,500 – $1,700 + $3,500) ................ Allowance for Expected Credit Losses .............

3,700

Depreciation Expense ............................................... Accumulated Depreciation—Buildings ............. ($142,000 – $10,000) ÷ 30

4,400

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

350

Bank Charges Expense ............................................ Cash .................................................................

3,000

Income Tax Expense ................................................ Income Tax Payable ........................................

6,000

33,600

3,700

4,400

350

3,000

6,000

ACR11.1 (CONTINUED) b., c., and f. Jan. 1 Bal. 40,000 Cash Jan. 1

Bal.

24,000

Buildings

Summary

50,000 Summary

315,560

Summary

30,000 Summary

88,200

Summary

100,000 Summary

6,000

Summary

296,000 Adj.

3,000

Dec. 31

Bal.

Jan. 1

Accumulated Depreciation—Buildings

87,240 Accounts Receivable

Jan. 1

Bal.

Summary Dec. 31

Bal.

45,500 Summary

296,000

320,000 Summary

1,700

67,800

Bal.

Summary Dec. 31

Bal.

Summary Dec. 31

1,700 Jan. 1 Bal.

1,500

Dec.31 Adj.

3,700

Dec.31 Bal.

3,500

Dec. 31

Adj.

4,400

Dec. 31

Bal.

26,400

Bal.

55,600

Summary

322,000 Summary

35,100

Summary

330,000 Bal.

98,700

Adj.

350

Interest Payable Dec. 31 Dividends Payable

70,000 Summary

250,000

330,000 Summary

6,440

Summary

5,600

Income Tax Payable

143,560

Dec. 31 Adj.

6,000

Mortgage Payable

4,400 Dec.31 Adj. 35,100

Bal.

22,000

Dec. 31

Supplies Jan. 1

Bal.

Jan. 1

Inventory Jan. 1

Jan. 1

Accounts Payable

Allowance for Expected Credit Losses Summary

Bal. 142,000

33,600

Summary 2,000

Jan. 1

Bal.

80,000

Dec. 1 Bal.

78,000

5,900

ACR11.1 (CONTINUED) Supplies Expense b., c., and f. (continued)

Dec. 31 Adj.

Preferred Shares

Dec. 31 Bal.

Summary

50,000

33,600 0

Depreciation Expense Dec. 31 Adj.

Common Shares

Dec.

Jan. 1

30,000

Summary

30,000

Dec. 31

Bal.

60,000

31 Bal.

Dec. 31 Adj.

127,400

Dec. 31 Adj.

3,000

5,600 Dec. 31

26,750

Dec. 31 Bal.

Dec. 31

Bal.

148,550

Jan. 1

Summary

Bal. 9,400

5,600 Dec. 31

Dec. 31 Bal.

3,000

4,350

4,000

Dec. 31 Adj.

350

Dec. 31 Bal.

Dec. 31

Adj.

6,000

Dec. 31

Bal.

Sales Summary 420,000

420,000

Dec. 31 Bal.

Cost of Goods Sold

Dec. 31 Bal.

Dec. 31

Income Tax Expense

CE 5,600

Dec. 31 CE

Dec. 31

Interest Expense

Dividends Declared

Summary 250,000

Dec. 31 CE

Dec. 31

393,250

Dec. 31

26,750

Dec. 31

Bal.

Dec. 31 CE 420,000

250,000

88,200

Dec. 31 Bal.

Dec. 31 CE

6,000

Income Summary

Salaries Expense Summary

3,700

Bal.

Dec. 31 CE

Bank Charges Expense

Accumulated Other Comprehensive Income

Summary

4,400

3,700

31 Bal.

Retained Earnings Dec. 31 CE

4,400 Dec. 31 CE

Credit Losses Dec.

Jan. 1

Dec. 31 CE 33,600

88,200

CE – Means closing entry

ACR11.1 (CONTINUED) d. HAMPTON CORPORATION Adjusted Trial Balance December 31, 2024 Debit Cash Accounts receivable Allowance for expected credit losses Inventory Supplies Land Buildings Accumulated depreciation—buildings Accounts payable Interest payable Dividends payable Income tax payable Mortgage payable Preferred shares Common shares Retained earnings Accumulated other comprehensive income Dividends declared Sales Cost of goods sold Salaries expense Supplies expense Depreciation expense Credit losses Bank charges expense Interest expense Income tax expense

Credit

$ 87,240 67,800 $ 3,500 143,560 5,900 40,000 142,000 26,400 98,700 350 5,600 6,000 78,000 50,000 60,000 127,400 9,400 5,600 420,000 250,000 88,200 33,600 4,400 3,700 3,000 4,350 6,000 $885,350

$885,350

ACR11.1 (CONTINUED) e. (1) HAMPTON CORPORATION Statement of Income Year Ended December 31, 2025

Sales ..... ............................................................... Cost of goods sold ................................................... Gross profit ............................................................. Operating expenses Salaries expense ............................................ Supplies expense ........................................... Depreciation expense ..................................... Credit losses ................................................... Bank charges expense ................................... Total operating expenses....................... Income from operations ........................................... Other income and expenses Interest expense ............................................. Income before income tax ....................................... Income tax expense................................................. Net income ..............................................................

$420,000 250,000 170,000 $88,200 33,600 4,400 3,700 3,000 132,900 37,100 4,350 32,750 6,000 $ 26,750

ACR11.1 (CONTINUED) e. (2) HAMPTON CORPORATION Statement of Changes in Equity Year Ended December 31, 2024

Balance Dec. 31, 2023 Issued preferred shares Issued common shares Dividends declared Net income Balance Dec. 31, 2024

Share Capital Preferred Common Shares Shares

Retained Earnings

Accumulated Other Comprehensive Income

$30,000

$127,400

$9,400

(5,600) 26,750 $148,550

$9,400

$50,000 30,000

$50,000

$60,000

Total $166,800 50,000 30,000 (5,600) 26,750 $267,950

(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)

ACR11.1 (CONTINUED) e. (3) HAMPTON CORPORATION Statement of Financial Position December 31, 2024 Assets Current assets Cash .......................................................... Accounts receivable ................................... Less: Allowance for expected credit losses Inventory .................................................... Supplies ..................................................... Total current assets ............................. Property, plant, and equipment Land ........................................................... Buildings .................................................... $142,000 Less: Accumulated depreciation ............... 26,400 Total property, plant, and equipment .. Total assets ........................................................

$ 87,240 $67,800 3,500

64,300 143,560 5,900 301,000

40,000 115,600 155,600 $456,600

ACR11.1 (CONTINUED) e. (3)(continued) Liabilities and Shareholders‘ Equity Current liabilities Accounts payable ...................................... Interest payable ......................................... Dividends payable ..................................... Income tax payable .................................... Current portion of mortgage payable ......... Total current liabilities ....................... Non-current liabilities Mortgage payable ...................................... Total liabilities ................................... Shareholders‘ equity Share capital $2.80 Preferred shares, cumulative, 50,000 shares authorized, 500 issued .............................. Common shares, unlimited number of shares authorized, 3,500 issued ........................................ Total share capital .......................................................... Retained earnings ......................................................... Accumulated other comprehensive income.................... Total shareholders‘ equity ............................................. Total liabilities and shareholders‘ equity ..............

$98,700 350 5,600 6,000 2,500 $113,150 75,500 188,650

$ 50,000 60,000 110,000 148,550 9,400 267,950 $456,600

ACR11.1 (CONTINUED) f.

Closing Entries:

2024 Dec. 31

031

Sales ............................................................... Income Summary ...................................

420,000

Income Summary ............................................ Cost of Goods Sold ................................ Salaries Expense ................................... Supplies Expense .................................. Depreciation Expense ............................ Credit Losses ......................................... Bank Charges Expense ......................... Interest Expense .................................... Income Tax Expense .............................

393,250

Income Summary ............................................ Retained Earnings .................................

26,750

Retained Earnings .......................................... Dividends Declared ................................

5,600

420,000

250,000 88,200 33,600 4,400 3,700 3,000 4,350 6,000

26,750

LO 2,3,4 BT: AP Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

5,600

CT11.1

FINANCIAL STATEMENT IMPACT

Declared a dividend of $0.55 per share.

Common Shares Increase by $28,500 Unchanged

Paid the dividend of $0.55 that had been declared previously.

Unchanged

Decrease by $5,500 Unchanged

Declared and distributed a 10% stock dividend. The company's shares were trading at $3.30 per share. Repurchased 2,000 common shares at a price of $3.00 per share. The repurchased shares were cancelled. Completed a 2-for-1 stock split.

Increase by $3,300 1 Decrease by $5,780 2 Unchanged

Decrease by $3,300 Decrease by $220 4 Unchanged

Transaction Issued 10,000 common shares at $2.85 per share.

(10,000 x 10%) x $3.30 ($28,500 + $3,300) / (10,000 + 1,000) = $2.89; 2,000 shares x $2.89 = $5,780 3. 2,000 shares x $3.00 = $6,000 4 $6,000 - $5,780 - $220 2.

LO 2,3 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Retained Earnings Unchanged

Cash Flow Increase by $28,500 Unchanged Decrease by $5,500 Unchanged Decrease by $6,000 3 Unchanged

CT11.2 a.

FINANCIAL REPORTING CASE

The North West Company Inc. reported $3.21 basic earnings per share for the year ended January 31, 2022 and $2.87 for the year ended January 31, 2021.

North West reported a weighted average number of common shares of 48,268,000 in 2022, and 48,758,000 in 2021.

b. 1. Number of common shares authorized 1. Number of preferred shares authorized 2. Number of common shares issued 2. Number of preferred shares issued

2022 unlimited N/A 47,870,279 N/A

2021 unlimited N/A 48,613,319 N/A

Although very close in amount, the number of common shares issued does not correspond to the weighted average number of common shares because the number of shares issued is the actual number of shares issued as at the end of the fiscal year while the weighted average number of shares weights shares issued and repurchased during each fiscal year for the proportion of the year they have been outstanding.

The dollar amount showing in Note 16 for the Common Shares account is $173,081,000 and this is the amount received by the company when it issued the 47,870,279 common shares that are currently outstanding at January 31, 2022. The company would have received on average $3.62 per share ($173,081,000 ÷ 47,870,279).

North West reported other comprehensive income in the amount of $15,110,000 for the 2022 fiscal year and other comprehensive income of $4,281,000 for the 2021 fiscal year.

North West declared dividends in the amount of $70,420,000 for the 2022 fiscal year and $67,276,000 for fiscal 2021.

LO 4,5 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT11.3 a.

FINANCIAL ANALYSIS CASE

Companies choose different types of ownership structures for a variety of reasons. One of the most common reasons companies choose to go public is to access the funds available through the capital markets. However, this access to capital comes with costs. Once a company goes public, it must follow the securities regulations, which results in additional costs and requirements such as filing quarterly financial statements, audited annual financial statements, expanded disclosure requirements, and various other reports. Also, because public companies must publicly disclose financial information, competitors may have access to useful information. Although private companies may have more difficulty accessing large amounts of capital, some choose to remain private in order to retain control over the company. Once a company is public, it is answerable to a variety of stakeholders. Consequently, some companies choose to remain private in order to avoid revealing information to the general public, in particular to their competitors.

Public companies should record noncash transactions at the fair value of the consideration received (the new restaurant). If that consideration cannot be reliably determined, the fair value of the consideration given up (the shares) should be used instead. Since Boston Pizza is a public company, it can easily obtain an objective measure of the fair value of its shares through the TSX (the exchange where it is listed). Private companies should record noncash transactions at the most reliable fair value of what was received or given up. When private companies such as Pizza Pizza, whose shares are not publicly traded, need to determine the fair value of their shares, they often hire a business valuation expert to provide them a valuation. It is more usual that they find the fair value of the consideration received (that is, of the new restaurant) to be more reliable and relevant to use than the fair value of the consideration given up, given the lack of a readily available share price.

CT11.3 (CONTINUED) c.

When the standard setters developed ASPE, a major focus was on the objectives and needs of the users of the financial statements. The users generally fall into two broad groups: creditors and private shareholders. The two groups are generally more focused on shorter-term cash flows, liquidity, balance sheet strength, interest coverage, and solvency issues. Given these users‘ needs, basic earnings per share (EPS) is not usually considered to be relevant. In addition, the shares are usually very closely held. Therefore, ASPE does not require that private companies report EPS (but if the company thinks EPS is relevant information, it is free to report it).

LO 1,5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

CT11.4

PROFESSIONAL JUDGEMENT CASE

At the beginning of the year: Assets Liabilities Shareholders' equity

Option 1 All equity

Option 2 All debt

Option 3 Debt and equity

$1,000,000 1,000,000

$1,000,000 999,999 1

$2,000,000 1,000,000 1,000,000

Option 1 All equity

Option 2 All debt

Option 3 Debt and equity

$1,000,000 850,000 150,000 150,000

$1,000,000 850,000 150,000 60,000 90,000

$2,000,000 1,700,000 300,000 60,000 240,000

37,500 $ 112,500

22,500 $ 67,500

60,000 $ 180,000

a. Projected statements of income:

Revenue (= to assets) Operating expenses (85% of revenue) Income from operations Interest expense (6% of liabilities) Income before income tax Income tax expense (25% of income before income tax) Net income

CT11.4 (CONTINUED) b.

The return on common shareholders‘ equity for each option is calculated below. Note that because the net income will be paid out as dividends, the retained earnings at the end of the year will be zero so the average common shareholders‘ equity at the end of the year will be the same amount that it was at the beginning of the year.

Net income for the year Common shareholder's equity, beg. of year Common shareholder's equity, end of year Average shareholder's equity for the year Return on common shareholders‘ equity

Option 1 All equity $ 112,500 1,000,000

Option 2 All debt $67,500 1

Option 3 Debt and equity $ 180,000 1,000,000

1,000,000

11.3%

6,750,000%

18.0%

The option with the lowest return is the one with the lowest level of debt relative to equity. When no debt is taken on, a company cannot take advantage of leverage, which means that the company does not profit by using the bank‘s money. As a result, the best return is the one with all debt, Option 2. Because the denominator is so low (only $1 of equity), the return appears to be astronomically high. c.

The amount of cash that Depinder would have before income tax is calculated in the table below. He will have the most cash under Option 3 if he borrows money from the bank and buys the larger restaurant. Option 1 All equity $112,500

Option 2 Option 3 All debt Debt and equity Dividends received by Depinder $ 67,500 $180,000 Interest received by Depinder 60,000 $127,500 d. If the operating expenses are greater than the revenues, then the company will have a loss. The return on common shareholders‘ equity will be negative. The more debt the company has, the more interest will have to be paid to the bank and this will make the loss greater and the return on common shareholder‘s equity lower than it would have been otherwise.

CT11.4 (CONTINUED) e.

If the bank loan was replaced with preferred shares, there would be no interest expense on the statement of income and net income would rise. The preferred dividends would be reported on the statement of changes in shareholders‘ equity and not on the statement of income. The net income for the large restaurant would be exactly double what is currently reported on the statement of income for Option 1, the purchase of the small restaurant.

If the business was not incorporated, the statement of income would still be prepared but income tax expense would not apply and therefore not be shown. This is because the net income of the business is taxed at the personal level as the business is not a separate legal entity.

LO 2,3,4,5 BT: S Difficulty: C Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT11.5 a.

ETHICS CASE

The stakeholders in this situation are: Vince Ramsey, president of Flambeau Corporation Janice Rahn, financial vice-president The shareholders of Flambeau Corporation

The stock dividend results in a decrease in retained earnings and an increase of the same amount in share capital with no change in total shareholders‘ equity. There is no change in total assets and no change in total liabilities and shareholders‘ equity.

The 5% stock dividend will likely reduce the value at which the shares are trading by around 5%—at least in the immediate future. Since essentially nothing has changed in the company‘s financial position, the only effect a 5% stock dividend will have on the market value of the shares is to allocate the equity of the business over 5% more shares.

There is nothing unethical in declaring and issuing a stock dividend. However, the president‘s order to write a press release convincing the shareholders that the stock dividend is just as good as a cash dividend is unethical. A stock dividend is not a cash dividend and does not necessarily leave the shareholders in the same position. A stock dividend is a ―paper‖ dividend—the company issues a certificate, not a cheque (cash).

LO 3 BT: C Difficulty: M Time: 20 min. AACSB: Analytic, Ethics, and Communication CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT11.6

FINANCIAL ANALYSIS CASE

Alternative 2 (Issue $50,000 common shares)

Alternative 3 (Issue $50,000 preferred shares)

Debt to total assets

$71,980 ÷ $195,280 = 36.9%

$31,980 ÷ $207,680 = 15.4%

$31,980 ÷ $204,680 = 15.6%

Return on common shareholders‘ equity

$21,600 ÷ [[($50,000 + $51,700) + ($50,000 + $73,300)] ÷ 2] = 19.2%

$24,000 ÷ [[($50,000 + $51,700) + ($100,000 + $75,700)] ÷ 2] = 17.3%

($24,000 – $3,000) ÷ [[($50,000 + $51,700) + ($50,000 + $72,700)] ÷ 2] = 18.7%

$24,000 ÷ 1,000 = $24.00

($24,000 – $3,000) ÷ 500 = $42.00

Basic earnings $21,600 ÷ 500 per share = $43.20

(Debt to assets ratio = Total liabilities ÷ Total assets) (Return on common shareholders‘ equity = (Net income – preferred dividends) ÷ Average common shareholders‘ equity) (Basic earnings per share = (Net income – preferred dividends) ÷ Weighted average number of common shares)

Alternatives 2 and 3 provide for the least amount of debt—$31,980 instead of $71,980 reported in Alternative 1. Instead of borrowing, the company has issued shares in Alternatives 2 and 3.

CT11.6 (CONTINUED) c.

Alternative 1, borrowing instead of issuing shares, provides for the highest return on equity and the highest basic earnings per share.

If I were John, I would choose Alternative 1. This alternative would generate a smaller amount of net income because of the amount of aftertax interest expense paid on the loan; however, the return on common shareholders‘ equity and basic earnings per share would increase because the distribution of net income is limited to current shareholders.

LO 5 BT: E Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT11.7 a.

SERIAL CASE

June 15 Dividends Declared .................................... Dividends Payable ..............................

60,000

June 30 Dividends Payable ....................................... Cash ...................................................

60,000

Since the date of record on the declaration of the dividend is June 20, 2025, only shareholders on that date are eligible to receive dividends. Bev, Doug, and Emily each receive one-third of the dividend and will each receive $20,000. b.

June 30 Cash ............................................................ 185,000 Common Shares (100 × $1,850) .........

185,000

ANTHONY BUSINESS COMPANY LTD. Statement of Retained Earnings Year Ended June 30, 2025

Retained earnings, June 30, 2024 .......................................................... Add: Net income ................................................................................... Less: Dividends declared....................................................................... Retained earnings, June 30, 2025 ..........................................................

$396,734 218,900 615,634 60,000 $555,634

(Ending retained earnings = Beginning retained earnings + Net income – Dividends declared)

If ABC followed IFRS rather than ASPE, a statement of changes in equity explaining the changes in each component of shareholders‘ equity would be required instead of a statement of retained earnings.

CT11.7 (CONTINUED) d.

ANTHONY BUSINESS COMPANY LTD. Statement of Financial Position (Partial) June 30, 2025 Shareholders‘ equity Common shares, unlimited number authorized, 400 issued ... Retained earnings .................................................................. Total shareholders‘ equity ..............................................................

$185,300 555,634 $740,934

($300 + $185,000 = $185,300) LO 2,3,4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Legal Notice

CHAPTER 12 REPORTING AND ANALYZING INVESTMENTS LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Identify reasons to invest, and how to classify investments. Account for non-strategic investments. Account for strategic investments. Explain how investments are reported in the financial statements. Compare the accounting for a bond investment and a bond payable (Appendix 12A).

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO 1.

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO

13.

19.

25.

2,5

1,4

14.

20.

26.

2,5

2 2

15.

21.

10.

16.

22.

11.

17.

23.

3,4

12.

18.

24.

Brief Exercises 1.

10.

13.

2,3,4

11.

14.

2,3,4

12.

Exercises 1.

10.

1,4

2,4

2,3,4

11.

2,3

2,3,4

Problems: Set A and B 1.

2,4

2,3,4

10.

2,4

2,3,4

11.

2,3,4

3,4

Cases 1. 2,3,4,5 AN

3,4

2,3,4

1,3,4

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation

Difficulty:

Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

Cash equivalents are securities that have insignificant risk, such as a term deposit or a guaranteed investment certificate, that mature within 90 days or less from the date of purchase and are not debt investments. When buying debt investments, management‘s intention is to earn interest income or gain on resale if the investment is to be held for trading, or to earn interest income if the debt investment is expected to be held to maturity.

LO 1 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Companies invest primarily for three reasons: to invest temporary excess cash to earn investment income such as interest and dividends, to generate gains through the appreciation in the value of an investment, or to influence or control other companies through the acquisition of large amounts of common shares.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

A non-strategic investment is made for the purposes of generating investment income. A strategic investment is purchased to influence or control the operations of another company in some way.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Human judgement is necessary in analyzing and interpreting the several sources of data and opinions expressed concerning investment opportunities. Once that human judgement is exercised, the execution of a buy or sell order on an investment can be automated to suit the decisions made based on judgement. If the decision to buy or sell is left to algorithms, the risk is that these algorithms may not take into account some non-financial information that influences the market value of the investment.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Before making an investment in a company that owns several hotels, data analytics could assist in confirming whether or not the investment is warranted. Data such as occupancy rates, average room rate, traffic information for the location, future development announcements for the neighbourhood area and construction permits issued for the area are examples of the data that may be useful in making the decision to invest.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

This equity investment should be classified as a non-strategic investment as the company intends to sell its Suncor Energy shares if the need for cash arises.

(b)

The investment would most likely be classified as a current asset (although judgement must be exercised here) as it was not purchased with the intent of holding it for a long period of time.

LO 1,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

For most debt and equity investments, their fair value is determined by the stock and bond markets. Adjustments in the carrying amount of investments are made for increases and decreases in fair value and the adjustments generate unrealized gains and losses from holding the investments. For inventory, the valuation for reporting is at the lower of cost and net realizable value. Inventory cannot be written up beyond historical cost. In other words, there cannot be unrealized gains for inventory due to fair value adjustments. The same holds true for accounts receivable that are reported at realizable value by establishing an allowance for doubtful accounts.

LO 2 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

Common shares in a publicly traded company that will be sold within a year are valued at fair value.

(b)

Bond investments that will be held until maturity are valued at amortized cost.

(c)

Shares in a private company that do not have a determinable fair value are valued at cost.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Management might choose to account for a bond investment at amortized cost because the reasons for purchasing the bond were to hold it to maturity and earn interest income. If management does not intend to trade the bond or earn gains from the appreciation in the price of the bond, then information pertaining to the fair value of the bond is not relevant so its carrying amount does not have to be adjusted to fair value. By not adjusting the bond to its fair value, the company would not be recording any unrealized gains or losses pertaining to the bond and this would eliminate the volatility in the amounts reported in the financial statements caused in turn by the volatility of the interest rate environment affecting the bond market.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 12-1341 Chapter 12 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

10.

Realized gains (losses) are the differences between fair values and the carrying amounts when the investments are actually sold. Unrealized gains (losses) are the differences between the fair values and carrying amounts of investments still held or owned by the investor.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

(a)

The $10,000 difference between the carrying amount of $245,000 and the fair value of $255,000 should be recorded as an unrealized gain and reported in the other income and expenses section in the statement of income.

(b)

Yes, the answer would be different if the fair value could not be determined. No unrealized gain would be reported and the investment would be valued at cost.

LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

12.

(a)

The bonds would be shown at their fair value of $1,050,000.

(b)

The interest income earned on the bonds would be reported as other income, under the other income and expenses section of the statement of income.

LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

(a)

Under the cost model, the carrying amount of the company‘s investment is equal to its cost. The investment account is not affected by the earnings of the entity into which the investment is made, as it is under the equity method. Furthermore, dividends received do not affect the investment account when using the cost model as they do when using the equity method. In the cost model, the investing company records any dividends received as investment income, leaving the carrying amount (usually cost) of the investment intact.

(b)

Under the equity method, the investment is also recorded at cost on the day when the investment is purchased. However, the investment account is increased or decreased by the investor‘s share of the investee company‘s net income or loss for the period, respectively. The investing company would reduce the carrying amount of its investment by any dividends received from the investee, since the value of the latter‘s net assets decreases as it declares dividends.

(c)

Under the fair value through profit or loss model, the recording of the strategic investment is at cost at the date of purchase, but at all subsequent reporting periods, the carrying amount is adjusted to the investment‘s fair value at that date. The investing company records any dividends received as investment income.

LO 3 BT: K Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

When an investor exercises significant influence over its associate, it is in a position to affect some of the operational decisions of the associate through membership on the board of directors. Because this degree of influence has been achieved, it is deemed appropriate for the investor to record, in an account called Income from Associates, the investor‘s proportionate share of the net income or loss reported by the associate. This recording of income is done even if the associate has paid no dividends to the investor. If the associate does pay a dividend to the investor, the dividend cannot be recorded in the statement of income because the dividend is simply a distribution of the previously recorded income from the associate. Consequently, dividends received are treated as a return of the investment (reduction of the investment account) instead of revenue.

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

(a)

Under the cost model, the investor has little to no influence over the investee, due to its relatively small ownership interest. Therefore, the only entries the investor would make relative to this investment is to record any cash dividends it receives from the investee as investment income and any realized gains or losses when selling the investment.

(b)

The equity method is used when the investor exercises significant influence over the investee (known as an associate if it is significantly influenced). Consequently, the investor has played a role in the determination of any net income or loss experienced by the investee. As the investee earns income, its value will increase. Thus, the investor‘s carrying amount of its investment in the investee should reflect this reality. Consequently, the investor records investment income (loss) when the investee reports net income (loss) and does not wait for the distribution of income by way of dividends to record income from the investee. The investment is reduced by the amount of dividends received and dividends received do not result in the recording of dividend income. This is done because the dividend is simply a distribution of income that has already been recorded. Furthermore, when the investee (also known as associate) distributes a dividend, the value of the associate falls, so a corresponding reduction in the investment account balance is appropriate.

(c)

Under the fair value through profit or loss model, as with the cost model, the investor would record, in the statement of income, any cash dividends it receives from the investee as investment income along with any realized gains or losses when selling the investment. In addition, unrealized holding gains or losses are recorded in the statement of income at the end of each reporting period.

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

(a)

(b)

Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, material inter-company transactions, interchange of managerial personnel, or technological dependency. An investment (direct or indirect) of 20% or more of the voting shares of an investee constitutes significant influence unless there exists evidence to the contrary. Control on the other hand exists when one entity holds more than 50% of the voting shares of the investee. Companies are required to use judgement rather than to blindly follow the 20% and 50% guidelines. For example, 25% ownership in a company that is 75% controlled by another company would not necessarily indicate significant influence. Similarly, a single investor holding 45% ownership in a public company that has the remaining 55% ownership spread over thousands of shareholders could have control over the investee.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

An associate is an investee where significant influence exists; normally 20% or more of the outstanding voting shares are held by the investor. In the case of a subsidiary, the investor has control over the investee by holding more than 50% of the outstanding voting shares. Investments in an associate are accounted for using the equity method and investments in subsidiaries are consolidated with the parent company under IFRS. Consolidation is optional under ASPE.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Consolidated (combined) financial statements are prepared when a parent company owns a subsidiary (ownership with control). Consolidated financial statements show the combined assets and liabilities of both the parent and subsidiary companies. To avoid duplication, the investment account is eliminated and replaced with the assets and liabilities of the subsidiary.

LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

(a)

Trading investments are classified as current assets under the assumption that management intends to trade them actively, thereby implying that they will be sold fairly soon.

(b)

Investment in associates is classified as a long-term investment under the assumption that if an investor has gone to the trouble of obtaining a large enough block of shares to significantly influence the investee, they would want to hold on to the investment for more than one year.

(c)

Debt investments held to maturity are classified as long-term investments except in the year of maturity, when the securities would be classified as current assets.

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

20. Account

Financial Statement

Classification

(a)

Unrealized Gain on Trading Investments

Statement of Income

Other income and expenses

(b)

Realized Loss on Trading Investments

Statement of Income

Other income and expenses

(c)

Income from Associates

Statement of Income

Other income and expenses

(d)

Dividend Income

Statement of Income

Other income and expenses

(e)

Interest Income

Statement of Income

Other income and expenses

(f)

Investment in Associates

Statement of Financial Position

Non-current assets

LO 4 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Comprehensive income includes all changes to shareholders‘ equity during a period except changes resulting from investments by shareholders and dividends declared. Net income is one component of comprehensive income. The other component is other comprehensive income, which includes the current period‘s unrealized gains/losses on securities accounted for using the fair value through other comprehensive income model and certain other unrealized gains/losses such as revaluation gains under the revaluation model for property, plant, and equipment that was covered in Chapter 9. Net income and other comprehensive income can be reported separately in two statements although the preferred approach is to report both in a single statement known as the statement of comprehensive income. Accumulated other comprehensive income is the cumulative total of each period‘s other comprehensive income/loss. Just as net income is closed out to retained earnings at the end of the year, other comprehensive income is closed out to accumulated other comprehensive income at the end of the year. The changes to accumulated other comprehensive income are reported in the statement of changes in equity, and the ending balance of accumulated other comprehensive income is reported in the shareholders‘ equity section of the statement of financial position.

LO 4 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

22.

Net income reported on the statement of income is a component of comprehensive income. Net income along with other comprehensive income is reported in the statement of comprehensive income (if the company chooses to report both under a single statement). Net income (loss) increases (decreases) retained earnings. Other comprehensive income (loss) increases (decreases) accumulated other comprehensive income which, like retained earnings, is an equity account. Changes in both retained earnings and accumulated other comprehensive income are reported in the statement of changes in equity. Total shareholders‘ equity is reported in the statement of financial position (assets = liabilities + shareholders‘ equity).

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

(a)

TC Energy Corporation accounted for its investment in Bruce Power using the equity method. TC Energy does not have control but does have significant influence over its associate Bruce Power.

(b)

The name of the account that was likely used for the Bruce Power investment would be Investment in Associate.

(c)

The carrying amount of the account Investment in Associate is increased by the 48.4% of the net income reported by Bruce Power for the period. The carrying amount is reduced by the dividends received from Bruce Power during the period. The carrying amount is not affected by the market value of the shares at the reporting date, even if the market value could be determined. It is possible that the market value of the Bruce Power shares would change by the net change in the equity of the company though unlikely, as the change in the market value is a reflection of the expectation for future earnings.

LO 3,4 BT: AP Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

*24.

The accounting treatment for an investment in bonds is essentially the inverse of the recording required for a bond liability. In both cases, the bond is recorded at its issue price, with any premium or discount netted with the bond account. The premium or discount is amortized using the effective interest method unless the bond is held for trading. Debt investments in bonds that are held for trading are re-valued to fair value at year-end, whereas bond liabilities are not because it is extremely rare for them to have been issued for the purposes of trading (because they are liabilities, not investments).

LO 5 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*25. (a)

A bond is purchased at a premium or discount because the coupon or contractual rate of interest does not match the market rate of interest (the rate of interest expected by the investor) on the date of the purchase. If the market rate of interest is higher than the coupon interest rate, the bond will be purchased at a discount. Conversely, if the market rate of interest is lower than the coupon interest rate, the bond will be purchased at a premium.

(b)

The amortization of a bond premium will cause the interest income to be lower than if the bond had been issued at par or at a discount. This is the case because the amortization decreases the carrying amount of the bond over the term such that the carrying amount will equal the par value of the bond at the maturity date. Conversely, the amortization of a bond discount will cause the interest income to be higher than if the bond had been issued at par or at a premium. This is the case because the amortization increases the carrying amount of the bond over the term such that the carrying amount will equal the par value of the bond at the maturity date. The amortization of the premium or discount causes interest income to be the same as that determined by using the market rate of interest and reflects the true cost of borrowing for the company.

(c)

When using the fair value model for debt securities, the investment is held for a short time and any misstatement of interest caused from not amortizing the discount/premium is not considered material.

LO 2,5 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

*26.

A company would choose to use the fair value through profit or loss model when this model corresponds to management‘s intention in holding the bonds. The fair value through profit or loss model is generally used when the bonds are held for short periods of time for the purpose of generating interest income, and possibly a gain on their resale. If management intended for the investment to be held to the maturity date of the bond, the amortized cost model would be chosen.

LO 2,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*27.

When the bonds are sold by the investor on the open market, the investor must record the sale. The investee is not affected by the sale since an independent third party purchases the bonds on the market, and as such, that transaction is occurring between two investors and has nothing to do with the company that originally issued the debt. The liability has not been settled, but rather, the amount of the bonds owing is simply payable to a different investor.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12.1 (a) Debt or Equity Investment? 1.

120-day treasury bill

Debt

(b) Non-Strategic or Strategic Investment? Non-Strategic

A few common shares of a small oil company purchased with a temporary surplus of cash that will be held temporarily 30% of the common shares of a company purchased in order to obtain a position on the board of directors Bonds purchased with a temporary cash surplus that will not be held to maturity 100% of the common shares of a company purchased to combine its operations with those of the investor Five-year bonds intended to be held for the entire term of the bonds A term deposit that matures in 60 days.

Equity

Non-Strategic

Equity

Strategic

Influence the operations of the other company

Debt

Non-Strategic

Interest income

Equity

Strategic

Control the operations of the other company

Debt

Non-Strategic

Interest income over the long term

Debt

Non-Strategic

Interest income over the very short term

(c) Reason for Making the Investment? Interest income for 120 days Share price appreciation (capital gain) and dividend income

LO 1 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.2 a. Jan. b. July c. Dec.

Dec.

Trading Investments ............................................... 200,000 Cash...............................................................

200,000

Cash ....................................................................... Interest Income ($200,000 × 10% × 6/12) ......

10,000 10,000

Interest Receivable ................................................. Interest Income ($200,000 × 10% × 6/12) .....

10,000

Unrealized Loss on Trading Investments ................ Trading Investments ..................................... ($200,000 – [$200,000 × 97%])

6,000

10,000

6,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.3 2025 Jan.

Cash ....................................................................... 194,000 Trading Investments ......................................

194,000

The investment is already carried at fair value so no gain or loss will result on this sale. LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.4 a. Aug.

b. Dec.

c. Dec.

Trading Investments. .............................................. Cash...............................................................

45,000

Cash ....................................................................... Dividend Income ............................................

1,000

Trading Investments ............................................... Unrealized Gain on Trading Investments .......

4,000

45,000

1,000

4,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.5 a. Feb.

b. Feb.

Cash ............................................................................... Realized Loss on Trading Investments ………... .. Trading Investments .......................................... Cash ........................................................................... Realized Loss on Trading Investments ………... ........ Trading Investments ..........................................

47,000 2,000 49,000 44,000 5,000 49,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.6 a. Jan.

Dec.

Investment in Associates .............................................. 800,000 Cash.....................................................................

800,000

Cash (25% × $40,000).................................................. Investment in Associates .....................................

10,000 10,000

Investment in Associates (25% × $80,000) .................. Income from Associates .....................................

20,000 20,000

Rook would report $20,000 of income from its investment in Hook for the year.

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.7 a. Jan.

Dec.

Investment in Associates .............................................. 800,000 Cash.....................................................................

800,000

Cash (25% × $40,000).................................................. Dividend Income ..................................................

10,000

Since Rook uses the cost model to account for its investment, the only income that Rook should report is its pro-rata share of any dividends declared by Hook, which amounts to $10,000 (25% × $40,000).

Accounting for the investment using the cost model is different from using the equity method which records a pro-rata share of income from Hook and records receipt of dividends as a reduction of the investment account on the statement of financial position.

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.8 a.

Significant influence – The balance in the equity investment account at December 31, would be $287,000. The investment would be reported as an investment in associates in long-term investments. Cost of investment Add: Share of Dong‘s net income (20% × $350,000) Less: Dividends received from Dong (20% × $40,000)

$225,000 70,000 (8,000) $287,000

Without significant influence, the investment would be reported at the fair value of $275,000 in long-term investments.

Under the cost model, the investment would be reported at its purchase price of $225,000. It would be reported as an investment in associates in long-term investments.

LO 2,3,4 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.9 (a) Significant Influence Equity Method Statement of Income: Other income and expenses Dividend income 0 Income from associates $70,000 Unrealized gain on longterm investments 0 *Fair value through profit or loss model

(b) No-Significant Influence FVTPL Model*

(c)

Cost Model

$ 8,000 0

$8,000 0

50,000

LO 2,3,4 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.10 Financial Statement

Classification

A bond investment that will mature next year

Statement of financial position

Current assets

Dividend income from a trading investment

Statement of Income

Other income and expenses

Investment in associate

Statement of financial position

Long-term investments

Investment of a few hundred Statement of financial common shares in a large publicly position traded company that is held for trading purposes

Current assets

A bond investment that management intends to hold for 10 years

Statement of financial position

Long-term investments

Realized gain on a trading investment

Statement of Income

Other income and expenses

Unrealized gain on a trading investment

Statement of Income

Other income and expenses

Dividends received from a strategic investment accounted for using the equity method

Statement of financial position

Long-term investments (Investment in Associate is reduced)

Interest earned on a trading investment

Statement of Income

Other income and expenses

LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.11 Include in net income or not__

Item Realized gain on long-term investments $5,000 Unrealized gain on long-term investments $9,000 Interest income $4,000 Unrealized gain on trading investments $28,000 Income from associate $17,000 Dividend from associate $8,000

Include Exclude* Include Include Include Exclude**

* The unrealized gain on the bonds intended to be held to maturity is not reported as this investment is accounted for on the amortized cost basis. ** The dividend received from the associate of $8,000 will be recorded as a reduction in the account Investment in Associates. LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.12 SABRE CORPORATION Statement of Financial Position (Partial) December 31, 2024 Assets Current assets Trading investments……………… ............................................

$ 45,000

Long-term investments Long-term investments .............................................................. Investment in associates ...........................................................

870,000 * 233,600 **

* **

$870,000 = $550,000 (equity investment in Epee at fair value) + $320,000 (bond investment held to maturity at amortized cost) $233,600 = $220,000 + ($50,000 × 40%) – ($16,000 × 40%)

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.13 Brookfield‘s purchase of investment in associates should be reported on the company‘s statement of cash flows as a cash outflow in investing activities. The amount would also be included in the statement of financial position in longterm investments as an investment in associates. Brookfield‘s share of income from associates would be reported on the company‘s statement of income in the other income and expenses section. The amount would also cause an increase in the investment in associates account in the long-term investments section on the statement of financial position. Dividends received from associates would be reported on the company‘s statement of cash flows as a cash inflow as an operating activity or an investing activity. The amount would also reduce the investment in associates account on the statement of financial position. The year-end balance of investment in associates would be reported on the statement of financial position in long-term investments. LO 4 BT: C Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 12.14 a.

Investor

June

Dec.

Long-Term Investments .......................................... Cash...............................................................

143,602

Cash ($150,000 × 5% × 6/12) ................................. Long-Term Investments .......................................... Interest Income ($143,602 × 6% × 6/12) ........

3,750 558

Investee

June

Dec.

143,602

4,308

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

143,602

Interest Expense ($143,602 × 6% × 6/12) .............. Cash............................................................... Bonds Payable ...............................................

4,308

143,602

3,750 558

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 12.1

1. 2. 3. 4. 5.

a. Debt or Equity Investment? Equity Debt Equity Debt Equity

b. Non-Strategic or Strategic Investment? Strategic Non-Strategic Strategic Non-Strategic Non-Strategic

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 12.2 (a) 1.

10-year BCE bonds

10-year GE bonds

5-year Government of Canada bonds 180-day treasury bill

4. 5.

Bank of Montreal preferred shares*

Common shares

NonStrategic NonStrategic NonStrategic NonStrategic NonStrategic

NonStrategic

(b) Held until maturity Trading

Trading

Current

Trading

Current

Neither trading or held to maturity Trading

Non-current

Current

* Note that if Kroshka is a public company, it has the choice and can elect to value these preferred shares using the fair value through other comprehensive income model. If Kroshka reports under ASPE, the investment would be carried using the fair value through profit or loss model. LO 1,4 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 12.3 a. July b. Dec.

Trading Investments ($1,000,000 × 108.5%) .......... Cash...............................................................

1,085,000

Interest Receivable ................................................. Interest Income ($1,000,000 × 4% × 6/12) .....

20,000

Adjustment to fair value: Dec. 31 Unrealized Loss on Trading Investments ................ ($1,000,000 × 107%) – $1,085,000 Trading Investments ......................................

1,085,000

20,000

15,000 15,000

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 12.4 a. Transactions Apr. 1 Trading Investments .................................................... Cash ....................................................................... July

210,000 210,000

1 Cash (2,000 × $5 ÷ 4) .................................................. Dividend Income ....................................................

2,500

02 Cash ............................................................................ Realized Gain on Trading Investments .................

57,000

2,500

4,500

Trading Investments .............................................. [($210,000 ÷ 2,000) × 500] Oct.

1 Cash [(2,000 – 500) × $5 ÷ 4] ...................................... Dividend Income ....................................................

b. Adjusting entries Dec. 31 Dividends Receivable ..................................................

52,500

1,875 1,875

1,875

Dividend Income ....................................................

1,875

31 Trading Investments .................................................... Unrealized Gain on Trading Investments ............... (1,500 × $115) – ($210,000 – $52,500)

15,000

1 Cash ............................................................................ Dividend Receivable ..............................................

1,875

31 Cash (700 x $89) ......................................................... Realized Loss on Trading Investments ........................ Trading Investments ............................................... (Carrying amount = $115 × 700)

62,300 18,200

Feb. 15 Cash (500 × $117) ....................................................... Realized Gain on Trading Investments .................. Trading Investments ............................................... (Carrying amount = $115 × 500)

58,500

Jan.

15,000

1,875

80,500

1,000 57,500

EXERCISE 12.4 (CONTINUED) c.

After the Feb. 15, 2025 sale, McCormick held 300 Starr preferred shares (2,000 – 500 – 700 –500) at carrying amount $34,500 (carrying amount per share $115 x 300) or ($210,000 – $52,500 + $15,000 – $80,500 – $57,500). The fair value of the 300 Starr shares was $35,100 (300 x $117) at Feb. 15, 2025.

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 12.5 a. Dec.

31 Trading Investments ........................................... Unrealized Gain on Trading Investments ...... ($54,000 – $52,000)

2,000 2,000

b. YANIK INC. Statement of Financial Position (Partial) December 31, 2024

Current assets Trading investments................................................................ $54,000 YANIK INC. Statement of Income (Partial) Year Ended December 31, 2024

Other income and expenses Unrealized gain on trading investments ..........................

c. Mar.

22 Cash ........................................................................... Realized Gain on Trading Investments .................. Trading Investments ..............................................

$2,000

22,000 1,000 21,000

LO 2,4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 12.6 Jan.

Mar.

June

Dec.

1 Investment in Associates .................................... Cash (60,000 × 40% × $16) .........................

384,000 384,000

18 Long-Term Investments ....................................... 1,680,000 Cash (400,000 × 15% × $28) ........................ 15 Cash ($140,000 × 40%) ....................................... Investment in Associates .............................

56,000

30 Cash ($300,000 × 15%) ....................................... Dividend Income ...........................................

45,000

31 Investment in Associates .................................... Income from Associates............................... ($300,000 × 40%)

120,000

31 Unrealized Loss on Long-Term Investments [($1,680,000 – (60,000 × $26)] ............................ Long-Term Investments ................................

1,680,000

56,000

45,000

120,000

120,000 120,000

When the equity method is used to account for investment in associates, the investment account is not adjusted to fair value. LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 12.7 a. Oct.

Investment in Associates ..................................

500,000

Cash (200,000 × $2.50) ............................... Dec.

b. Oct.

500,000

Dividend Receivable ($80,000 × 20%*)..... ……. Investment in Associates .............................

16,000

Investment in Associates .................................. Income from Associates ($200,000 × 20%*) .......................................

40,000

Long-Term Investments ....................................

500,000

16,000

40,000

Cash (200,000 × $2.50) ............................... Dec.

Dividend Receivable ($80,000 × 20%*)............. Dividend Income .......................................... 31

500,000 16,000 16,000

No entry

* 200,000 shares / 1,000,000 shares LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 12.8 a. and b. Statement of Income: Other income and expenses Dividend Income Income from associates Realized gain on trading investments Unrealized loss on trading investments

$10,000 40,000 15,000 (10,000) $55,000

(A) (B) (C) (D)

b. Calculations: Account Balance, beginning of year (given) Purchases of investments during the Carrying amount of investments sold during the year (given)

year

Trading Investments

Investment in Associates

$120,000

$500,000

50,000

120,000

(30,000)

Dividends received (given)

(60,000)

(B) Share of associates‘ income (derived)

40,000

($600,000 - $500,000 - $120,000 +$60,000) (D) Fair value adjustment (derived) ($130,000−$120,000 + $30,000 −$50,000)

(10,000)

Balance, end of year (given)

$130,000

$600,000

(A) Given for trading investments (C) Proceeds from sale of trading investments $45,000 less carrying amount of $30,000 LO 2,3,4 BT: AP Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 12.9 a.

Account

Balance, beginning of year Purchases of investments during the Carrying amount of investments sold during the year

year

Trading Investments

Investment in Associates

$100,000

$300,000

30,000

40,000

(43,000)*

(42,000)**

Dividends received

(8,000)

Share of associates‘ income Fair value adjustment derived ($94,000−$100,000 - $30,000 +$43,000)

43,000

Balance, end of year

* ** b.

7,000 $94,000 $333,000 $55,000 less gain of $12,000

$32,000 plus loss of $10,000 Trading Investments Trading Investments .................................................... Cash ..................................................................

30,000 30,000

Cash .......................................................................... Realized Gain on Trading Investments .............. Trading Investments ..........................................

55,000

Cash .......................................................................... Dividend Income ................................................

3,000

Trading Investments .................................................... Unrealized Gain on Trading Investments .............

7,000

12,000 43,000

3,000

7,000

EXERCISE 12.9 (CONTINUED) b. (continued) Investment in Associates Investment in Associates ............................................ Cash ..................................................................

40,000 40,000

Cash .......................................................................... Realized Loss on Investment in Associates ................ Investment in Associates ...................................

32,000 10,000

Cash ........................................................................... Investment in Associates ...................................

8,000

Investment in Associates ............................................ Income from Associates ....................................

43,000

42,000

8,000

43,000

c. Trading Investments Statement of Financial Position: Trading investments Investment in associates Statement of Income: Realized gain on trading investments Unrealized gain on trading investments Dividend income Income from associates Realized loss from investment in associates

Investment in Associates

$94,000 $333,000

$12,000 7,000 3,000 $43,000 (10,000)

LO 2,3,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 12.10 a.

100% Cameco Marketing Inc. – equity method but then investment is eliminated when the subsidiary accounts are consolidated together with those of the parent company. 40% JV Inkai – equity method Cameco Marketing Inc. and JV Inkai investments exceed 20% ownership in each corporation. Control is exerted over Cameco Marketing Inc. and significant influence over JV Inkai.

Cameco Marketing Inc. should be consolidated with Cameco‘s operations because Cameco is the parent company of a fully owned subsidiary, Cameco Marketing Inc.

LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

*EXERCISE 12.11 a.

Investor

2024 July

Dec.

2025 Jan. 1

July

Long-Term Investments .......................................... Cash...............................................................

462,808

Interest Receivable ($500,000 × 5% × 6/12) ........... Long-Term Investments .......................................... Interest Income ($462,808 × 6% × 6/12) ........

12,500 1,384

Cash ....................................................................... Interest Receivable ........................................

12,500

Investee

2025 July

2025 Jan. 1

July

13,884

12,500

Cash ($500,000 × 5% × 6/12) ................................. 12,500 Long-Term Investments .......................................... 1,426 Interest Income (($462,808 + $1,384) × 6% × 6/12)

Dec.

462,808

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

462,808

Interest Expense ($462,808 × 6% × 6/12) .............. Interest Payable ............................................. Bonds Payable ...............................................

13,884

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

12,500

Interest Expense (($462,808 + $1,384) × 6% × 6/12) Cash............................................................... Bonds Payable ...............................................

13,926

462,808

12,500 1,384

12,500

12,500 1,426

*EXERCISE 12.11 (CONTINUED) c.

For part a., the bond purchase would be recorded in a Trading Investments account. Companies can amortize the discount and then adjust for the change in fair value but the separation of these two items for reporting purposes is usually not done so for our purposes we will not do this. The $12,500 accrual for the interest would be recorded as interest income. The collection of interest at January 1, 2025 would be the same. The bonds‘ carrying amount would be adjusted to the fair value of $465,000 ($500,000 × 93%) at December 31, 2024. An unrealized gain of $2,192 would be reported on the statement of income. [$465,000 (fair value) – $462,808 (carrying amount) = $2,192]. For part b., there would be no changes to how the investee recorded the bonds or interest.

LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 12.1A a.

Dec.

Jun.

Oct.

Trading Investments........................................... Cash ($400,000 × 1.05) .............................

420,000

Cash ($400,000 × 4% × 6/12) ............................ Interest Income ..........................................

8,000

Cash ($100,000 × 1.06) ..................................... Trading Investments ($420,000 × 25%*) ... Realized Gain on Trading Investments ..... *100,000/400,000 = 25%

106,000

Interest Receivable ($300,000 × 4% × 5/12) .. Interest Income ..........................................

5,000

420,000

8,000

Unrealized Loss on Trading Investments ($420,000 – $105,000) – $309,000*................... Trading Investments .................................. *$300,000 x 1.03 = $309,000

105,000 1,000

5,000

6,000 6,000

Notice how the bond premium was not amortized under this model. b. CHEESEIFY CORPORATION Statement of Financial Position (Partial) October 31, 2024 Current assets Interest receivable .............................................................. Trading investments ...........................................................

$ 5,000 309,000

PROBLEM 12.1A (CONTINUED) c. CHEESEIFY CORPORATION Statement of Income (Partial) Year Ended October 31, 2024 Other income and expenses Interest income ($8,000 + $5,000) ............................. ..... $13,000 Realized gain on trading investments ........................ $1,000 Unrealized loss on trading investments ....................... 6,000 (5,000) $8,000 LO 2,4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.2A a.

Jan.

Jan. 15

Feb. 1

Jun.

Aug. 1

Dec. 1

Dec. 30

Trading Investments ........................................... 40,000 Cash .........................................................

40,000

Trading Investments ........................................... 60,000 Cash ..........................................................

60,000

Trading Investments ........................................... 80,000 Cash .........................................................

80,000

Cash ($2 × 500) ................................................. Dividend Income ........................................

1,000 1,000

Cash ($80,000 × 5% × 6/12) .............................. Interest Income ..........................................

2,000 2,000

Cash ................................................................... 78,000 Realized Loss on Trading Investments………… 2,000* Trading Investments .................................. *($80,000 – $78,000) = $2,000 Cash ($95 × 50) ................................................ Realized Loss on Trading Investments ............. Trading Investments .................................. [$100 × 50]

4,750 250

Dividend Receivable (500 x $2.50)..................... Dividend Income ........................................

1,250

80,000

5,000

1,250

Unrealized Loss on Trading Investments ........... 1,000 Trading Investments ($95,000 – $94,000) 1,000 Carrying Fair Security Amount Value FBC common $35,000* $31,500 (350 × $90) DSR common 60,000 62,500 (500 × $125) $95,000 $94,000 *$40,000  $5,000 = $35,000

PROBLEM 12.2A (CONTINUED) b.

PRIMARY FINANCIAL CORPORATION Statement of Financial Position (Partial) December 31, 2024 Current assets Trading investments .........................................................

$94,000

PRIMARY FINANCIAL CORPORATION Statement of Income (Partial) Year Ended December 31, 2024 Other income and expenses Dividend income ($1,000 + $1,250) ................................... Interest income ................................................................

Unrealized loss on trading investments .................. $1,000 Realized loss on trading investments .................... 2,250

$2,250 2,000 4,250

3,250 $1,000

Note that it would be acceptable to combine or not combine realized and unrealized gains and losses for a specific category of investments for presentation purposes.

LO 2,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.3A a. Jan.

Feb.

Mar.

June

Oct.

Dec.

Cash ......................................................................... Dividend Receivable (500 x $2.50) ..................

1,250

Cash (350 x $3)........................................................ Dividend Income ..............................................

1,050

Cash ......................................................................... Realized Loss on Trading Investments .................... Trading Investments (300 × $90) .....................

24,000 3,000

Trading Investments ................................................. Cash ................................................................

28,000

Cash ........................................................................ Realized Gain on Trading Investments ............ Trading Investments (400 × $125) ...................

54,000

Dividend Receivable (100 x $2.80)........................... Dividend Income ......................................

280

Trading Investments ($50,000 – $45,000) ............... Unrealized Gain on Trading Investments .........

5,000

Security FBC common DSR common KEF common

Carrying Amount Fair Value $ 4,500* $ 4,000 12,500** 14,000 28,000 32,000 $45,000 $50,000 *$31,500 - $27,000 = $4,500; **$62,500 – $50,000 = $12,500 b.

PRIMARY FINANCIAL CORPORATION Statement of Financial Position (Partial) December 31 2025 Current assets Trading investment ........................................ $50,000

1,250

1,050

27,000

28,000

4,000 50,000

280

5,000

(50 × $80) (100 × $140) (2,000 × $16)

2024 $94,000

PROBLEM 12.3A (CONTINUED) c.

PRIMARY FINANCIAL CORPORATION Statement of Income (Partial) Year Ended December 31, 2025 2024 Other income and expenses Interest income $2,000 Dividend income ($1,050 + $280) $ 1,330 2,250 Realized gain on trading investments 4,000 Realized loss on trading investments (3,000) (2,250) Unrealized loss on trading investments (1,000) Unrealized gain on trading investments 5,000 ______ $7,330 $1,000 Note that it would be acceptable to combine or not combine realized and unrealized gains and losses for a specific category of investments for presentation purposes. LO 2,4 BT: AP Difficulty: M Time: 30min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.4A a.

Cost Debt Securities Dominion bonds Government of Canada bonds Sub-total

Quantity

Fair Value

4,000

Unit $100

Total $400,000

Unit $ 97

Total $388,000

2,000

100

200,000 600,000

135

270,000 658,000

Cost Equity Securities Bank of Calgary Matco Inc. Argenta Corp. Sub-total Total b.

Quantity 4,000 10,000 10,000

Unit $55 29 36

Fair Value Total $220,000 290,000 360,000 870,000 $1,470,000

Unit $61 32 40

Total $244,000 320,000 400,000 964,000 $1,622,000

If Val d‘Or‘s entire portfolio is comprised of trading investments, they would be carried at their fair value of $1,622,000.

An unrealized gain of $152,000 ($1,622,000 – $1,470,000) would appear under other income and expenses on the company‘s statement of income.

If Val d‘Or intends to hold the debt securities to maturity, this portion of the portfolio should be reported at amortized cost on the statement of financial position. The premium or discount would be amortized and the carrying amount of the bonds would be adjusted. If the bonds were purchased at par, they would be carried at their cost of $600,000. The portfolio of debt securities would be classified as a long-term investment.

No unrealized gains or losses would be recognized for the debt portfolio of bonds on the statement of income. The equity securities would be carried at fair value of $964,000. The portfolio of equity securities would be classified as current assets. An unrealized gain of $94,000 ($964,000 – $870,000) would appear under other income on the company‘s statement of income for the equity securities.

PROBLEM 12.4A (CONTINUED) d.

If Val d‘Or cannot obtain fair value information relating to the securities in its portfolio, the equity securities should be reported at cost and the debt securities at amortized cost on the statement of financial position. No unrealized gains or losses would be recognized on the statement of income.

LO 2,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.5A a.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Under IFRS, Lai could have accounted for the bonds using the fair value through OCI model and the following transaction would change:

Statement of Financial Position Statement of Income Shareholders‘ Other Other Assets Liabilities Equity Income Expenses Net Income 10. + NE + NE NE NE* *The increase in value of the bonds would be included in Other Comprehensive Income and flow through to Accumulated Other Comprehensive Income in shareholders‘ equity on the statement of financial position.

PROBLEM 12.5A (CONTINUED) c.

Under ASPE, using the cost model to account for investment in associates is allowed if the fair value of the investment is not known. Under these circumstances, the following transactions would change:

Statement of Financial Position Shareholders‘ Assets Liabilities Equity 7. NE NE NE 8. + NE +

Statement of Income Other Other Income Expenses Net Income NE NE NE + NE +

LO 2,3,4 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 12.6A a. Significant influence – equity method Jan. 1 Investment in Associates ............................... Cash ......................................................... Mar.

Jun.

Sept. 20

Dec. 20

Jun.

Sept. 20

Dec. 20

4,800,000

Cash (120,000 x $.75) ................................... Investment in Associates ..........................

90,000

Cash (120,000 x $.75) ................................... Investment in Associates ..........................

90,000

Cash (120,000 × $0.75) ................................. Investment in Associates ..........................

90,000

Cash (120,000 x $.75) ................................... Investment in Associates ..........................

90,000

Investment in Associates ($1,200,000 × 40%) Income from Associates............................

480,000

b. No significant influence - FVTPL Jan. 1 Long-Term Investments ................................. Cash ......................................................... Mar.

4,800,000

90,000

480,000

4,800,000 4,800,000

Cash (120,000 x $.75) ................................... Dividend Income .......................................

90,000

Cash (120,000 x $.75) ................................... Dividend Income ......................................

90,000

Cash (120,000 x $.75) ................................... Dividend Income .......................................

90,000

Cash (120,000 x $.75) ................................... Dividend Income .......................................

90,000

Long-Term Investments ................................. 240,000 Unrealized Gain on Long-Term Investments [(120,000 × $42) - $4,800,000]

90,000

240,000

PROBLEM 12.6A (CONTINUED)

No significant interest - cost model

Jan.

Mar.

Jun.

Sept. 20

Dec. 20

31 d.

Long-Term Investments ................................. 4,800,000 Cash ......................................................... Cash (120,000 x $.75) ................................... Dividend Income .......................................

90,000

Cash (120,000 x $.75) ................................... Dividend Income ......................................

90,000

Cash (120,000 x $.75) ................................... Dividend Income .......................................

90,000

Cash (120,000 x $.75) ................................... Dividend Income .......................................

90,000

4,800,000

90,000

no entry.

Several factors should be examined to determine whether one company can exercise significant influence over another. Although an ownership interest of 20% to 50% implies significant influence, other factors should be taken into consideration. One factor would be the presence of a member of the investor‘s management on the investee‘s board of directors. A second factor to be considered would be whether the investor influences the investee‘s policy-making process. Third, the presence of material transactions between the investor and investee might indicate significant influence. Fourth, there is an exchange of managerial personnel. Fifth, the investor is providing key technical information to the investee. Another consideration is the distribution of the investee‘s common shares. That is, are the investee‘s shares widely held or owned by relatively few shareholders? If someone owns 20% of the outstanding shares and none of the shareholders holding the other 80% owns more than 1% of the shares, there is probably significant influence, but if there is only one other shareholder who owns 80%, there may not be significant influence.

PROBLEM 12.6A (CONTINUED) e.

Statement of Financial Position: Long-term investments: Purchase price Receipt of dividends ($90,000 × 4) Investee‘s income Fair value adjustment Carrying amount Statement of Income: Dividend income Income from associates Unrealized gain on longterm investments

Equity Method

FVTPL

$4,800,000

(360,000) 480,000 0 $4,920,000

0 0 240,000 $5,040,000

0 0 0 $4,800,000

$ 360,000

$360,000

480,000

240,000

Cost Model

LO 2,3,4 BT: AN Difficulty: C Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.7A a.

2023 Oct.

2024 Sept. 30

Under situation 1, it is unlikely that significant influence has been achieved as the percentage of Hat‘s total shares outstanding that is held by CT Inc. is too low at 12.5%. (25,000 ÷ 200,000 = 12.5% ownership)

Long-Term Investments .................................... 1,250,000 Cash (25,000 × $50) .................................... Cash ($0.25 × 25,000) ...................................... Dividend Income ..........................................

6,250

Long-Term Investments .................................... Unrealized Gain on Long-Term Investments ([$53 – $50] × 25,000) ..........

75,000

1,250,000

6,250

75,000

2. Situation 1

Statement of Financial Position: Long-term investments: Beginning balance Purchase price Fair value adjustment Carrying amount end of year Statement of Income: Dividend income Unrealized gain on long-term investments b.

$ 0 1,250,000 75,000 $1,325,000 $ 6,250 75,000

Under situation 2, it is likely that significant influence has been achieved as the percentage of Hat‘s total shares outstanding that is held by CT Inc. is 35%. (70,000 ÷ 200,000 = 35% ownership)

PROBLEM 12.7A (CONTINUED) b. (continued) 2023 Oct.

2024 Sept. 30

Investment in Associates .................................. 3,500,000 Cash (70,000 × $50) .................................... Cash ($0.25 × 70,000) ...................................... Investment in Associates .............................

17,500

Investment in Associates .................................. Income from Associates ($575,000 × 35%) ........................................

201,250

3,500,000

17,500

201,250

2. Situation 2

Statement of Financial Position: Investments in Associates: Beginning balance Purchase price Receipt of dividends Investee‘s income Carrying amount end of year Statement of Income: Dividend income Income from associates Unrealized gain on long-term investments c.

$ 0 3,500,000 (17,500) 201,250 $3,683,750 $ 0 201,250 0

Under IFRS, CT Inc. has no option but to account for its investment in Hat using the equity method when significant influence has been achieved. On the other hand, under ASPE, CT Inc. has options. If the fair value of the shares of the investee is known, CT Inc. can account for the investment using the equity method or fair value through profit or loss. If fair value is not known, CT Inc. can choose the equity method or the cost model.

PROBLEM 12.7A (CONTINUED) d.

In Situation 3, under IFRS, consolidated financial statements are required for financial reporting purposes because CT Inc. owns 100% of Hat. Under IFRS, CT Inc. has no option but to prepare consolidated financial statements. Under ASPE, CT Inc. can choose not to consolidate its subsidiary and instead use the equity method or the cost model unless the fair value of Hat‘s shares is available, in which case the fair value through profit or loss model or equity method would be used.

Consolidated financial statements show the combined assets and liabilities of both the parent and subsidiary companies. In order to avoid duplication, the investment account is eliminated. The (parent) investor‘s name: CT Inc. will appear on the consolidated financial statements.

For situation 1, because the fair value of the Hat shares is unknown, CT Inc. would only be able to use the cost model. For situation 2, CT Inc. can choose the equity method or the cost model. The choice of using the equity or the cost model depends on how many users of financial statements there are and what their needs are. For small companies with very few users, the cost model may be sufficient and more efficient. Under situation 3, CT Inc. can choose to consolidate its subsidiary or instead use the equity method or the cost model. As in situation 2, the choice of model depends on meeting the information needs of users of the financial statements.

LO 2,3,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.8A a.

Kang purchased 30,000 shares [($1,320,000 – $120,000) ÷ $40]

Kang owns 25% (30,000 ÷ 120,000) of Sandhu shares.

The cash dividend per share was $3.00 ($90,000 ÷ 30,000 shares)

The fair value per share was $44 ($1,320,000 ÷ 30,000)

Because Kang can exercise significant influence over Sandhu Travel Agency, the equity method will be used to account for the long-term investment. Accordingly, the investment account will be increased for the acquisition of shares and for Kang‗s share of Sandhu‘s income for the year that it held the investment in Sandhu. The investment account will be decreased when Sandhu pays dividends. Accordingly, the investment account contains the following: Investment in Sandhu Travel Agency (30,000 shares × $40) Less: cash dividends received

$1,200,000 (90,000) 1,110,000

Plus: 25% of Sandhu Travel Agency‘s income for the year that the investment was owned - derived ($1,400,000 – $1,110,000) 290,000 Balance of investment, December 31, 2024 $1,400,000 If $290,000 is 25% of Sandhu‘s income for the year, then Sandhu Travel Agency must have earned $1,160,000 throughout the year ($290,000 ÷ 25%).

PROBLEM 12.8A (CONTINUED) f.

Under the equity method, Kang would report its share of Sandhu Travel Agency‘s income as follows: KANG INC. Statement of Income (Partial) Year Ended December 31, 2024 Other income and expenses Income from associates ...................................................

$290,000

Under the cost model, Kang would report only the dividends received as income as follows: KANG INC. Statement of Income (Partial) Year Ended December 31, 2024 Other income and expenses Dividend income .................................................................

$90,000

LO 2,3,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.9A a.

Balance, beginning of year Unrealized loss Dividends earned and received Share of income Carrying amount of investments sold Balance, end of year *(Proceeds $10,000 - gain $4,000) ** (Proceeds $6,300 + loss $2,000)

Trading Investments $50,000 (3,500)

(6,000)* $40,500

Investments in Associates $250,000

Long-Term Investments (at cost) $30,000

(7,000) 22,000 ______ $265,000

(8,300)** $21,700

b. Statement of income Trading Investments Income from associates Interest income Dividend income Realized gain on trading investments Realized loss on long-term investments Unrealized loss on trading investments

Investments in Associates $22,000

$1,200 1,000 4,000 (3,500) $2,700

Long-Term Investments (at cost)

$ 800

_______ $22,000

(2,000) _______ $(1,200)

LO 2,3,4 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 12.10A a. Jan.

Long-Term Investments .................................... Cash ............................................................

1,520,367 1,520,367

Bond Amortization Schedule

Semi-Annual Interest Period

Interest Received 2.5%

Interest Income 3%

Discount Amortization

Amortized Cost

Jan. 1

2024

July 1

2024

$40,000

$45,611

$5,611

1,525,978

Jan. 1

2025

40,000

45,779

5,779

1,531,757

July 1

2025

40,000

45,953

5,953

1,537,710

Jan. 1

2026

40,000

46,131

6,131

1,543,841

July 1

2026

40,000

46,315

6,315

1,550,156

Jan. 1

2027

40,000

46,505

6,505

1,556,661

July 1

2027

40,000

46,700

6,700

1,563,361

Jan. 1

2028

40,000

46,901

6,901

1,570,262

July 1

2028

40,000

47,108

7,108

1,577,370

Jan. 1

2029

40,000

47,321

7,321

1,584,691

July 1

2029

40,000

47,541

7,541

1,592,232

Jan. 1 *rounded c. July 1

2030

40,000

47,768*

7,768

1,600,000

d. Sept. 30

$1,520,367

Cash ................................................................. Long-Term Investments .................................... Interest Income ...........................................

40,000 5,611

Interest Receivable ($40,000 × 3/6) .................. Long-Term Investments .................................... Interest Income ($45,779 × 3/6) ..................

20,000 2,890

45,611

22,890

*PROBLEM 12.10A (CONTINUED) e. JACKSON CORP. Statement of Financial Position (Partial) September 30, 2024 Current assets Interest receivable .................................................

$ 20,000

Long-term investments ................................................... 1,528,868 ($1,520,367 + $5,611 + $2,890) JACKSON CORP. Statement of Income (Partial) Year Ended September 30, 2024 Other income and expenses Interest income ................................................. ($45,611 + $22,890) f. 2030 Jan. 1

Cash .................................................... Long-Term Investments .................

68,501

1,600,000 1,600,000

Note that interest would also be received on January 1, 2030. LO 5 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 12.11A a.

Mar.

1 Long-Term Investments ............................... 5,225,000 Cash ($5,000,000 × 1.045) .....................

Sept. 1 Cash ($5,000,000 × 5.0% × 6/12) ................ Long-Term Investments.......................... Interest Income ....................................... ($5,200,000 × 4.25% × 6/12) b.

Mar.

125,000 14,500 110,500

1 Trading Investments .................................... 5,225,000 Cash ($5,000,000 × 1.045%) .................

Sept. 1 Cash ($5,000,000 × 5% × 6/12) ................... Interest Income .......................................

5,225,000

125,000 125,000

Note: the investment would be adjusted to its fair value at year end. c.

Regardless of whether Tyd2u purchased the bonds at a discount or premium, Tyd2u will always receive the par value of the bond at maturity. Tyd2u would receive $5,000,000 at maturity.

Mar.

1 Cash ............................................................ 15,675,000 Bonds Payable ...................................... ($15,000,000 × 1.045%)

Sept. 1 Interest Expense ......................................... ($15,600,000 × 4.25% × 6/12) Bonds Payable ............................................. Cash ($15,000,000 × 5.0% × 6/12).........

15,675,000

331,500 43,500 375,000

PROBLEM 12.11A (CONTINUED) e.

When the bonds are purchased with the intention of holding them to maturity, the recording of the bonds for the investor and investee are mirror images. The bonds have the same proportionate carrying amount and both parties will be amortizing the same discount or premium amounts (or portions thereof if the investor did not buy all the bonds issued). This is not the case if Tud2u purchased the bonds on the open market after the date of issue. The purchase price could reflect a different discount or premium than the one that existed when the bonds were first issued. There are also differences in accounting for the investor and investee when the bonds are purchased for trading purposes. Any premium or discount is not amortized by the investor even though the company issuing the bonds would continue to amortize any discount or premium. If the bonds are held at year-end, their carrying amount would be adjusted to fair value on the investor‘s books while the issuer would carry the liability at amortized cost. If Tyd2u had sold its bonds on the open market, the issuer, YU, would not be affected by this transaction because it took place between Tyd2u and another company.

LO 5 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.1B a.

Jan.

July

Dec. 31

Trading Investments............................................. 192,000 Cash ($200,000 × .96) ................................. Cash ($200,000 × 3% × 6/12) .............................. Interest Income ............................................

3,000

Cash ($50,000 x .99) ........................................... Trading Investments ($50,000 ×.96) ............ Realized Gain on Trading Investments ........

49,500

Interest Receivable ($150,000 × 3% × 6/12) ........ Interest Income ............................................

2,250

Trading Investments ([$150,000 × 1.01] – $144,000*) .......................... Unrealized Gain on Trading Investments..... *$192,000 – $48,000 = $144,000 $150,000 x .96 = $144,000

192,000

3,000

48,000 1,500

2,250

7,500 7,500

b. LIU CORPORATION Statement of Financial Position (Partial) December 31, 2024 Current assets Interest receivable ............................................................ Trading investments ........................................................ c.

$ 2,250 151,500

LIU CORPORATION Statement of Income (Partial) Year Ended December 31, 2024 Other income and expenses Interest income ($3,000 + $2,250) ..................................... Realized gain on trading investments ................................ Unrealized gain on trading investments .............................

$5,250 1,500 7,500 14,250

LO 2,4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.2B a.

Feb. 1

Mar. 1

Apr.

July

Aug. 1

Oct.

Dec. 28

Trading Investments ................................................. Cash ................................................................

30,000

Trading Investments ................................................. Cash ................................................................

29,000

Trading Investments ................................................. Cash ...............................................................

90,000

Cash ($2 × 1,000) .................................................... Dividend Income ..............................................

2,000

Cash (350 × $33) ..................................................... Realized Gain on Trading Investments ............ Trading Investments [($30,000  1,000) × 350]................................

11,550

Cash ($90,000 × 6% × 6/12) .................................... Interest Income ................................................

2,700

Cash ........................................................................ Realized Loss on Trading Investments .................... Trading Investments ........................................

86,000 4,000

Dividend Receivable (500 x $1.50)........................... Dividend Income ..............................................

750

30,000

29,000

90,000

2,000

1,050 10,500

2,700

90,000

750

PROBLEM 12.2B (CONTINUED) a. (Continued) Dec.

Trading Investments ................................................. Unrealized Gain on Trading Investments ......... ($49,200 – $48,500) .........................................

Security IBF Common RST Common

Cost $19,500* 29,000 $48,500

Fair Value $18,200 31,000 $49,200

700 700

(650 × $28) (500 × $62)

*$30,000 – $10,500 = $19,500

CHEQUE MART LTD. Statement of Financial Position (Partial) December 31, 2024 Current assets Trading investments ......................................................

$49,200

CHEQUE MART LTD. Statement of Income (Partial) Year Ended December 31, 2024 Other income and expenses Dividend income ($2,000 + $750)................................... Interest income ............................................................. Realized gain on trading investments ............................. Unrealized gain on trading investments .......................... Realized loss on trading investments .............................

$2,750 2,700 1,050 700 (4,000) 3,200

Note that it would not be wrong to combine realized and unrealized gains and losses for a specific category of investments for presentation purposes. LO 2,4 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.3B a. Jan.

Mar.

June

Sept.

Oct.

Dec.

Cash ......................................................................... Dividend Receivable ........................................

750

Cash ......................................................................... Realized Gain on Trading Investments ............ Trading Investments ........................................

22,100

Trading Investments ................................................. Cash ................................................................

18,000

Cash ($1.50 × 500) .................................................. Dividend Income ..............................................

750

Cash ........................................................................ Realized Loss on Trading Investments .................... Trading Investments ........................................ (250 × $62)

14,250 1,250

Dividend Receivable (250 x $1.60)........................... Dividend Income ......................................

400

Trading Investments ................................................. Unrealized Gain on Trading Investments ......... (See below: $38,000 – $33,500)

4,500

Security RST Common DEF Common

Carrying Amount Fair Value $15,500* $14,000 18,000 24,000 $33,500 $38,000 *$31,000 – $15,500 = $15,500 which is the same as 250 × $62

CHEQUE MART LTD. Statement of Financial Position (Partial) December 31, 2025

750

3,900 18,200

18,000

750

15,500

400

4,500

(250 × $56) (2,000 × $12)

2024

Trading investments ......................................... $38,000

$49,200

PROBLEM 12.3B (CONTINUED) c.

CHEQUE MART LTD. Statement of Income (Partial) Year Ended December 31, 2025 Other income and expenses Dividend income ($750 + $400) Interest income Unrealized gain on trading investments Realized gain on trading investments Realized loss on trading investments

$1,150 4,500 3,900 (1,250) $8,300

2024

$2,750 2,700 700 1,050 (4,000) $3,200

Note that it would not be wrong to combine realized and unrealized gains and losses for a specific category of investments for presentation purposes. LO 2,4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.4B a. Security

Quantity

Cost

Ajax Ltd. shares

9,400

$ 100,4001

Beta Corp. shares

5,000

36,0002

Citrus Inc. bonds

600

60,0003 $ 196,400

(3,000 × $12) + (2,400 × $11) + (2,000 × $9) + (2,000 × $10) = $100,400 2 (4,000 × $7) + (1,000 × $8) = $36,000 3 (600 × $100) = $60,000 Security

Quantity

Fair Value

9,400 5,000 600

Ajax Ltd. shares Beta Corp. shares Citrus Inc. bonds

56,4001 45,0002 64,2003 $ 165,600

9,400 × $6 = $56,400 5,000 × $9 = $45,000 3 600 × $100 × 1.07 = $64,200 2

If Sturge‘s entire portfolio is comprised of trading investments, they would be carried at their fair value of $165,600.

An unrealized loss of $30,800 ($196,400 – $165,600) would be reported under other income and expenses on the company‘s statement of income.

PROBLEM 12.4B (CONTINUED) c.

If Sturge‘s intends to hold the Citrus bonds to maturity, this portion of the portfolio should be reported at amortized cost on the statement of financial position. The premium or discount would be amortized and the carrying amount of the bonds would be adjusted. If the bonds were purchased at par, they would be carried at their cost of $60,000. The portfolio of debt securities would be classified as a long-term investment.

No unrealized gains or losses would be recognized for the Citrus bonds on the statement of income. Only on the equity portion of the investment would an unrealized loss be recorded at $35,000 [($100,400 + $36,000) – ($56,400 + $45,000)] under other income and expenses on the statement of income. The equity securities would be carried at fair value of $101,400 ($165,600 – $64,200) or ($56,400 + $45,000) and would be classified as a current investment.

If Sturge cannot obtain fair value information relating to the securities in its portfolio, the portfolio should be reported at cost on the statement of financial position. No unrealized gains or losses would be recognized on the statement of income.

LO 2,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.5B a.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. b.

Statement of Financial Position Statement of Income Shareholders‘ Other Other Assets Liabilities Equity Income Expenses Net Income NE NE NE NE NE NE (+/-) + NE + + NE + NE NE NE NE NE NE (+/-) + NE + + NE + + NE + + NE + (+/-) NE NE NE NE NE NE (+/-) + NE + + NE + NE NE NE NE NE NE (+/-) + NE + + NE + NE NE NE NE NE NE Under IFRS, Olsztyn could have accounted for the bonds using the fair value through OCI model and the following transaction would change:

Statement of Financial Position Statement of Income Shareholders‘ Other Other Assets Liabilities Equity Income Expenses Net Income 10. NE NE NE NE* *The decrease in value of the bonds would be included in Other Comprehensive Income and flow through to Accumulated Other Comprehensive Income in shareholders‘ equity on the statement of financial position.

PROBLEM 12.5B (CONTINUED) c.

Under ASPE, using the cost model to account for the investment in associates is allowed if the fair value of the investment is not known. Under these circumstances, the following transactions would change: Statement of Financial Position Statement of Income Shareholders‘ Other Other Assets Liabilities Equity Income Expenses Net Income 7. NE NE NE NE NE NE 8. + NE + + NE +

LO 2,3,4 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 12.6B a.

No significant influence Jan. 1 Long-Term Investments ................................. Cash ...................................................... June

Dec.

6,000,000

Cash (200,000 × $0.50) ................................. Dividend Income ....................................

100,000

Cash (100,000 × $0.50) ................................. Dividend Income ....................................

100,000

Long-Term Investments ($31 × 200,000) – $6,000,000 ........................ Unrealized Gain on Long-Term Investments .......................................

Significant influence Jan. 1 Investment in Associates ............................... Cash ...................................................... June

6,000,000

100,000

200,000 200,000

6,000,000 6,000,000

Cash (200,000 × $0.50) ................................. Investment in Associates .......................

100,000

Cash (100,000 × $0.50) ................................. Investment in Associates .......................

100,000

Investment in Associates ............................... Income from Associates ($3,360,000 × 20%) ...............................

672,000

100,000

672,000

PROBLEM 12.6B (CONTINUED) c.

Several factors should be examined to determine whether one company can exercise significant influence over another. Although an ownership interest of 20% or more implies significant influence, other factors should be taken into consideration. One factor would be the presence of a member of the investor‘s management on the investee‘s board of directors. A second factor to be considered would be whether or not the investor influences the investee‘s policy-making process. Third, the presence of material transactions between the investor and investee might indicate significant influence. Fourth, there is an exchange of managerial personnel. Fifth, the investor is providing key technical information to the investee. Another consideration is the distribution of the investee‘s common shares. That is, are the investee‘s shares widely held or owned by relatively few shareholders? If someone owns 20% of the outstanding shares and none of the shareholders holding the other 80% owns more than 1% of the shares, there is probably significant influence, but if there is only one other shareholder who owns 80%, there may not be significant influence.

Cost model Jan. 1 Long-Term Investments .................................

6,000,000

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

June

Cash (200,000 × $0.50) .................................

6,000,000

100,000

Dividend Income ....................................

Dec.

Cash (200,000 × $0.50) ................................. Dividend Income ....................................

100,000

100,000 100,000

PROBLEM 12.6B (CONTINUED) e.

Statement of Financial Position: Long-term investments: Purchase price Receipt of dividends ($100,000 × 2) Investee‘s income Fair value adjustment Carrying amount Statement of Income: Dividend income Income from associates Unrealized gain on longterm investments

No Significant Influence

Significant Influence

Cost Model

$6,000,000

0 0 200,000 $6,200,000

(200,000) 672,000 0 $6,472,000

0 0 0 $6,000,000

$200,000

672,000

200,000

LO 2,3,4 BT: AN Difficulty: C Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.7B a.

2024 Jan.

Dec.

Under situation 1, it is unlikely that significant influence has been achieved as the percentage of Akwesasne‘s total shares outstanding that is held by Partridge is too low at 12%. (60,000 ÷ 500,000 = 12% ownership)

2 Long-Term Investments ............................... Cash (60,000 × $10) ...........................

600,000

31 Cash (60,000 × $0.50) ................................. Dividend Income .................................

30,000

31 Long-Term Investments ............................... Unrealized Gain on Long-Term Investments ($12 – $10) × 60,000

120,000

600,000

30,000

120,000

2. Situation 1

$ 0 600,000 120,000 $720,000 $ 30,000 120,000

PROBLEM 12.7B (CONTINUED) b.

2024 Jan.

Dec.

Under situation 2, it is likely that significant influence has been achieved as the percentage of Akwesasne‘s total shares outstanding that is held by Partridge is 25%. (125,000 ÷ 500,000 = 25% ownership)

2 Investment in Associates ............................. 1,250,000 Cash (125,000 × $10) ....................... 31 Cash (125,000 × $0.50) ............................... Investment in Associates ..................

62,500

31 Investment in Associates ............................. Income from Associates ($350,000 × 25%) ......

87,500

1,250,000

62,500

87,500

2. Situation 2

$ 0 1,250,000 (62,500) 87,500 $1,275,000 $ 0 87,500 0

Under IFRS, Partridge has no option but to account for its investment in Akwesasne using the equity method when significant influence has been achieved. On the other hand, under ASPE, Partridge has options. If fair value of the shares of the investee is known, Partridge can account for the investment using either the equity method or fair value through profit or loss. If fair value is not known, Partridge can choose the equity method or the cost model.

PROBLEM 12.7B (CONTINUED) d.

In Situation 3, under IFRS, consolidated financial statements are required for financial reporting purposes because Partridge owns 100% of Akwesasne. Under IFRS, Partridge has no option but to prepare consolidated financial statements. Under ASPE, Partridge can choose not to consolidate its subsidiary and instead use the equity method or the cost model unless the fair value of Akwesasne‘s shares is available, in which case the fair value through profit or loss model or equity method would be used.

Consolidated financial statements show the combined assets and liabilities of both the parent and subsidiary companies. In order to avoid duplication, the investment account is eliminated. The (parent) investor‘s name (Partridge Inc.) will appear on the consolidated financial statements.

For situation 1, because the fair value of the Akwesasne shares is unknown, Partridge would only be able to use the cost model. For situation 2, Partridge can choose the equity method or the cost model. Under situation 3, Partridge can choose to consolidate its subsidiary or instead use the equity method or the cost model.

LO 2,3,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.8B a.

Hadley‘s accountant used the equity method to account for the investment which resulted in Hadley recognizing 20% of Letourneau‘s income as revenue ($200,000 ÷ $1,000,000). Therefore, Hadley Inc. must own 20% of the common shares of Letourneau Cycles Corp.

Hadley would have received 20% of any dividends declared by Letourneau, or $40,000 ($200,000 × 20%).

Hadley purchased 80,000 common shares of Letourneau Cycles Corp. This amount could be calculated as follows: Balance in long-term investment account, Dec. 31 Less: Hadley‘s share of Letourneau‘s income Add: Hadley‘s share of Letourneau‘s dividends 1 Investment account (at cost)

$960,000 (200,000) 40,000 $800,000*

*Since the cost of the investment was $800,000 and the purchase price of Letourneau‘s shares was $10 per share, it follows that 80,000 shares were purchased. 1

Part (b) above

Among the questions that should be considered in determining an investor‘s influence are whether:     

the investor has representation on the investee‘s board of directors the investor participates in the investee‘s policy-making process there are material transactions between the investor and the investee the investor and investee are exchanging managerial personnel the investor is providing key technical information to the investee

PROBLEM 12.8B (CONTINUED) d. (continued) In addition, we should also consider whether the common shares held by other shareholders are concentrated or dispersed. Companies are required to use judgement in determining if significant influence exists instead of blindly following the guideline of 20% or greater ownership.

If significant influence does not exist, Hadley should use the fair value model to account for the investment in Letourneau Cycles Corp. Under the fair value model, Hadley would report the investment in Letourneau Cycles Corp. as follows: HADLEY INC. Statement of Financial Position (Partial) December 31, 2024 Investments Long-term investments ..............................................

$950,000

HADLEY INC. Statement of Income (Partial) Year Ended December 31, 2024 Other income Dividend income ........................................................ Unrealized gain on long-term investments ................. ($950,000 – $800,000)

$ 40,000 150,000

Under the cost model, Hadley would report the investment at cost of $800,000 on the statement of financial position and only the dividends received of $40,000 as other income on the statement of income.

LO 2,3,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 12.9B a.

Balance, beginning of year Unrealized loss Dividends earned and received Share of income Carrying amount of investments sold Balance, end of year *(Proceeds $21,000 - gain $9,000) ** (Proceeds $12,600 + loss $5,000)

Trading Investments $100,000 (8,200)

(12,000)* $79,800

Investments in Associates $500,000

Long-Term Investments (at cost) $60,000

(15,000) 37,000 _______ $522,000

(17,600)** $42,400

Investments in Associates $37,000

$2,800 3,000 9,000 (8,200) $6,600

Long-Term Investments (at cost)

$1,200

_______ $37,000

(5,000) _______ $(3,800)

LO 2,3,4 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPAL cpa-t001 CM: Reporting

*PROBLEM 12.10B a. Jan.

Long-Term Investments .................................... Cash ............................................................

946,160 946,160

Bond Amortization Schedule

Semi-Annual Interest Period

Interest Received 3%

Interest Income 2.5%

Premium Amortization

Amortized Cost

Jan. 1

2024

July 1

2024

$27,000

$23,654

$3,346

942,814

Jan. 1

2025

27,000

23,570

3,430

939,384

July 1

2025

27,000

23,485

3,515

935,869

Jan. 1

2026

27,000

23,397

3,603

932,266

July 1

2026

27,000

23,307

3,693

928,573

Jan. 1

2027

27,000

23,214

3,786

924,787

July 1

2027

27,000

23,120

3,880

920,907

Jan. 1

2028

27,000

23,023

3,977

916,930

July 1

2028

27,000

22,923

4,077

912,853

Jan. 1

2029

27,000

22,821

4,179

908,674

July 1

2029

27,000

22,717

4,283

904,391

Jan. 1 *rounded c. July 1

2030

27,000

22,609*

4,391

900,000

d. Oct. 31

$946,160

Cash ................................................................. Long-Term Investments ............................... Interest Income ............................................

27,000

Interest Receivable ($27,000 × 4/6) .................. Long-Term Investments ($3,430 × 4/6)........ Interest Income ($23,570 × 4/6) ...................

18,000

3,346 23,654

2,287 15,713

*PROBLEM 12.10B (CONTINUED) e. MORRISETTE INC. Statement of Financial Position (Partial) October 31, 2024 Current assets Interest receivable ............................................................ $ 18,000

Long-term investments ............................................................ 940,527 ($946,160 – $3,346 – $2,287) f. 2030 Jan. 1

Cash .................................................................. Long-Term Investments ...............................

900,000 900,000

Note that interest would also be received on January 1, 2030. LO 5 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 12.11B a.

Densmore Consulting —Trading Jan. 1 Trading Investments ....................................

204,000

Cash ($200,000 × 1.02) .......................... June

July

Cash ($200,000 × 4% × 6/12) ...................... Interest Income .......................................

4,000

Cash ($200,000 × 1.03) ............................... Realized Gain on Trading Investments... Trading Investments ...............................

206,000

Densmore Consulting — Hold to Maturity Jan. 1 Long-Term Investments ............................... Cash....................................................... June

204,000

Cash ($200,000 × 4% × 6/12) ...................... Long-Term Investments..........................

4,000

2,000 204,000

204,000 204,000 4,000 369

Interest Income ....................................... ($204,000 × 3.56% × 6/12) July

Cash ($200,000 × 1.03) ............................... Long-Term Investments ($204,000 – $369) ................................. Realized Gain on Long-Term Investments

3,631

206,000 203,631 2,369

*PROBLEM 12.11B (CONTINUED) c.

CASB Jan. 1

June

Dec.

Cash ($1,000,000 × 1.02) ............................ ..................................................................... Bonds Payable .......................................

1,020,000 1,020,000

Interest Expense ($1,020,000 × 3.56% × 6/12) ....................... Bonds Payable ............................................. Cash ($1,000,000 × 4% × 6/12) .............

18,156 1,844

Interest Expense .......................................... ([$1,020,000 – $1,844] × 3.56% × 6/12) . Bonds Payable ............................................. Cash ($1,000,000 × 4% × 6/12) .............

18,123 1,877

20,000

When the bonds are purchased with the intention of holding them to maturity, the recording of the bonds for the investor and investee are mirror images. The bonds have the same proportionate carrying amount. This would not be the case if the bonds were purchased by Densmore on the open market. The purchase price would reflect a different effective rate than the rate that existed at issuance of the bond and would be different than the selling price received by CASB when the bonds were issued. There are also differences in accounting for the investor and investee when the bonds are purchased for trading purposes. Any premium or discount is not amortized by the investor even though the company issuing the bonds would continue to amortize any discount or premium. If the bonds are held at year-end, their carrying amount would be adjusted to fair value on the investor‘s books while the issuer would carry the liability at amortized cost. When Densmore sold its bonds on the open market, the issuer, CASB, was not affected by this transaction because it took place between Densmore and another investor.

LO 5

BT: AN

Difficulty: C

Time: 40 min.

AACSB: Analytic

CPA: cpa-t001

CM: Reporting

CT12.1

FINANCIAL STATEMENT IMPACT Model

Unrealized Gains/Losses

Dividend/ Interest Income

Income from Associates

Investment A – public company shares

FVTPL

Yes

Investment A – public company shares

Yes

Investment B – government bonds

Equity Amortized Cost

Yes

Investment B – government bonds

FVTPL

Yes

LO 2,3,4,5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT12.2

FINANCIAL REPORTING CASE

North West does not have trading securities. According to note 11 titled Other Assets, North West has a 50% interest in a jointly controlled entity discussed in note 23 called Transport Nanuk Inc. This is a strategic investment in a company that supplies freight handling and shipping services.

The companies mentioned in note 23 are subsidiaries of North West. The balances in the investment accounts for these companies have been eliminated when the financial statements of these subsidiaries were consolidated along with their parent company. This is why the financial statement titles include the word ―consolidated.‖

LO 1,3,4 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

CT12.3 a.

FINANCIAL ANALYSIS CASE

North West has an investment in a jointly controlled entity as listed in note 23. North West owns 50% of the Canadian Arctic shipping company, Transport Nanuk Inc. The equity method is used to account for the 50% ownership of Transport Nanuk Inc., as discussed in note 3 (A) titled Basis of Consolidation.

Sobeys has an investment in the preferred shares of a related company (affiliate). The investment is accounted for using the fair value through profit or loss. Earnings are recognized only to the extent received or receivable.

Any income earned from investments in subsidiaries is embedded within the specific revenue and expense accounts of the consolidated financial statements and is not shown on a separate line. North West would have investment income from an associate for its share of the net income of Transport Nanuk Inc. because it is using the equity method. In the case of Sobeys, dividend income from its investment in the preferred shares of its related company would be reported on the statement of income along with any unrealized gain or loss from the change in the market value of the shares. Because the statements of income are condensed and appear in millions of dollars in the case of Sobeys and thousands of dollars in the case of North West, the amounts involved are likely very small and it was not relevant to list them separately on the respective statements of income.

North West has other comprehensive income of $15,111,000, which was less than that of Sobeys, which had $43,700,000. North West ended the year with a balance of $22,350,000 in Accumulated Other Comprehensive Income (AOCI). In the case of Sobeys, the balance was a loss of $4,900,000.

LO 3,4 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT12.4 a.

PROFESSIONAL JUDGEMENT CASE

ARP‘s investment in CPS is strategic, but ARP is not exercising significant influence even though it owns 20% of the outstanding voting shares. ARP does not have representation on CPS‘s board of directors, and Adam and Robert have not been involved in any decisions related to CPS‘s operations. Long-term investments that do not involve significant influence must be accounted for using the fair value model if the value of the shares trade in an active market. Under ASPE, if the investment was subject to significant influence, ARP would have the choice between two accounting methods, the equity method and the fair value model if the shares trade in an active market. If the shares did not trade in an active market, ASPE allows a choice of the equity method or the cost model. The cost model is therefore not an acceptable method under ASPE for this investment because the shares do trade actively.

Recording the investment using the cost model means that the carrying amount of the investment remains at its original cost of $100,000. Revenues are derived from dividends received from CPS. Since no dividends were received during the year, no revenue has been reported on ARP‘s statement of income. The cost model does not record unrealized gains or losses from fair value adjustments at year end. Had ARP applied the fair value model, the statement of income would report an unrealized loss of $10,000 ([fair value of $4.50/ share × 20,000 shares] – cost of $100,000). If ARP had applied the equity method, the statement of income would report a loss from its associate of $6,000 (20% × loss of $30,000). This loss would reduce income. Robert would prefer the cost model to keep income higher by $10,000 for 2024 because the financial statements will be presented to the bank to obtain financing for expansion. The bank would likely find out about the unrecorded unrealized loss by inquiring about the status of the investment.

If ARP reported its financial results under IFRS, it would apply the fair value model and would be prohibited from using the cost model because the shares trade in an active market.

LO 2,3,4 BT: E Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT12.5 a.

PROFESSIONAL JUDGEMENT CASE

The three investments held by Bering Limited fall into three categories: 1. Debt investment with the intention to be held to maturity — for the Government of Alberta bonds. 2. Non-strategic trading investments purchased with the expectation of active trading of the security — for the Atlas Inc. common shares. 3. Strategic investment in an associate where Bering exercises significant influence over the investee — for the CH Resources Inc. common shares. Because each investment has a different purpose and management has a different intention in holding the investment, IFRS provides some alternatives in how to account for each of the three investments. Debt securities such as the Government of Alberta bonds will normally be accounted for using the amortized cost model. The option exists under IFRS to account for the bonds using fair value through profit or loss. The amortized cost model is chosen because the bonds‘ fair value at December 31, 2024 falls below the amortized cost. Using the amortized cost model will avoid recording an unrealized loss on long-term investments in the amount of $10,000. Non-strategic trading investments must be reported at their fair value. A choice is available under IFRS to report any unrealized gains or losses in the statement of income or in other comprehensive income in the statement of comprehensive income. The fair value though profit or loss is recommended. An unrealized gain on the trading investments in the amount of $5,000 is therefore recognized as other income on the statement of income.

CT12.5 (CONTINUED) a. (continued) The investment in the CH Resources Ltd. is a strategic investment in an associate and Bering under IFRS must account for the investment using the equity method because it holds 40% of the common shares and exercises significant influence over CH Resources. Bering will recognize income from investment in associates and an increase in its investment in this associate in the amount of its share of the net income reported by CH Resources for the fiscal year of $4,000 (40% × $10,000). The investment in associates account will be reduced by the amount dividends received from CH Resources during the year in the amount of $800 (40% × $2,000) and cash will be increased. Consequently, the balance of the investment in associate account reported on the statement of financial position will be $103,200 ($100,000 + $4,000 – $800).

Based on the above, the financial statements will show the following: BERING LIMITED Statement of Financial Position (Partial) December 31, 2024 Current assets Trading investments ..................................................... Non-current assets Long-term investments ................................................. ..................................................................................... Investment in associates ..............................................

$105,000

100,000 103,200

BERING LIMITED Statement of Income (Partial) Year Ended December 31, 2024 Other income Income from associates ................................................. Interest income ............................................................ Unrealized gain on trading investments .........................

$ 4,000 3,000 5,000 12,000

The choices among the different models will not affect the statement of cash flows.

CT12.5 (CONTINUED) b.

If it can be demonstrated that Bering does not have significant influence over CH Resources Ltd., then the investment should be reported at fair value if that value is available. Since this is not the case here, as the fair value of the shares is unknown, Bering would use the cost model to account for its investment in CH Resources Ltd. The dividend received in the amount of $800 would be reported as other income on the statement of income.

Under ASPE, the accounting for the three investments would be done using the following models and methods: 1. Debt investment with the intention to be held to maturity — the Government of Alberta bonds will be accounted for using the amortized cost model. However, an option does exist under ASPE to value this investment at fair value, but it must be fair value through profit or loss. This option would most likely not be taken as it would result in recording an unrealized loss. 2. Non-strategic trading investments purchased with the expectation of active trading of the security — the Atlas Inc. common shares will be reported using the fair value through profit or loss because the shares‘ market value is available (as under IFRS), but Bering cannot report their investments using the fair value through the other comprehensive income model. 3. Strategic investment in an associate where Bering exercises significant influence over the investee — the CH Resources Ltd. common shares are accounted for using the equity method (as under IFRS) although Bering has a choice to use the cost. model, since the fair value of the shares is not known. If the shares are traded actively and fair value can be obtained, Bering could choose between the equity model and the fair value thought profit and loss model. Based on the information given, the financial statements would show the same amounts and classifications as was recommended in part (a) under IFRS. Bering would opt to report the CH Resources shares using the equity method at $103,200.

LO 2,3,4 BT: E Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT12.6

ETHICS CASE

Lemke‘s position would show unrealized gains, dividend income, and interest income on the statement of income, but would not report unrealized losses. Her position would mask unrealized losses by overstating the carrying amount of certain investments that had declined in value. Her approach does not reflect the nature of the investments as strategic or non-strategic. Her approach would also result in financial results that are not comparable because as investments fluctuate from increasing in value to decreasing in value, the model used would need to change. She understands the implications of using different models for financial statement presentation purposes, but she is not applying the models in the correct manner.

Greenwood‘s position would show interest income and some dividend income but does not show any unrealized gains or losses, and reports revenue from associates where significant influence does not exist. Her position would also mask unrealized losses by overstating the carrying amount of certain investments that had declined in value. Her approach also does not reflect the nature of the investments as strategic or nonstrategic. Her approach would also result in financial results that are not comparable, because as equity investments fluctuate from increasing in value to decreasing in value, the model used would need to change. She understands the implications of using different models for financial statement presentation purposes, but she is not applying the models in the correct manner.

By selling its trading investments that had risen in value just prior to year end, Kreiter Financial Services would report realized gains on its statement of income. The trading investments that decline in value would be reported at fair value with the unrealized losses also reported on the statement of income. When the declining investments are sold immediately after year end, a realized gain or loss is reported based on the difference between the selling price and the year-end carrying amount of the investment, which in this case would probably be insignificant as the sale occurs so soon after year end. Had Kreiter sold these investments just prior to year end, a realized loss equal to the reported unrealized loss would be reported on the company‘s statement of income. By properly classifying its trading portfolio, decisions as to the timing of selling these investments will not allow management to manipulate net income because investments are reported at fair value.

LO 2,3,4 BT: S Difficulty: M Time: 30 min. AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT12.7 a.

SERIAL CASE

As a public corporation, Software Solutions reports under IFRS. If Software Solutions succeeds in purchasing all of the shares of Anthony Business Company Ltd (ABC), Software Solutions would record the investment in its accounting records using the equity model. However, there would be a requirement to consolidate the ABC accounts into Software Solutions‘ financial statements using consolidation techniques that would remove the investment account and replace it with the assets and liabilities of ABC. ABC would be a wholly owned subsidiary company and Software Solutions would be the parent company. The purchase of the shares would not necessarily require a change in ABC‘s accounting records, but some parent companies do require their subsidiaries to make changes to their accounting policies or systems and processes to improve consistency with those used by the parent and facilitate consolidation of the financial statements. Another change that might be required is to make ABC‘s fiscal year end match that of its parent.

As a private corporation, Compuhelp likely reports under ASPE. If Compuhelp succeeds in purchasing Bev and Doug‘s (50%) of the shares of ABC, but control is retained by Emily and Daniel, Compuhelp could account for the investment using the equity method. This reflects Compuhelp‘s significant influence over the operations of ABC. Alternatively, Compuhelp could also account for its investment using the cost model. Since ABC is a private company, its shares do not trade actively on public stock exchanges. It would then be difficult for Compuhelp to report its investment at fair value because such values are not readily obtained. So, if fair value cannot be determined, ASPE allows the use of the cost method. Under ASPE, companies can choose to use the cost model rather than the equity model to account for investments subject to significant influence if the fair value of the shares is not known. Computech may have few users of the financial statements and the information provided by the equity method may not be relevant. The purchase of the shares would likely not require a change in ABC‘s accounting records since the relationship between Compuhelp and ABC is one of significant influence and not control.

CT12.7 (CONTINUED) c.

Offer from Software Solutions: The offer from Software Solutions may result in reduced hours of work for Emily and Daniel. This could be a significant advantage because of the work involved in running the business. In addition, the sale of the shares will provide them with a substantial amount of cash that, if invested wisely, could yield benefits for many years. The transition of Emily and Daniel from shareholders to employees would also result in some disadvantages, such as loss of control. Software Solutions will exercise control over ABC‘s operations and will not likely be willing to let Emily and Daniel participate in the decision-making process. Their employment contract is also limited to 2 years, leaving uncertainty about their relationship with Software Solutions at the end of the employment period. The nature of the income received would also change. Emily and Daniel currently receive a management salary plus dividends as shareholders of ABC. This income fluctuates based on the financial results of the company. As employees, the income that they receive will be more stable, but they will no longer participate in the net income of the business. Offer from Compuhelp: The offer from Compuhelp will keep Emily and Daniel in control of the operations of ABC. It will also allow them to participate in their share of the net income of the business since they retain 50% ownership of the company. The company could also benefit from integration of services and opportunities through the relationship with Compuhelp, as well as taking advantage of the expertise of the Compuhelp management team. The offer would not result in reduced hours of work for Emily and Daniel, as they would be responsible for running the business. In addition, they would be subject to the significant influence of Compuhelp rather than dealing with Bev and Doug. They would also not receive a large cash payment for the sale of their shares as would Bev and Doug. Finally, if the business relationship with Compuhelp did not work out, it may be difficult to find another investor to purchase the shares held by Emily and Daniel. The comparative financial rewards to Bev and Doug are not stated in this case.

LO 3,4 BT: C Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

Legal Notice

CHAPTER 13 STATEMENT OF CASH FLOWS LEARNING OBJECTIVES 1. Describe the content and format of the statement of cash flows. 2. Prepare the operating activities section of a statement of cash flows using the indirect method. 3. Prepare the investing and financing activities sections and complete the statement of cash flows. 4. Prepare the financing activities section and complete the statement of cash flows. 5. Use the statement of cash flows to evaluate a company. 6. Prepare the operating activities section of a statement of cash flows using the direct method (Appendix 13A).

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Ite

BT Item

BT Item LO

BT Item LO BT

m Questions 1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

C C AP C C K

7. 8. 9. 10. 11. 12.

1 1 2 2,5 2 2

K C C C K C

13. 14. 15. 16. 17. 18.

1. 2. 3. 4.

1 1 1 2

K C C C

5. 6. 7. 8.

2 3 3 4

AP AN AP AN

9. 10. 11. 12.

1. 2. 3.

1 1 2

C C C

4. 5. 6.

2 2,3,4 3,4

AP C AN

7. 8. 9.

1. 2. 3.

1 2 3,5

C AP AN

4. 5. 6.

4,5 2,3,4,5 2,3,4,5

2,3 2,3 4 4 4 4

C C C C AP C

19. 20. 21. 22. 23. 24.

5 5 5 5 5 5

C C C C C C

25. 26. 27. 28.

6 6 6 6

C C AP C

AP AN AN AP

13. 14. 15. 16.

6 6 6 6

AP AP AP AP

AP AN AN

10. 11. 12.

5 5 6

AN AN C

13. 14. 15.

6 6 6

AP AP AP

1,2,6 6 5,6

AN AN AN

5,6 5

AN AN

Brief Exercises 4 5 5 6

Exercises 2,3,4 2,3,4,5 2,3,4,5

Problems: Set A and B AN AN AN

7. 8. 9.

2,3,4,5 5 5

AN AN AN

10. 11. 12.

Accounting Cycle Review Cases 1. 2.

2,3,4 AN 1,2,3,4,5 AN

3. 4.

1,5 5

AN E

5. 6.

5 1

AN C

7. 8.

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during a period, in a format that reconciles the beginning and ending cash balances. The statement of cash flows is useful to all readers because it allows them to assess the following aspects of a company‘s financial position:   

the reasons for the difference between net income and cash provided (used) by operating activities the cash generated by (used in) investing and financing transactions during a period the company‘s ability to generate future cash flows

Creditors in particular, are concerned about the borrower‘s ability to generate cash to repay loans and service debt. The cash flow statement helps creditors assess risk. LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash. Generally, only debt investments with maturities of three months or less qualify under this definition. These would include term deposits, guaranteed investment certificates and bank overdrafts and indebtedness from an operating line of credit. Trading investments differ from cash equivalents in that they include those investments that are readily marketable and are purchased with an intention to generate short-term gains. In addition, trading investments are held for investment purposes whereas cash equivalents are held for the purpose of meeting short-term cash needs. The statement of cash flows may be prepared using cash, or cash and cash equivalents as its base. If the latter, cash equivalents must be clearly defined.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

a. Cash and cash equivalents: Beginning of Year Cash $ 4,000 Term deposits 12,000 Cash and cash equivalents $16,000 b. Cash and cash equivalents: Beginning of Year Cash $ 4,000 Term deposits 12,000 Bank indebtedness (3,000) Cash and cash equivalents $13,000

End of Year $ 6,000 16,000 $22,000

End of Year $ 6,000 16,000 0 $22,000

Increase (Decrease) $2,000 4,000 $6,000 Increase (Decrease) $2,000 4,000 3,000 $9,000

LO 1 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Operating activities include the cash flow activities arising from a company‘s principal revenue-producing activities and all other activities that are not investing or financing activities. Investing activities are those arising from the acquisition and disposal of non-current assets. Financing activities include those resulting in changes in the size and composition of the equity and borrowings of a company.

LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Companies following ASPE classify interest paid, interest income, and dividend income, as part of operating activities because they are disclosed on the statement of income as part of net income. Dividend payments are classified as financing activities. This is the most common practice for both publicly traded and private companies. Companies following IFRS may classify interest and dividend income as either investing activities or operating activities, and interest and dividend payments as either financing activities or operating activities. Companies select where these payments and receipts will be presented and must apply the presentation consistently.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Examples of noncash transactions include the issue of shares or a mortgage to purchase property, plant, and equipment. Other examples include issuing notes payable to settle a debt or to purchase land. In all cases, cash is not involved. Noncash transactions should be reported in the notes to the financial statements and cross-referenced to the statement of cash flows, but not reported as investing and financing activities in the body of the statement of cash flows.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Although the approaches and format are different, both the direct and indirect methods will produce the same net cash provided by operating activities.

LO 1 BT: K Difficulty: S Time: 2 min. AACSB: None CPA CM: Reporting

(a) and (b) (1) The adjusted trial balance is not required to prepare the statement of cash flows because it does not provide necessary data. (2)

A comparative statement of financial position is required to obtain the changes in individual asset, liability, and equity balances. Changes in the noncash working capital (current) accounts may affect the operating activities, changes in short-term investment and long-lived asset accounts may affect the investing activities, and changes in non-current liability and equity accounts may affect the financing activities reported in the statement of cash flows.

(3)

The statement of income is required to obtain the elements of operating activities, which will be converted from the accrual basis to the cash basis. The statement of income is also required to identify noncash revenues and expenses such as depreciation and amortization expenses and accounting gains and losses.

(4)

The statement of comprehensive income is needed to reconcile certain fair-valued assets (e.g., revaluation of the fair value of land) and equity (e.g., accumulated other comprehensive income) accounts appearing in the statement of financial position. However, changes in comprehensive income do not affect cash and are not reported on the statement of cash flows.

QUESTION 8 (CONTINUED) (5)

The statement of changes in equity will provide details of the changes in the share capital and retained earnings accounts. From these, the cash effects of financing transactions with shareholders, such as the issue or repurchase of shares and/or payment of dividends, can be determined and reported as financing activities on the statement of cash flows.

LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

The indirect method involves converting accrual-based net income to net cash provided by operating activities. This is done by starting with accrual-based net income from the statement of income and adding or subtracting noncash items included in net income. Examples of adjustments include adding back noncash expenses, such as depreciation, and removing any noncash gains or losses from net income. Then, changes in the balances of noncash current asset and current liability accounts from one period to the next are added or subtracted.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

A number of factors could have caused a positive amount of net cash provided by operating activities in spite of the fact that Ensign reported a net loss. These include (1) a high amount of collection of deferred revenue (which Ensign does not have); (2) large amounts of depreciation or amortization; and (3) accounting losses or impairments. The increase in deferred revenue is added as an inflow under operating activities. Items (2) and (3) are non-cash items deducted in arriving at net income (in this case a net loss) so they are now added back to net loss when determining net cash flow provided by operating activities, thereby making it positive.

LO 2,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

Under the indirect method, depreciation, depletion, and amortization expenses are added back to net income to reconcile net income to net cash provided by operating activities because they are expenses that have reduced net income, but do not result in the use of cash. Adding them back cancels the expenses reported in the statement of income, as accrual net income is the starting point under the indirect method. Example:

Income before depreciation $5,000 Less: Depreciation expense (1,000) Income 4,000 Add: Depreciation expense 1,000 Cash provided by operating activities $5,000

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

The operating activities section of the statement of cash flows prepared using the indirect method highlights trends in changes in working capital account balances. For example, an increase in inventory with a decrease in accounts payable may flag an issue with the inventory management. Increases in inventory should bring about a corresponding increase in accounts payable. Another example would be the increase in accounts receivable beyond the level of increase in sales which might highlight poor management of collections from customers.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

Under the indirect method, a gain on disposal of equipment is deducted from net income to reconcile net income to net cash provided by operating activities. A gain is the difference between the cash proceeds received when the asset is sold and the carrying amount of the asset. This gain is not a cash receipt or payment. Therefore, the noncash gain, which was included in net income, must be deducted from net income on the statement of cash flows to convert net income to net cash provided by operating activities. The total cash proceeds received when the asset is disposed of would be reported in the statement of cash flows as an investing activity.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

When a business invests money, it does so outside of its main revenuegenerating operations. It might have excess cash, which it wants to put to use in producing some interest or dividend income. Since the intention is to earn a return on its investment, the buying and selling of investments is generally reported as investing activities in the statement of cash flows. The exception occurs when the investments are held for trading purposes, in which case they are treated similarly to inventory acquired for resale. These types of investments are reported as operating activities.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

The principal amount advanced by the bank and later repaid involves borrowing and repayment transactions that need to be reported under financing activities in the statement of cash flows. The timing of the loan principal repayments will lead to a portion of the loan principal being classified as current liabilities. This classification does not change the nature of the cash activity with the bank. Both the current and non-current principal portions are treated together for cash flow reporting purposes.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

The amount of the mortgage payment that represents the repayment of principal does not affect the statement of income and like the borrowing of cash by signing a mortgage payable, it is a financing activity. On the other hand, the amount of the mortgage payment that represents the payment of interest does affect the statement of income as interest expense. The payment of interest expense is an operating activity on the statement of cash flows under ASPE but if reporting under IFRS a choice exists between showing it is as an operating or financing activity.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

(a)

Dividends declared reduce retained earnings once the declaration is made by the board of directors. For the cash flow statement, only dividends paid are reported in the financing activities section of the statement. Similar to the adjustments made for the changes in working capital accounts in the indirect format of the statement of cash flows, any increase or decrease in the Dividends Payable account will adjust dividends declared (accrual basis) to dividends paid (cash basis). For this example, the amount of the increase of $2,000 ($10,000 - $8,000) in dividends payable will be deducted from the amount of dividends declared of $40,000 to arrive at cash paid for dividends of $38,000.

(b)

My answer would change if the company had declared dividends in the amount of $2,000. This amount corresponds to the increase in the Dividends Payable account for the year. Consequently, no dividends would have been paid during the year and no amount would appear in the financing activities of the statement of cash flows.

LO 4 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

18.

The statement of cash flows is prepared from detailed information about the changes in account balances that occurred between two periods of time, as shown on the other financial statements. Unlike the other financial statements, it is not prepared from an adjusted trial balance. In particular, the information to prepare the statement of cash flows comes from a comparative statement of financial position, the statement of income, the statement of changes in equity, and additional information concerning specific transactions such as disposals of property, plant, and equipment.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

19.

(a) (b)

The corporate life cycle consists of four phases: introductory, growth, maturity, and decline. In the introductory and growth phases, we don‘t usually expect to see a company generate positive cash from its operating activities until part way through the growth phase. Because the company is making significant investments in its long-lived assets, cash will be used by investing activities. During the first two phases, cash generated by financing activities is usually positive as debt and equity are issued to pay for the investments and cover the operating activities shortfall. These patterns reverse in the maturity and decline phases of the cycle. In the decline phase, cash from operating activities decreases. Cash from investing activities is positive as the company sells off its excess assets, before starting to decline. Cash is used for financing activities as the company continues to pay off its debt.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

A company that just commenced its operations would be expected to report low or negative cash flows from operating activities. Later, when the company is growing and healthy, the cash from operating activities will become positive. The company would also usually show cash used in investing activities as it invests in its productive capacity. At this stage, the company will also usually show cash inflows in financing activities to finance the purchase of productive assets not covered from operating activities.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Creditors may be concerned about the company‘s ability to repay its obligations over the long-term. The lack of cash flows from operating activities may be of concern to investors for several reasons. First, the decrease in cash flows may have an adverse effect on the company‘s share price. In addition, some investors may be concerned that the company will not generate enough cash to pay dividends in the future. This concern is supported by the declining free cash flow, which also indicates the company is generating less cash from operating activities to pay future dividends and to expand the business.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

22.

Improvements in free cash flow that do not involve improving cash from operating activities include reducing the amount of capital expenditures or by reducing the amount of dividends paid.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

If net capital expenditures and dividends paid exceed cash provided by operating activities, then free cash flow will be negative.

LO 5 BT: C Difficulty: M Time: 2 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

24.

Data collected from customers using loyalty cards can be mined to target advertising of specific products meeting the customer‘s need and buying habits. Based on the most popular product sold, a store can adjust their product placement to maximize customer traffic to those products. These strategies can lead to increased sales and corresponding increases in operating cash flow.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*25.

Net cash provided by operating activities under the direct method is the difference between cash revenues and cash expenses. The direct method adjusts the accrual-based revenues and expenses directly to reflect the cash-based revenues and expenses, which combine to equal "net cash provided by operating activities."

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*26.

Depreciation and amortization expenses are not listed in the operating activities section under the direct method because they are not cash flow items—they do not affect cash. Recall the journal entry to record depreciation: debit Depreciation Expense and credit Accumulated Depreciation. The entry to record amortization is similar. As you can see, there is no cash involved in this journal entry. This is different from the indirect method, which uses net income as its starting point and must add back depreciation and amortization as noncash items included in the determination of net income.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*27.

When preparing the operating activities of the statement of cash flows using the direct method, the same information is needed as when preparing the statement using the indirect method. For the amount of cash received from customers, the amount of sales, changes in accounts receivable, change in refund liability and changes in deferred revenue are needed. In the case of the cash paid to suppliers, cost of goods sold and the changes in inventory, estimated inventory returns and accounts payable are needed.

LO 6 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*28.

The gain on disposal of equipment and the loss on the sale of land would not appear on the statement of cash flows prepared using the direct method because these are not cash flow items. However, the gross proceeds received when the assets are sold would be reported in the statement of cash flows, as investing activities.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13.1– a. – b. – c. NE d. + e. – f. + g. NE h. – i. – j. NE k. l. NE m. NE LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.2 a. b.

F O if reporting under ASPE but if reporting under IFRS a choice exists between showing this as an operating or financing activity c. NC – an exchange of land (investing activity) for shares (financing activity) that does not involve cash d. F e. O f. O g. Not a cash activity – a reduction of retained earnings and an increase in dividends payable h. F if reporting under ASPE but if reporting under IFRS a choice exists between showing this as a financing or operating activity i. O j. Not a cash activity – a cost allocation k. F l. Not a cash activity but is part of cash and cash equivalents m. Not a cash activity but is part of cash and cash equivalents LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.3 a.

1. 2. 3. 4. 5. 6. 7. 8.

F O O I F O F O Linamar uses the indirect method as indicated by the change in noncash operating working capital items and the depreciation and amortization expenses.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.4 a. + b. – c. + d. + e. N/A f. + g. + h. – i. – j. + k. N/A l. + m. + n. Does not appear as it is part of cash and cash equivalents o. Does not appear as it is part of cash and cash equivalents LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.5 DUPIGNE CORPORATION Statement of Cash Flows (Partial) Year Ended March 31, 2024 Operating activities Net income ................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense ........................................... Loss on disposal of land ....................................... Accounts receivable increase ............................... Inventory increase ................................................ Accounts payable decrease .................................. Net cash provided by operating activities ...............................

$275,000

$60,000 15,000 (20,000) (5,000) (5,000)

45,000 $320,000

[Adjustments to net income include depreciation (+); loss (+); increase in noncash current assets (–); and decrease in current liabilities (−)]. Dividends pertain to financing activities. LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.6 Original cost of equipment sold ........................................................... Less: Accumulated depreciation ......................................................... Carrying amount of equipment sold ..................................................... Less: Loss on disposal ....................................................................... Cash received from disposal of equipment ..........................................

$20,000 (5,500) 14,500 (1,500) $13,000

The following journal entry may be helpful in understanding this brief exercise: Cash ............................................................................ Accumulated Depreciation—Equipment ...................... Loss on Disposal ......................................................... Equipment .........................................................

13,000 5,500 1,500 20,000

Cash provided by disposal of equipment = $13,000

Investing activities for the proceeds; Operating activities for the loss as it is shown on the statement of income.

LO 3 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.7 ($ in thousands) Investing activities Purchase of long-term investments ($150 – $100) ................ Disposal of equipment ........................................................... Purchase of equipment [$500 – ($400 – $100)] ..................... Net cash used by investing activities ..............................................

$ (50) 60 * (200) $(190)

Equipment 400 XXX 100 500 *Cost of equipment sold ......................................................... *Accumulated depreciation ($100 – carrying amount of $50) *Carrying amount ................................................................... *Gain on disposal................................................................... *Cash proceeds from disposal ...............................................

$100 50 50 10) $ 60)

LO 3 BT: AP Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.8 ($ in millions) Beginning balance, retained earnings ......................... Add: Net income .......................................................... Less: Ending balance, retained earnings ..................... Dividends paid .............................................................

$4,136.9 1,127.6 (4,696.5) $568.0

Retained Earnings 4,136.9 1,127.6 568.0 4,696.5 The answer would change if the Dividends Payable account increased during the year. In this case, the $568.0 decrease in Retained Earnings would be reduced by the increase in Dividends Payable to arrive at the amount of dividends paid. LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.9 ($ in thousands) Financing activities Payment of cash dividends .................................................... Repayment of bank loan payable .......................................... Issue of common shares ($600 – $400) ................................ Net cash used by financing activities ..............................................

$(195) 1 (200)2 200 $(195)

Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing $500 by paying $200 cash and issuing a $300 bank loan payable. 1

Beginning balance, retained earnings................. Add: Net income ................................................. Less: Ending balance, retained earnings ............ Dividends declared .............................................

$500 400 (700) $200

Beginning balance, dividends payable................ Add: Dividends declared (from above) ............... Less: Ending balance, dividends payable ........... Dividends paid ....................................................

$ 10 200 (15) $195

Beginning balance, bank loan ($200 + $300) ..... Additional borrowings .........................................

$500 300 800 (600) $200

Ending balance, bank loan ($200 + $400) .......... Loan payments made .........................................

(Financing activity cash flows = Issuance/repayment of long-term debt, issuance/repurchase of shares, and payment of cash dividends) LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.10 a.

Free cash flow = $325,000 – $200,000 – $25,000 = $100,000

Free cash flow provides better information than net cash provided by operating activities because it includes the corporation‘s ability to sustain capital asset replacements and additions, and its ability to distribute dividends to its shareholders.

LO 5 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 13.11 a. During 2020 Alimentation Couche-Tard reduced some of its long-term investments, while at the same time borrowed more cash using long-term debt. b. During 2021, when cash flow from operating activities improved from 2020, Alimentation Couche-Tard repaid a large amount of long-term debt that was increased in 2020. c. The company continued to pay dividends during Covid-19 as it had the necessary cash to do so and wanted to satisfy shareholders expectations. d. Free cash flow in millions of US dollars: a. 2021: $4,087 – $1,041 – $268 = $2,778 b. 2020: $3,721 – $1,318 – $216 = $2,187 Free cash flow increased in 2021 compared to 2020 due to the increase in cash flows from operating activities and the reduction of the amount of cash paid on capital expenditures. e. As a shareholder of Alimentation Couche-Tard Inc., I would be pleased with the fact that the company continued to pay dividends during Covid19, borrowed the necessary cash using long-term debt in 2020 to secure the necessary cash to operate and continued to make capital expenditures. I would also be pleased with the large repayment of longterm debt in 2021 and the large increase in the free cash flow generated in 2021 compared to 2020. f. Based on 2021 cash flows, Alimentation Couche-Tard Inc. is likely in the maturity stage of the corporate life cycle. This is due to the modest uses of cash from investing activities and high uses of cash from financing activities. LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 Solutions Manual 14-1450 Chapter 14 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

CM: Reporting and Finance

*BRIEF EXERCISE 13.12 Cash receipts = from customers

Sales revenues

+ Decrease in accounts receivable – Increase in accounts receivable

+ Increase in refund liability - Decrease in refund liability

Thus, cash receipts from customers must have equalled = $160,700 [ $170,000 – ($24,000 – $14,000) + ($1,700 - $1,000)]. LO 6 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 13.13 (in USD millions) + Increase in inventory Cash payments to = Cost of goods suppliers

+ Decrease in accounts payable

– Decrease in inventory – Increase in accounts payable

Thus, the cash payments to suppliers must have equalled = $1,526 ($1,514 + $89 – $77). LO 6 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 13.14 Cash payments for = other operating expenses

Operating expenses (excluding depreciation and amortization)

+ Increase in prepaid expenses – Decrease in prepaid expenses and + Decrease in liabilities relating to other operating expenses – Increase in liabilities relating to other operating expenses

Thus, the cash payments for other operating expenses must have equalled = $184,000 ($200,000 – $30,000 – $5,000 + $1,000 + $13,200 + $4,800). LO 6 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 13.15 a. Income tax expense Less: Increase in income tax payable Cash payments for income tax

$50,000 (4,000) $46,000

b. Income tax expense Add: Decrease in income tax payable Cash payments for income tax

$50,000 3,000 $53,000

LO 6 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 13.16 Operating activities Cash receipts from customers .................................................. Cash payments To suppliers ........................................................................... To employees ........................................................................ For other operating expenses ................................................ For income tax ....................................................................... Net cash provided by operating activities .......................................

$830,0001 $474,0002 37,0003 212,0004 10,0005

733,000* $ 97,000*

$850,000 – $20,000 = $830,000 $475,000 – $6,000 + $5,000 = $474,000 3 $40,000 – $3,000 = $37,000 4 $230,000 – $20,000 + $2,000 = $212,000 5 $15,000 – $5,000 = $10,000 2

LO 6 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 13.1

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

(a) Cash Effect

(b) Classification

+ $50,000 – $5,000 + $16,000 – $25,000 + $18,000 + $1,000 – $18,000 – $100,000 NE + $1,000

F I / NC* O F I O O O ** O

– $25,000

Investing activity; Cash payment of $5,000. Also requires note disclosure of the $25,000 noncash transaction acquisition of machine in exchange for long-term note payable. No effect on cash flows; increase in inventory offset by increase in accounts payable.

LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.2 1.

An impairment loss on goodwill involves the recording of a loss and a reduction of the asset account Goodwill. This transaction does not involve cash in any way. This would not be reported on the statement of cash flows when using the direct method but the impairment might be discussed in the accompanying notes. (The amount would be shown as an adjustment to net income to reverse this loss in the operating activities section prepared using the indirect method.)

Depreciation is a cost allocation technique. The cash transaction occurred with the purchase of the property, plant, and equipment. Depreciation charges the cost to expense as the assets are being consumed. This transaction does not involve cash. This would not be reported on the statement of cash flows or in the accompanying notes. (The amount would be shown as an adjustment to net income to reverse this expense in the operating activities section prepared using the indirect method.)

The recording of the fair value adjustment through net income or loss for an unrealized gain on a trading investment does not involve cash, but increases net income for the gain that is accrued and the carrying amount of the investment on the statement of financial position. This would not be reported on the statement of cash flows if the direct method were used or shown in the accompanying notes. (The amount would be shown as reduction in net income in the operating activities section prepared using the indirect method.)

The reduction of inventory to net realizable value is similar to the recording of an impairment in item 1 above. This transaction does not involve cash in any way. This would not be reported on the statement of cash flows when using the direct method but the charge to cost of goods sold might be discussed in the accompanying notes. (The amount would be included in the change in inventory amount that appears as an adjustment to net income in the operating activities section prepared using the indirect method.)

EXERCISE 13.2 (CONTINUED) 5.

The purchase of land in exchange for a note payable issued to the seller would not appear on the statement of cash flows. Since this transaction does not involve cash directly, it is not reported on the statement of cash flows. Rather it is reported in a note to the financial statements explaining this non-cash financing and investing transaction.

A stock split results in additional shares being issued and does not involve cash in any way. This would not be reported on the statement of cash flows, but would be reported in the statement of changes in equity and the notes to the financial statements.

The conversion occurs as a result of non-payment of the outstanding receivable and does not involve cash. This would not be reported separately on the statement of cash flows or in the accompanying notes. (The amount would be included in the change in accounts receivable and the change in notes receivable that appear as adjustments to net income in the operating activities section prepared using the indirect method.)

The equipment was purchased by paying with common shares rather than cash. Since this transaction does not involve cash directly, it is not reported on the statement of cash flows. This is, however, an example of a significant noncash investing (acquisition of equipment) and financing (issue of shares) activity and would be disclosed in the notes to the financial statements.

LO 1 BT: C Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.3 Net income

Cash Provided (Used) by Operating Activities

Recorded and paid salaries.

–

Recorded income tax payable.

–

Transaction

1. 2.

3. 4. 5. 6. 7. 8. 9. 10.

Sold inventory for cash at a higher price than cost. Collected cash in advance from a customer for a service to be provided in the future. Purchased inventory on account in a perpetual inventory system. Declared and paid dividends.

Accrued interest receivable. Recorded depreciation expense. Paid an amount owing on account to a supplier. Collected an amount owing from a customer.

–

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.4 a. JUNO LTD. Statement of Cash Flows (Partial) Year Ended December 31, 2024

$21,000

$11,000 5,000 5,000 (1,400) (500) 1,250 400 1,000

21,750 $42,750

Note: The current portion of the bank loan payable was not included because this bank loan was issued for borrowing purposes rather than trade. [Adjustments to net income include depreciation (+); loss (+); decrease in noncash current assets (+); increase in noncash current assets (-); and increase in current liabilities (+)]

The most significant adjustment to net income when arriving at net cash provided by operating activities is the addition of depreciation expense. Depreciation expense does not involve cash flows and is therefore added back to income in order to eliminate it to arrive at cash flows from operating activities.

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.5 Transaction Purchased inventory for 1. cash. Sold inventory on account. 2. Sold equipment for cash at 3. a loss. Recorded depreciation on 4. equipment. Paid dividends. 5. Recorded an unrealized 6. loss on a long-term equity investment carried at fair value through profit or loss. Collected an account from 7. a customer. Signed and received a 8. mortgage payable. Paid, in full, the current 9. portion of a mortgage payable. Purchased land by issuing 10. common shares.

Operating Investing Financing Noncash Activities Activities Activities Activities –

(+/–) NE

–

+/–

LO 2,3,4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.6 DUPRÉ CORP. Statement of Cash Flows (Partial) Year Ended December 31

Investing activities Proceeds from disposal of equipment.................................... Purchase of land .................................................................... Purchase of equipment [$70,000 + ($53,000 – $43,000)] ...... Net cash used by investing activities ..............................................

$ 6,000* (6,000) (80,000) $(80,000)

Financing activities Payment of cash dividends** .................................................

$1.000

*Cost of equipment sold ......................................................... *Accumulated depreciation .................................................... *Carrying amount ................................................................... *Loss on disposal of equipment ............................................. *Cash proceeds .....................................................................

$39,000 30,000 9,000 3,000) $ 6,000)

Cash ................................................................................ Accumulated Depreciation—Equipment .......................... Loss on Disposal ............................................................. Equipment ...................................................................

6,000 30,000 3,000 39,000

Notes to the financial statements: Equipment of $53,000 was purchased by paying $10,000 cash and issuing a bank loan payable specifically for the purchase of this equipment for $43,000. **

For this year, no dividends were paid. We know this because the dividends declared are equal to the increase in the Dividends Payable account. The amount of dividends paid is equal to dividends declared plus any decrease in the Dividends Payable account or minus any increase in the Dividends Payable account. In this case, the dividends paid = $4,000 - $4,000 = $0.

LO 3,4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.7 a. PUFFY LTD. Statement of Cash Flows Year Ended December 31, 2024

Operating activities Net income.................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Gain on sale of long-term investments................. $ (5,000) Depreciation expense .......................................... 34,000 Increase in accounts receivable ($80,000 – $76,000).......................................... (4,000) Decrease in inventory ($186,000 – $180,000) ..... 6,000 Increase in estimated inventory returns ($5,000 – $3,000) ............................................ (2,000) Decrease in accounts payable ($41,000 – $29,000) (12,000) Increase in refund liability ($10,000 – $6,000) ..... 4,000 Net cash provided by operating activities .............................. Investing activities Proceeds from sale of long-term investments ............... Purchase of equipment ................................................. Net cash used by investing activities ..................................... Financing activities Payment of cash dividends ($134,000 + $115,000 – $199,000)............................ Repayment of bank loan .............................................. Issue of common shares ............................................... Net cash used by financing activities ..................................... Net increase in cash and cash equivalents ............................ Cash and cash equivalents, January 1 ($21,000 + $1,000) .. Cash and cash equivalents, December 31 ($48,000 + $5,000)

$115,000

21,000 136,000

$35,000* (65,000) (30,000)

$(50,000) (50,000) 25,000 (75,000) 31,000) 22,000) $ 53,000)

EXERCISE 13.7 (CONTINUED) * Cash proceeds received from sale of long-term investments: Cash ........................................................................ 35,000 Long-Term Investments ($100,000 – $70,000) 30,000 Gain on Disposal ............................................ 5,000 It is assumed that the carrying value of the long-term investments is the same as its fair value. b.

The major reason why net cash from operating activities exceeded net income is because of the amount of depreciation in the amount of $34,000. Depreciation expense does not involve cash flows and is therefore added back to income in order to eliminate it to arrive at cash flows from operating activities.

The company did not need to issue common shares during the year. By issuing common shares, this caused cash and cash equivalents to increase by $25,000. Without issuing shares, it would have increased by $6,000. The issuance and extra cash may have been needed to finance an expansion or new product line, but it does not appear the company needed the extra cash in the short term.

LO 2,3,4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.8 a.

CHARMAINE RETAILERS LTD. Statement of Cash Flows Year Ended December 31, 2024 Operating activities Net income.................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense .......................................... $21,000 Increase in accounts receivable ($50,000 – $42,000).......................................... (8,000) Increase in inventory ($168,000 – $143,000)....... (25,000) Increase in accounts payable ($45,000 – $35,000) 10,000 Net cash provided by operating activities .............................. Investing activities Purchase of furniture ($163,000 – $80,000) ................. Net cash used by investing activities ..................................... Financing activities Increase in bank loans ($20,000 + $83,000 + $10,000 – $61,000 – $15,000 .. ) Repayment of bank loan .............................................. Issue of common shares ($60,000 – $55,000).............. Net cash provided by financing activities ...............................

$62,000

(2,000) 60,000

$(83,000) (83,000)

$37,000 (10,000) 5,000

Net increase in cash .............................................................. Cash, January 1..................................................................... Cash, December 31 ............................................................... b.

The major reason why net cash from operating activities was lower than net income is because of the large amount of cash outflows from the increase in inventory of $25,000, which exceeded the add back of deprecation expense of $21,000.

The likely reason for the company to increase its bank loan during the year is to finance the substantial investment in furniture.

32,000 9,000) 9,000) $18,000)

LO 2,3,4,5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.9 a. DAGENAIS RETAILERS LTD. Statement of Cash Flows Year Ended December 31, 2024

Operating activities Net income.................................................................... Adjustments to reconcile net income to net cash used by operating activities Gain on disposal of furniture ................................ $ (2,000) Depreciation expense .......................................... 19,000 Increase in accounts receivable ($77,000 – $50,000).......................................... (27,000) Increase in inventory ($219,000 – $168,000)....... (51,000) Increase in accounts payable ($68,000 – $45,000) 23,000 Net cash used by operating activities .................................... Investing activities Proceeds from disposal of furniture (see below) ........... Net cash provided by investing activities ............................... Financing activities Payment of cash dividends ($173,000 - $32,000 – $146,000) .............................. Repurchase of common shares .................................... Repayment of bank loan ($103,000 – $90,000) ............ Net cash used by financing activities ..................................... Net decrease in cash ............................................................. Cash, January 1..................................................................... Bank indebtedness, December 31.........................................

$32,000

(38,000) (6,000)

$6,000 6,000

$(5,000) (10,000) (13,000) (28,000) (28,000) 18,000) $(10,000)))

The bank is considered a cash equivalent.

EXERCISE 13.9 (CONTINUED) Calculations: Transactions involving Furniture: Furniture Dec. 31, 2023

163,000

Dec. 31, 2024

130,000

Disposal

33,000

Accumulated Depreciation—Furniture Disposal (derived)

29,000

Dec. 31, 2023 Depreciation Dec. 31, 2024

45,000 19,000 35,000

Cost of furniture sold (derived) ........................................ Accumulated depreciation (derived) ................................ Net carrying amount (derived) ......................................... Add: Gain on disposal of furniture .................................. Cash proceeds from disposal ..........................................

$33,000 29,000 4,000 2,000 $ 6,000

Cash ................................................................................ Accumulated Depreciation—Furniture ............................. Gain on Disposal ........................................................ Furniture ......................................................................

6,000 29,000 2,000 33,000

EXERCISE 13.9 (CONTINUED) b.

The two main reasons why net cash used in operating activities is lower than net income is because of the increase in accounts receivable of $27,000 and the increase in inventory of $51,000. The increase in the inventory is not from higher turnover because if that were the case the amount of the increase in inventory would be similar to the amount of increase in accounts payable. In this case, the increase in accounts payable was significantly lower at $23,000.

The cost of the furniture that was disposed of is $33,000. This is only 20% of the furniture cost at the beginning of the year. The furniture that was sold was 88% depreciated ($29,000 ÷ $33,000). The sale generated a gain of $2,000. The likely reason why the furniture was not replaced is that the remaining furniture is considerably newer and likely more efficient in its use. The amount of the accumulated depreciation at the end of the year, compared to the remaining cost is 27% ($35,000 ÷ $130,000). Another reason why the furniture was not replaced is that there was no cash available to do so.

The payment of dividends and the cash paid to buy back shares was made possible by the company draining all of its available cash and going into bank indebtedness by $10,000. Some of the cash came from the proceeds obtained by selling off some of the furniture, without replacing it. The decrease in cash and subsequent bank indebtedness indicate that the company is not in a position to afford a dividend payment or repurchasing shares and would get a user to question management‘s decision to do so.

LO 2,3,4,5 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.10 a.

Company A and Company C both show a source of increase in their cash from operating activities of $25,000 when compared to net income or loss. Since the amount of depreciation is assumed to be the same, both companies show an equal ability in managing non-cash working capital, which is better than Company B.

When a company has cash provided by investing activities, it arises from an excess of cash proceeds received from the sale of non-current assets such as long-term investments or property, plant, and equipment over amounts paid to purchase these assets. This can occur for a number of reasons, including the timing of these cash flows. For example, if a company sells such assets first but then replaces them later in a subsequent year, cash provided from investment activities will be shown. Another reason why this may occur is because the company is not generating sufficient cash flows from operations and must sell off noncurrent assets in order to obtain funds.

Company A is the most likely to have sufficient cash flows to pay down debt or pay out dividends because it is the only company of the three that has provided positive cash flows from operations.

Company A is the most capable of growing the size of its business operations as its operations have generated the most cash and this made it able to spend $50,000 on investing activities, to pay out cash for financing activities, and still increase its cash position by the end of the year.

LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 13.11 Category of Cash Flow Affected Collect accounts receivable more quickly and Operating and use the cash received to buy equipment. Investing Pay accounts payable more slowly and use Operating and the cash saved to pay dividends. Financing Issue common shares and use the proceeds to Financing and pay down bank loans. Financing Sell non-current bond investments and use the Investing and proceeds to pay a larger bonus to employees Operating to improve retention rates.

Impact on Cash Flow (Increase or Decrease) Increase and Decrease Increase and Decrease Increase and Decrease Increase and Decrease

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

*EXERCISE 13.12

Statement of Income Account

Change in Current Asset / Current Liability Account

Part (a) Add to (+) or Deduct from (–) Statement of Income Account

Part (b) Related Cash Receipt or Payment

1. Sales

Decrease in accounts receivable

Cash receipts from customers

2. Dividend income

Increase in dividends receivable

–

Cash receipts from dividends

3. Interest income Decrease in interest receivable

Cash receipts from interest

4. Rent income

Decrease in deferred revenue

–

Cash receipts from customers

5. Cost of goods sold

Decrease in inventory

–

Cash payments to suppliers

6. Cost of goods sold

Decrease in accounts payable

Cash payments to suppliers

7. Insurance expense

Decrease in prepaid insurance

–

Cash payments for other operating expenses

8. Salaries expense

Decrease in salaries payable

Cash payments to employees

9. Interest expense

Increase in interest payable

–

Cash payments for interest

10. Income tax expense

Decrease in income tax payable

Cash payments for income tax

LO 6 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

*EXERCISE 13.13 a.

Sales Add: Decrease in accounts receivable Add: Increase in deferred revenue Cash receipts from customers

$160,000 2,000 3,000 $165,000

Cost of goods sold Add: Increase in inventory Less: Increase in accounts payable Cash payments to suppliers

$85,000 1,700 (3,200) $83,500

Salaries expense Less: Increase in salaries payable Cash payments to employees

$45,000 (1,175) $43,825

Operating expenses Add: Decrease in rent payable Less: Decrease in prepaid expenses Cash payments for other operating expenses

$50,000 300 (450) $49,850

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 13.14 JUNO LTD. Statement of Cash Flows (Partial) Year Ended December 31, 2024

Operating activities Cash receipts from customers ..................................................

$195,000

Cash payments To suppliers ........................................................................... For other operating expenses ................................................ For interest ............................................................................ For income tax ....................................................................... Net cash provided by operating activities .......................................

$114,1502 33,5003 1,200 3,4004

152,250 $ 42,750

Note: The current portion of the bank loan payable was not included because this bank loan was issued for lending purposes rather than trade. 1

$190,000 + $5,000 = $195,000 $114,000 + $1,400 – $1,250 = $114,150 3 $50,000 – $11,000 – $5,000 + $500 – $1,000 = $33,500 4 $3,800 – $400 = $3,400 2

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 13.15 PUFFY LTD. Statement of Cash Flows Year Ended December 31, 2024

Operating activities Cash receipts from customers* ..................................... Cash payments To suppliers** ......................................................... $759,000 For other operating expenses ................................. 43,000 For interest ............................................................. 14,000 For income tax ........................................................ 26,000 Net cash provided by operating activities .............................. Investing activities Proceeds from sale of long-term investments***........... Purchase of equipment ................................................. Net cash used by investing activities ..................................... Financing activities Payment of cash dividends ($134,000 + $115,000 – $199,000) .............................. Repayment of bank loan ............................................... Issue of common shares ............................................... Net cash used by financing activities .....................................

$978,000

842,000 136,000

$35,000 (65,000) (30,000)

$(50,000) (50,000) 25,000

(75,000) 31,000) 22,000 $ 53,000)

Calculations: * Cash receipts = sales – increase in accounts receivable + increase in refund liability = $978,000 – $4,000 + $4,000 = $978,000 ** Cash payments to suppliers = cost of goods sold – decrease in inventory – increase in estimated inventory returns + decrease in accounts payable $751,000 – $6,000 + $2,000 + $12,000 = $759,000

EXERCISE 13.15 (CONTINUED) *** Cash proceeds received from sale of long-term investments: Cash ........................................................................ 35,000 Long-Term Investments ($100,000 – $70,000) 30,000 Gain on Disposal ............................................ 5,000 It is assumed that the carrying value of the long-term investments is the same as its fair value. LO 6 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 13.1A

a. Classification O NE O (for the gain) I (for the cash received)

b. Cash Flow – NE + (for the cash received)

c. Net Income NE – + (gain increases income)

4. Purchased a 30-day term deposit.

5. Paid interest on a bank loan payable. 6. Purchased common shares for cancellation. 7. Amortized intangible assets. 8. Proceeds from issuing a note payable used to pay salaries to employees.

–

O F (for the proceeds) O (payment of salaries) O

NE + (for the proceeds) – (for the salaries) NE

– NE – (for the salaries) –

–

I (for the cash downpayment) NC (for the exchange)

– (for the cash downpayment NE (for the exchange)

Transaction 1. Paid for an insurance policy. 2. Insurance policy expires. 3. Disposed of certain long-term equity securities and realized a gain.

9. Recorded an impairment loss on land. 10. Paid the outstanding balance for inventory purchased on account. 11. Purchased equipment by making a down payment in cash and signing a loan payable for the balance.

PROBLEM 13.1A (CONTINUED) d.

Because of the accrual basis of accounting, it is not surprising that transactions can impact cash and net income differently. For example, in transaction #1 above, cash was paid to purchase an insurance policy without net income being affected in any way. In transaction #9 above, net income is affected by the impairment loss but, cash was not affected as amortization, depreciation and impairment are non-cash operating items and therefore have no effect on cash.

LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 13.2A a.

MONT FORTUNE LTD. Statement of Cash Flows (Partial) Year Ended September 30, 2024

Operating activities Net income ............................................................. Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense .................................... Impairment loss on equipment ....................... Decrease in accounts receivable ................... Increase in inventory ...................................... Decrease in prepaid expenses ...................... Decrease in deferred revenue ....................... Decrease in interest payable ......................... Decrease in accounts payable ....................... Increase in rent payable ................................ Increase in income tax payable ..................... Net cash provided by operating activities ........................

$1,300,000

$ 25,000 375,000 80,000 (150,000) 60,000 (170,000) (150,000) (250,000) 30,000 95,000

(55,000) $1,245,000

If Mont Fortune were a publicly traded company following IFRS, it could choose to disclose interest expense as part of financing activities rather than in operating activities. Reporting interest paid as in part (a) in the operating activities section above is the usual practice for a publicly traded company and the required practice followed by a private company using ASPE.

While it is uncommon, the net cash provided from operating activities is lower than net income for Mont Fortune. The two items that are often compared are the changes in inventory and accounts payable. It is expected that an increase in inventory brings about an automatic increase in accounts payable. This is not the case for Mont Fortune. The increase in inventory of $150,000 is coupled with the decrease in accounts payable of $250,000 bringing about the uncommon negative effect on net cash flows from operating activities.

LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.3A a.

Cash receipts and payments related to property, plant, and equipment in 2024: Land purchase Equipment purchase Proceeds from disposal of equipment

$(40,000) (10,000) 8,000*

* Cost of equipment sold: $240,000 + $75,000 – $300,000 = $15,000 Accumulated depreciation of equipment sold $96,000 + $60,000 – $144,000 = $12,000 Cash proceeds = Carrying amount (cost $15,000 – accumulated depreciation $12,000) + gain $5,000 = $8,000 Note to instructor–some students may find journal entries helpful in understanding this problem. Equipment .............................................................................................. Bank Loan Payable ........................................................................ Cash ...............................................................................................

75,000

40,000

Cash ....................................................................................................... Accumulated Depreciation—Equipment ................................................. Gain on Disposal ............................................................................ Equipment ......................................................................................

8,000 12,000

65,000 10,000

40,000

5,000 15,000

PROBLEM 13.3A (CONTINUED) b. Land purchase Equipment purchase Proceeds from equipment disposal

Investing activities (use) Investing activities (use) Investing activities (source)

Also include the following note to the financial statements: Note: During the year the company purchased equipment costing $75,000 by paying $10,000 cash and issuing a bank loan payable for $65,000.

A growing company must invest in productive assets so it would normally be using cash in its investing activities.

LO 3,5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.4A a.

Cash receipts:

Issue of common shares $550,000 – $400,000 +$100,000 = $250,000 Issuance of preferred shares $325,000 – $275,000 = $50,000

Cash payments:

Repurchase of common shares 10,000 shares at $10 per share = $100,000 Payment of dividends = $15,626

Note to instructor: Students may find summary journal entries helpful in understanding this problem. Cash .................................................................................... Preferred Shares ($325,000 – $275,000) .................... To record issue of preferred shares

50,000

Common Shares [10,000 x ($400,000 ÷ 40,000)] ................ Cash (10,000 x $10) .................................................... To record the repurchase of common shares

100,000

Cash .................................................................................... Common Shares ($550,000 – $400,000 + $100,000) .. To record the issue of common shares

250,000

Dividends Declared .............................................................. Dividends Payable ($4,062 – $3,438) .......................... Cash ............................................................................ To record the payment of dividends

16,250

50,000

100,000

250,000

624 15,626

b. All of the above activities would be classified as financing activities on the statement of cash flows.

PROBLEM 13.4A (CONTINUED) c. A growing company would usually be generating cash from its financing activities. Cash is needed to invest in productive assets, such as buildings and equipment and most companies are not able to generate sufficient cash from their operating activities. To finance these purchases, companies normally have to issue debt or shares. LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.5A a.

FOLLOW YOUR DREAM INC. Statement of Cash Flows Year Ended March 31, 2024

Operating activities Net income ............................................................................ Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense ................................................... Loss on disposal of equipment ..................................... Unrealized loss on trading investments ........................ Increase in accounts receivable.................................... Increase in inventory..................................................... Increase in estimated inventory returns ........................ Decrease in prepaid expenses ..................................... Increase in accounts payable ....................................... Increase in deferred revenue ........................................ Increase in refund liability ............................................. Net cash provided by operating activities .......................................

$205,220

$75,000 15,000 15,000 (72,000) (75,880) (7,000) 10,110 3,370 5,160 2,620

(28,620) 176,600

Investing activities Proceeds from disposal of equipment.................................... $ 10,250 Purchase of equipment (Note X) ........................................... (17,730) Net cash used by investing activities ..............................................

(7,480)

Financing activities Issue of bank loan.................................................................. $90,000 Repurchase of common shares ($275,000 + $80,000 - $295,000) ................................. (60,000) Repayment of bank loan payable ($98,000 + $155,920 + $90,000 – $130,000 – $90,000) (123,920) Payment of cash dividends ($197,600 + $205,220 – $275,450) ............................. (127,370) Net cash used by financing activities ..............................................

(221,290)

Net decrease in cash ...................................................................... Cash, April 1, 2023 ......................................................................... Cash, March 31, 2024 ....................................................................

(52,170) 99,670 $ 47,500

PROBLEM 13.5A (CONTINUED) Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing $97,730 by paying $17,730 cash and issuing $80,000 in common shares. b.

FYD‘s cash position has decreased primarily because of significant amounts of cash used in financing activities. Cash from operating activities increased the company‘s cash account by $176,600. All of this cash plus some of the opening cash balance was used to repurchase shares, repay its bank loans and pay dividends, decreasing the cash balance by $52,170.

LO 2,3,4,5 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.6A a.

SYLVESTER LTD. Statement of Cash Flows Year Ended December 31, 2024 Operating activities Net income....................................................................... Adjustments to reconcile net income to net cash provided(used) by operating activities Depreciation expense (3) ........................................ Gain on disposal of land ......................................... Gain on disposal of building (1) .............................. Loss on disposal of equipment (2) .......................... Decrease in accounts receivable ............................ Decrease in inventory ............................................. Increase in accounts payable ................................. Decrease in interest payable .................................. Increase in income tax payable .............................. Net cash provided by operating activities .................................

$57,000

$ 74,000 (7,000) (38,000) 4,000 11,000 21,000 17,000 (1,000) 1,000

82,000 139,000

Investing activities Purchase of building (1) ................................................... $(364,000) Purchase of equipment (2) .............................................. (65,000) Proceeds from disposal of land ($110,000 – $100,000 + $7,000 gain) .................... 17,000 Proceeds from disposal of equipment (2) ........................ 5,000 Proceeds from disposal of building (1) ............................. 50,000 Net cash used by investing activities ........................................

(357,000)

Financing activities Issue of common shares ($198,000 – $88,000)............... Additions to bank loan ..................................................... Repayments of bank loan (5) ........................................... Dividends paid (4) ............................................................ Net cash provided by financing activities .................................. Net increase in cash ................................................................. Bank indebtedness, January 1 ................................................. Cash, December 31 ..................................................................

249,000 31,000 (8,000) $ 23,000

$110,000 210,000 (36,000) (35,000)

PROBLEM 13.6A (CONTINUED) a. (continued) Calculations: (1) Transactions involving Buildings: Buildings Dec. 31, 2023 Purchases Dec. 31, 2024

263,000 364,000 527,000

Disposal

100,000

Accumulated Depreciation—Buildings Disposal (derived)

88,000

Dec. 31, 2023 Depreciation Dec. 31, 2024

100,000 55,000 67,000

Cost of building sold (derived) ......................................... Accumulated depreciation ............................................... Net carrying amount (derived) ......................................... Add: Gain on disposal of buildings (derived) .................. Cash proceeds from disposal ..........................................

$100,000 88,000 12,000 38,000 $50,000

Cash ................................................................................ Accumulated Depreciation—Buildings ............................. Gain on Disposal ........................................................ Buildings......................................................................

50,000 88,000 38,000 100,000

PROBLEM 13.6A (CONTINUED) (2) Transactions involving Equipment: Equipment Dec. 31, 2023 Purchases Dec. 31, 2024

40,000 65,000 85,000

Disposal

20,000

Accumulated Depreciation—Equipment Disposal

11,000

Dec. 31, 2023 Depreciation Dec. 31, 2024

10,000 19,000 18,000

Cost of equipment sold (derived) ..................................... Accumulated depreciation ............................................... Net carrying amount ........................................................ Less: Loss on disposal ................................................... Cash proceeds from disposal ..........................................

$20,000 11,000 9,000 4,000 $ 5,000

5,000 11,000 4,000

(3)

Total depreciation recorded during the year: For buildings .......................................................... For equipment ........................................................ Total depreciation expense for the year: ................

20,000

$55,000 19,000 $74,000

PROBLEM 13.6A (CONTINUED) a. (continued) (4)

Transactions involving Retained Earnings: Retained Earnings Dividends declared (derived)

Dec. 31, 2023 37,000 Net income Dec. 31, 2024

30,000 57,000 50,000

Dividends Payable Dividends paid

(5)

Dec. 31, 2023 35,000 Dividends declared Dec. 31, 2024

1,000 37,000 3,000

Transactions involving Bank Loan Payable:

Bank loan balance Dec. 31, 2023: Current portion ........................................................... $ 20,000 Non-current portion .................................................... 212,000 Total ........................................................................... $232,000 Bank loan balance Dec. 31, 2024: Current portion ........................................................... $ 26,000 Non-current portion .................................................... 380,000 Total ........................................................................... $406,000 Net increase during the year ($406,000 – $232,000) ...... $174,000 Additions to the bank loans during the year (given) ......... 210,000 Repayments made on bank loans during the year .......... $ 36,000

PROBLEM 13.6A (CONTINUED) b.

On the surface, Sylvester Ltd. looks as if it is managing its noncash working capital efficiently. It decreased its accounts receivable and inventory while at the same time increased its accounts payable. A creditor might find this alarming because suppliers don‘t look as if they are being paid on time. As well, a decline in inventory might not necessarily mean that the company is making sure that inventory is on hand to secure sales.

The purchase of the building was financed partially from the issuance of common shares and mostly from increasing the bank loan. The amount of the investment for the building is disproportionate to the amount of the retained earnings, which in turn was substantially depleted from a large dividend payment. Net income is modest and is made up of a one-time gain realized on the disposal of the old building. The net income level will decline in the future as a result of servicing the additional debt. Sylvester Ltd. could not afford to purchase the building without external financing.

LO 2,3,4,5 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.7A a.

ALTON LTD. Statement of Cash Flows Year Ended December 31, 2024

Operating activities Net income....................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense (4) ........................................ Loss on disposal of land ......................................... Gain on disposal of building (1) .............................. Loss on disposal of equipment (2) .......................... Increase in accounts receivable .............................. Increase in inventory ............................................... Decrease in accounts payable ................................ Increase in interest payable .................................... Decrease in income tax payable ............................. Net cash used by operating activities .......................................

$10,000

$ 73,000 21,000 (15,000) 11,000 (35,000) (31,000) (43,000) 5,000 (2,000)

(16,000) (6,000)

Investing activities Purchase of building (1) ................................................... $(520,000) Purchase of equipment (2) .............................................. (72,000) Proceeds from disposal of land (3) .................................. 29,000 Proceeds from disposal of equipment (2) ........................ 21,000 Proceeds from disposal of building (1) ............................. 40,000 Net cash used by investing activities ........................................

(502,000)

Financing activities Repurchase of common shares ($180,000 – $160,000) .. $ (20,000) Additions to bank loan ..................................................... 512,000 Repayments of bank loan (6) ........................................... (25,000) Dividends paid (5) ............................................................ (32,000) Net cash provided by financing activities ..................................

435,000

PROBLEM 13.7A (CONTINUED) a. (continued) Net decrease in cash and cash equivalents ............................. Cash and cash equivalents, January 1 ($36,000 + $42,000) .... Cash and cash equivalents, December 31 ...............................

(73,000) 78,000 $ 5,000

Calculations: (1) Transactions involving Buildings: Buildings Dec. 31, 2023 Purchases Dec. 31, 2024

524,000 520,000 923,000

Disposal

121,000

Accumulated Depreciation—Buildings Disposal (derived)

96,000

Dec. 31, 2024 Depreciation Dec. 31, 2024

190,000 42,000 136,000

Cost of building sold (derived) ......................................... Accumulated depreciation (derived) ................................ Net carrying amount ....................................................... Add: Gain on disposal of buildings ................................. Cash proceeds from disposal ..........................................

$121,000 96,000 25,000 15,000 $40,000

40,000 96,000 15,000 121,000

PROBLEM 13.7A (CONTINUED) a. (continued) (2) Transactions involving Equipment: Equipment Dec. 31, 2023 Purchases Dec. 31, 2024

70,000 72,000 100,000

Disposal

42,000

Accumulated Depreciation—Equipment Disposal

10,000

Dec. 31, 2023 Depreciation (der.) Dec. 31, 2024

20,000 31,000 41,000

Cost of equipment sold .................................................... Accumulated depreciation (derived) ................................ Net carrying amount ........................................................ Less: Loss on disposal ................................................... Cash proceeds from disposal .........................................

$42,000 10,000 32,000 11,000 $ 21,000

21,000 10,000 11,000 42,000

(3) Transaction involving Land: Cash (derived) ................................................................. Loss on Disposal ............................................................. Land ($230,000 - $180,000) ........................................ (4) Total depreciation recorded during the year: For buildings ................................................................ For equipment ............................................................. Total depreciation expense for the year: .....................

29,000 21,000 50,000

$42,000 31,000 $73,000

PROBLEM 13.7A (CONTINUED) a. (continued)

(5) Transactions involving Retained Earnings: Retained Earnings Dividends declared (derived)

Dec. 31, 2023 32,000 Net income Dec. 31, 2024

72,000 10,000 50,000

(6) Transactions involving Bank Loan Payable: Bank loan balance Dec. 31, 2023: Current portion ........................................................... $ 40,000 Non-current portion .................................................... 420,000 Total ........................................................................... $460,000 Bank loan balance Dec. 31, 2024: Current portion ........................................................... $ 56,000 Non-current portion .................................................... 891,000 Total ........................................................................... $947,000 Net increase during the year ($947,000 – $460,000) ...... $487,000 Additions to the bank loans during the year (given) ......... 512,000 Repayments made on bank loans during the year .......... $ 25,000

Total Bank Loan Loan payments

Dec. 31, 2023 25,000 New loans Dec. 31, 2024

460,000 512,000 947,000

PROBLEM 13.7A (CONTINUED) b.

Alton Ltd. did not manage its noncash working capital efficiently. It increased both its accounts receivable and inventory while at the same time decreased its accounts payable. A creditor might find this an alarming trend. Alton runs the increased risk of not being able to collect receivables and sell its entire inventory in the future.

The banker would be worried for the reasons mentioned in part (b) but also for Alton‘s poor performance in obtaining cash from operating activities. The purchase of the building was financed completely with debt and no equity. Although some cash was obtained from selling land, this sale was done at a large loss. Cash paid in dividends was more than three times the size of the net income and additional cash was spent buying back common shares. The amount of the investment for the building is disproportionate to the amount of the retained earnings, which in turn was substantially depleted from the large dividend payment. The net income level will decline in the future as a result of servicing the additional debt and depreciating the new building. Alton Ltd. could not afford to purchase the building without external financing.

LO 2,3,4,5 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.8A a. ($ in thousands)

Boardwalk REIT

Granite REIT

$161,860 – $127,003 – $46,587

$262,264 – $926,490 – $191,082

= $(11,730)

= $(855,308)

Free cash flow

Both companies have negative free cash flows, but Boardwalk‘s negative free cash flow is smaller and therefore is in the better free cash flow position. b.

It is possible that a negative free cash flow is generated by a company, particularly during the introductory and growth phases of its life cycle. A negative free cash flow does not necessarily lead to overall cash flows that are negative or to cash and cash equivalents at the end of the period that are negative. For example, there may be large increases in cash during the year from the sale of investments, issuance of shares, or borrowing of funds. In addition, large capital expenditures can turn overall positive cash flow into negative free cash flow, as is the case here.

Both companies have positive cash flows from operations. This is the primary reason why both companies can afford to pay out dividends.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 13.9A a.

Both Linamar and Martinrea generated cash from operating activities that exceeded net income. This is typical of most companies because they add depreciation expense, which is a non-cash expense, to net income when calculating cash from operating activities. Both companies used cash for investing activities, most likely to replace aging assets like buildings and equipment. Notice however that Linamar‘s cash used for investing activities was only 20% ($290.3 ÷ $1,434.1) of its operating cash flows whereas Martinrea used 93% ($331.9 ÷ 355.0) of its operating cash flows to fund the cash spent on investing activities. Because of this, Martinrea would not be able to spend large amounts of cash on financing activities, unless it had a significant amount of cash and cash equivalents at the beginning of the year, but this was not the case. Consequently, because Linamar did not spend a large portion of its operating cash flows for investing activities, it could afford to use cash for its financing activities indicating that the company was either paying down debt or paying out dividends to shareholders. However, Martinrea did not have significant operating cash flows left over after spending 93% of these funds on investing activities. Therefore, it is not surprising that its financing activities did not indicate a use of cash. It is likely that Martinrea received loans or sold shares to increase cash for financing purposes, but the company probably used most of these funds (which is why there is a small increase in cash from financing activities) to pay down loans or dividends.

Although we do not have a detailed list of each item that comprises the totals for each type of activity on the statement of cash flows, we can see that Linamar increased its cash and cash equivalents in both absolute and percentage terms more than Martinrea, indicating that Linamar appears to be in a stronger financial position. Furthermore, this increase arose after reporting a large use of cash for financing purposes likely caused by paying down significant amounts of debt or paying out significant amounts of dividends (which shareholders would appreciate). This is another indication of Linamar‘s stronger financial position (it is capable or paying down debt and dividends). Martinrea, on the other hand used almost all its cash generated this year for investing activities. We do not know yet if these investments will generate positive operating cash flows in the future, but we do know that this prevented the company from reducing its debt to the extent that Linamar may have.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 13.10A a. (1)

TREMBLANT LIMITED Statement of Cash Flows (Partial) Year Ended December 31, 2024

Operating activities Net income ...................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense ............................................. Amortization expense ............................................. Loss on disposal of equipment ............................... Increase in accounts receivable............................... Decrease in prepaid expenses ................................ Decrease in accounts payable ................................. Decrease in salaries payable ................................... Increase in deferred revenue ................................... Increase in interest payable ..................................... Decrease in income tax payable .............................. Net cash provided by operating activities .................................. a. (2)

$111,750

$50,000 15,000 26,000 (10,000 ) 3,000 (5,000 ) (500 ) 3,000 1,250 (5,250)

77,500 $189,250

TREMBLANT LIMITED Statement of Cash Flows (Partial) Year Ended December 31, 2024

Operating activities Cash receipts from customers .......................................... Cash payments For other operating expenses .................................. $(112,000) (2) To employees .......................................................... (500,500) (3) For interest............................................................... (73,750) (4) For income tax ......................................................... (42,500) (5) Net cash provided by operating activities ..................................

$918,000 (1)

(728,750) $189,250

*PROBLEM 13.10A (CONTINUED) Note: Calculations follow below. (1)

(2)

(3)

(4)

(5)

Cash receipts from customers Service revenue Add: Increase in deferred revenues ($12,000 – $9,000) Less: Increase in accounts receivable ($57,000 – $47,000) Cash receipts from customers

$925,000 3,000 (10,000) $918,000

Cash payments for other operating expenses Operating expenses Add: Decrease in accounts payable ($41,000 – $36,000) Deduct: Decrease in prepaid expenses ($12,000 – $15,000) Cash payments for other operating expenses

$110,000 5,000 (3,000) $112,000

Cash payments to employees Salaries expense Add: Decrease in salaries payable ($20,000 – $19,500) Cash payments to employees

$500,000 500 $500,500

Cash payments for interest expense Interest expense per statement of income Deduct: Increase in interest payable ($6,250 – $5,000) Cash payments for interest

$75,000 (1,250) $73,750

Cash payments for income tax Income tax expense per statement of income Add: Decrease in income tax payable ($4,000 – $9,250) Cash payments for income tax

$37,250 5,250 $42,500

*PROBLEM 13.10A (CONTINUED) b.

Both methods are acceptable under both IFRS and ASPE. I would recommend that the company use the direct method to prepare its operating activities section. Users usually find this method to be more informative because it shows cash receipts from customers and other sources and cash payments for major categories. It is also the method preferred by the standard setters. Nonetheless, many companies prefer to use the indirect method because it is easier to prepare and their accounting system may not be adapted to capture the transaction data required in the direct method.

LO 1,2,6 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 13.11A a. MONT FORTUNE LTD. Statement of Cash Flows (Partial) Year Ended September 30, 2024

Operating activities Cash receipts from customers ................................ Cash payments To suppliers ................................................... $(7,900,000) (2) For other operating expenses ........................ (2,010,000) (3) For interest..................................................... (350,000) (4) For income tax ............................................... (405,000) (5) Net cash provided by operating activities ........................

(1)

(2)

$11,910,000 (1)

(10,665,000) $1,245,000

Cash receipts from customers Sales Add: Decrease in accounts receivable Deduct: Decrease in deferred revenue Cash receipts from customers

$12,000,000 80,000 (170,000) $11,910,000

Cash payments to suppliers Cost of goods sold Add: Increase in inventory Cost of purchases Add: Decrease in accounts payable Cash payments to suppliers

$7,500,000 150,000 7,650,000 250,000 $7,900,000

*PROBLEM 13.11A (CONTINUED) a. (continued) (3)

(4)

(5)

Cash payments for other operating expenses Operating expenses Deduct: Depreciation expense Deduct: Impairment loss Operating expenses, net of depreciation and impairment Less: Decrease in prepaid expenses Increase in rent payable Cash payments for other operating expenses

$2,500,000 (25,000) (375,000) 2,100,000 $(60,000) (30,000)

(90,000) $2,010,000

Cash payments for interest Interest expense Add: Decrease in interest payable Cash payments for interest

$200,000 150,000 $350,000

Cash payments for income tax Income tax expense Deduct: Increase in income tax payable Cash payments for income tax

$500,000 (95,000) $405,000

LO 6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 13.12A a.

FOLLOW YOUR DREAMS, INC. Statement of Cash Flows Year Ended March 31, 2024

Operating activities Cash receipts from customers (1) ..................................... To suppliers (2) ........................................................ For other operating expenses (3)............................. For income tax ......................................................... For interest............................................................... Net cash provided by operating activities ..................................

$525,510 Ca $(251,420) (34,890) (55,790) (6,810)

(348,910) 176,600

(7,480)

Financing activities Issued bank loan.................................................................... $90,000 Repurchase of common shares ............................................ (60,000) Repayment of bank loan payable ($98,000 + $155,920 + $90,000 – $130,000 – $90,000) (123,920) Payment of cash dividends ($197,600 + $205,220 – $275,450) ............................. (127,370) Net cash used by financing activities ..............................................

(221,290)

(52,170) 99,670 $ 47,500

Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing $97,730 by paying $17,730 cash and issuing $80,000 in common shares. Note: Calculations follow below.

*PROBLEM 13.12A (CONTINUED) a.

(continued)

Calculations (1)

(2)

Cash receipts from customers Sales .................................................................................................. Deduct: Increase in accounts receivable .......................................... Add: Increase in refund liability .......................................................... Add: Increase in deferred revenue .................................................... Cash receipts from customers ...........................................................

$589,730 (72,000) 2,620 5,160 $525,510

Cash payments to suppliers Cost of goods sold ............................................................................. Add: Increase in inventory ................................................................ Increase in estimated inventory returns .................................... Deduct: Increase in accounts payable .............................................. Cash payments to suppliers...............................................................

$171,910 75,880 7,000 (3,370) $251,420

(3) Cash payments for other operating expenses Operating expenses from statement of income ................................. Deduct: Depreciation expense ........................................................ ) Loss on disposal of equipment .......................................... ) Decrease in prepaid expenses .......................................... Cash payments for other operating expenses ...................................

$135,000 (75,000 (15,000 (10,110 ) $ 34,890

Follow Your Dream‘s cash position has decreased primarily because of significant amounts of cash paid out in dividends and for the repayment of the bank loan payable. By the end of the year, cash had decreased by $52,170.

LO 5,6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.1B

Transaction 1. Collected an account receivable. 2. Sold equipment for cash, at a loss.

a. Classification O

b. Cash Flow +

c. Net Income NE – (loss decreases income)

O (for the loss) I (for the proceeds) NE

–

6. Paid dividends to preferred shareholders.

–

7. Recorded depletion expense. 8. Issued preferred shares for cash.

–

9. Purchased inventory for cash. The company uses a perpetual inventory system. 10. Provided services on account.

–

3. Recorded an unrealized gain on a trading investment. 4. Acquired land by issuing common shares. 5. Prepaid insurance expired.

*PROBLEM 13.1B (CONTINUED) d.

Because of the accrual basis of accounting, it is not surprising that transactions can impact cash and profit differently. For example, in transaction #8 above, cash was received from the issue of preferred shares without profit being affected in any way. In transaction #10 above, revenue and profit were affected by providing services but because they were provided on account, cash was not affected.

LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 13.2B a. GUM SAN LTD. Statement of Cash Flows (Partial) Year Ended December 31, 2024

$768,000

$150,000 (12,000) (500,000) 220,000 (170,000) 50,000 (165,000) 5,000 8,000 (16,000)

(430,000) $338,000

If Gum San were a publicly traded company following IFRS, it would have the choice to disclose interest expense as part of financing activities rather than in operating activities. Reporting interest paid as in part (a) in the operating activities section above is the usual practice for a publicly traded company and the required practice followed by a private company using ASPE.

LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.3B a. equipment 2024:

Cash receipts and payments related to property, plant, and

Equipment purchase Land purchase Proceeds from equipment disposal

$(80,000) (20,000) 24,000*

* Cost of equipment sold: $480,000 + $80,000 – $500,000 = $60,000 Accumulated depreciation removed from accounts = ($192,000 + $128,000 – $288,000) = $32,000 Carrying amount = $60,000 Cost – Accumulated depreciation $32,000 = $28,000 Cash proceeds = Carrying amount $28,000 – Loss on disposal $4,000 = $24,000

Note to instructor: Students may find journal entries helpful in understanding this problem. Equipment .............................................................................................. Cash ...............................................................................................

80,000

Land ....................................................................................................... Cash ............................................................................................... Mortgage Payable ..........................................................................

50,000

Cash (calculated) .................................................................................... Accumulated Depreciation—Equipment ................................................. Loss on Disposal .................................................................................... Equipment ......................................................................................

24,000 32,000 4,000

80,000

20,000 30,000

60,000

*PROBLEM 13.3B (CONTINUED) b.

Equipment purchase Land purchase Proceeds from equipment disposal

Investing activities (use) Investing activities (use) Investing activities (source)

$(80,000) $(20,000) $24,000

Also include the following note to the financial statements: Note: During the year, the company purchased land for $50,000 by paying $20,000 cash and issuing a mortgage payable for $30,000.

A growing company must invest in productive assets so it can be expected to use cash in its investing activities.

LO 3,5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.4B a.

Cash receipts:

Issue preferred shares $25,000 Issue of common shares $20,400 Cash payments: Payment of cash dividends, $7,500 Repurchase of common shares, $30,000

Share repurchase

Common Shares 200,000 Beg. balance 30,000 20,400 Shares issued 190,400 End. balance

Journal entry for share repurchase: Common Shares 3,000 x ($200,000 ÷ 20,000) .................. Cash (3,000 x $10) .....................................................

30,000 30,000

The T-account for Retained Earnings is provided to illustrate that all transactions have been considered:

Cash dividends declared

Retained Earnings 250,000 Beg. balance 7,500 17,100 Net income 259,600 End. balance

All of the above activities (issuance of preferred and common shares, payment of cash dividends, and repurchase of shares) would be classified as financing activities on the statement of cash flows.

A growing company would usually be generating cash from its financing activities. Mathur has generated cash of $7,900. Cash is needed to invest in productive assets, such as buildings and equipment, and most companies are not able to generate sufficient cash from their operating activities. To finance these purchases, companies have to issue debt or shares.

LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.5B a. NACKAWIC INC. Statement of Cash Flows Year Ended December 31, 2024

Operating activities Net income ............................................................................ Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense ................................................... Loss on sale of long-term investments ......................... Gain on disposal of equipment ..................................... Increase in accounts receivable.................................... Increase in inventory..................................................... Increase in estimated inventory returns ........................ Increase in accounts payable ....................................... Decrease in property tax payable ................................. Increase in refund liability ............................................. Net cash provided by operating activities ....................................... Investing activities Proceeds from sale of long-term investments........................ Proceeds from disposal of equipment.................................... Purchase of equipment .......................................................... Net cash used by investing activities ..............................................

$87,810

$58,700 7,500 (8,750) (43,800) (28,650) (600) 14,420 (6,930) 200

(7,910) 79,900

$ 5,000 15,550 (71,000)

Financing activities Issue of common shares ........................................................ $60,000 Repurchase of common shares ($240,000 - $60,000 - $200,000) (20,000) Payment of cash dividends ($121,790 + $87,810 – $175,600) (34,000) Net cash provided by financing activities ........................................ Net increase in cash ....................................................................... Cash, January 1 ............................................................................. Cash, December 31 ........................................................................

(50,450)

6,000 35,450 47,250 $82,700

Note X to the Statement of Cash Flows: Equipment costing $141,000 was purchased by paying $71,000 cash and issuing a bank loan payable for $70,000.

*PROBLEM 13.5B (CONTINUED) b.

Nackawic‘s cash position has increased primarily because of the amount of cash generated from its operating activities. Cash from operating activities increased the company‘s cash account by $79,900. Some of this cash was used to purchase equipment and pay dividends with additional cash generated from selling common shares. Sufficient cash remained at the end of the year to increase its cash position by $35,450.

LO 2,3,4,5 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.6B a.

ANDERSON LTD. Statement of Cash Flows Year Ended December 31, 2024 Operating activities Net income....................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense (3) ........................................ Gain on disposal of land ......................................... Gain on disposal of building (1) .............................. Loss on disposal of equipment (2) .......................... Increase in accounts receivable .............................. Increase in inventory ............................................... Decrease in accounts payable ................................ Decrease in interest payable .................................. Increase in income tax payable .............................. Net cash provided by operating activities .................................

$53,000

$ 74,000 (14,000) (28,000) 5,000 (18,000) (14,000) (26,000) (1,000) 1,000

(21,000) 32,000

Investing activities Purchase of building (1) ................................................... $(304,000) Purchase of equipment (2) .............................................. (125,000) Proceeds from disposal of land ($110,000 – $95,000 + $14,000 gain) .................... 29,000 Proceeds from disposal of equipment (2) ........................ 4,000 Proceeds from disposal of building (1) ............................. 40,000 Net cash used by investing activities ........................................

(356,000)

Financing activities Issue of common shares .................................................. $ 10,000 Repurchase of common shares (6) .................................. (8,000) Additions to bank loan ..................................................... 350,000 Repayments of bank loan ................................................ (36,000) Dividends paid (4) ............................................................ (33,000) Net cash provided by financing activities .................................. Net decrease in cash ................................................................ Cash, January 1........................................................................ Bank indebtedness, December 31 ............................................

283,000 (41,000) 36,000 $ ( 5,000)

PROBLEM 13.6B (CONTINUED) Calculations: (1) Transactions involving Buildings: Buildings Dec. 31, 2023 Purchases Dec. 31, 2024

263,000 304,000 477,000

Disposal

90,000

Accumulated Depreciation—Buildings Disposal (derived)

78,000

Dec. 31, 2023 Depreciation Dec. 31, 2024

100,000 45,000 67,000

Cost of building sold (derived) ......................................... Accumulated depreciation ............................................... Net carrying amount (derived) ......................................... Add: Gain on disposal..................................................... Cash proceeds from disposal ..........................................

$90,000 78,000 12,000 28,000 $40,000

40,000 78,000 28,000 90,000

PROBLEM 13.6B (CONTINUED) a. (continued)

(2) Transactions involving Equipment: Equipment Dec. 31, 2023 Purchases Dec. 31, 2024

40,000 125,000 135,000

Disposal

30,000

Accumulated Depreciation—Equipment Disposal

21,000

Dec. 31, 2023 Depreciation Dec. 31, 2024

10,000 29,000 18,000

$30,000 21,000 9,000 5,000 $ 4,000

4,000 21,000 5,000

(3) Total depreciation recorded during the year: For buildings: ............................................................... For equipment: (derived) ............................................. Total depreciation expense for the year: .....................

30,000

$45,000 29,000 $74,000

PROBLEM 13.6B (CONTINUED) a. (continued)

(4) Transactions involving Retained Earnings: Retained Earnings Dividends (derived)

33,000

Dec. 31, 2023 Net income Dec. 31, 2024

30,000 53,000 50,000

(5) Transactions involving Bank Loan Payable: Bank loan balance Dec. 31, 2023: Current portion ........................................................... $ 20,000 Non-current portion .................................................... 212,000 Total ........................................................................... $232,000 Bank loan balance Dec. 31, 2024: Current portion ........................................................... $ 26,000 Non-current portion .................................................... 520,000 Total ........................................................................... $546,000 Net increase during the year ($546,000 − $232,000) ...... $314,000 Additions to the bank loans during the year (given) ......... 350,000 Repayments made on bank loans during the year .......... $ 36,000

PROBLEM 13.6B (CONTINUED) a. (continued)

(6) Transactions involving Common Shares: Common Shares Repurchase (derived)

8,000

Dec. 31, 2023 Issued (given) Dec. 31, 2024

88,000 10,000 90,000

Anderson Ltd. did not manage its noncash working capital efficiently. It increased its accounts receivable and inventory while at the same time decreasing its accounts payable. Taken together this shows a bad trend and possible issues with overstocking or slowing sales.

The purchase of the building was financed primarily through the use of bank loans, which are now at a fairly high level. The required repayments to the bank loan this year were $26,000 and this may rise in the future because of the additional debt incurred this year. To pay for this, the company has only generated $32,000 from operating activities. The bank will be concerned about this. Furthermore, the bank will notice that dividends paid were $1,000 greater than the amount of cash derived from operating activities and the bank may ask for dividends to be reduced.

LO 2,3,4,5 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.7B a.

SUMMERVILLE LTD. Statement of Cash Flows Year Ended December 31, 2024

Operating activities Net income....................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense (4) ........................................ Gain on disposal of land ......................................... Gain on disposal of building (1) .............................. Loss on disposal of equipment (2) .......................... Decrease in accounts receivable ............................ Decrease in inventory ............................................. Increase in accounts payable ................................. Increase in interest payable .................................... Increase in income tax payable .............................. Net cash provided by operating activities .................................

$89,000

$ 76,000 (7,000) (78,000) 10,000 10,000 42,000 18,000 4,000 2,000

77,000 166,000

Investing activities Purchase of building (1) ................................................... $(564,000) Purchase of equipment (2) .............................................. (140,000) Proceeds from disposal of land (3) .................................. 27,000 Proceeds from disposal of equipment (2) ........................ 15,000 Proceeds from disposal of building (1) ............................. 90,000 Net cash used by investing activities ........................................

(572,000)

Financing activities Repurchase of common shares ....................................... $ (26,000) Issuance of common shares (7)....................................... 250,000 Additions to bank loan ..................................................... 300,000 Repayments of bank loan (6) ........................................... (33,000) Dividends paid (5) ............................................................ (28,000) Net cash provided by financing activities .................................. Net increase in cash and cash equivalents ............................... Cash and cash equivalents, January 1 ..................................... Cash and cash equivalents, December 31 ($17,000 + $52,000)

463,000 57,000 12,000 $69,000

PROBLEM 13.7B (CONTINUED) Calculations: (1) Transactions involving Buildings: Buildings Dec. 31, 2023 Purchases Dec. 31, 2024

466,000 564,000 943,000

Disposal (derived) 87,000

Accumulated Depreciation—Buildings Disposal (derived)

75,000

Dec. 31, 2023 Depreciation Dec. 31, 2024

150,000 55,000 130,000

Cost of building sold (derived) ......................................... Accumulated depreciation ............................................... Net carrying amount (derived) ......................................... Add: Gain on disposal of buildings ................................. Cash proceeds from disposal ..........................................

$87,000 75,000 12,000 78,000 $90,000

90,000 75,000 78,000 87,000

PROBLEM 13.7B (CONTINUED) a. (continued)

(2) Transactions involving Equipment: Equipment Dec. 31, 2023 Purchases Dec. 31, 2024

80,000 140,000 190,000

Disposal (derived)

30,000

Accumulated Depreciation—Equipment Disposal

5,000

Dec. 31, 2023 20,000 Depreciation (derived) 21,000 Dec. 31, 2024 36,000

$30,000 5,000 25,000 10,000 $15,000

15,000 5,000 10,000 30,000

(3) Transaction involving land: Cash (derived) ................................................................. Gain on Disposal ........................................................ Land ($220,000 - $200,000) ........................................

27,000 7,000 20,000

PROBLEM 13.7B (CONTINUED) a. (continued) (4) Total depreciation recorded during the year: For buildings ................................................................ For equipment ............................................................. Total depreciation expense for the year: .....................

$55,000 21,000 $76,000

(5) Transactions involving Retained Earnings: Retained Earnings Dividends declared (derived)

Dec. 31, 2023 29,000 Net income Dec. 31, 2024

60,000 89,000 120,000

Dividends Payable Dividends paid

Dec. 31, 2023 28,000 Dividends declared Dec. 31, 2024

2,000 29,000 3,000

(6) Transactions involving Bank Loan Payable: Bank loan balance Dec. 31, 2023: Current portion ........................................................... $ 40,000 Non-current portion .................................................... 418,000 Total ........................................................................... $458,000 Bank loan balance Dec. 31, 2024: Current portion ........................................................... $ 52,000 Non-current portion .................................................... 673,000 Total ........................................................................... $725,000

PROBLEM 13.7B (CONTINUED) a. (continued) Net increase during the year ($725,000 – $458,000) ...... $267,000 Additions to the bank loans during the year (given) ......... 300,000 Repayments made on bank loans during the year .......... $ 33,000 Total Bank Loan Loan payments

33,000

Dec. 31, 2023 New loans Dec. 31, 2024

458,000 300,000 725,000

(7) Transactions involving Common Shares: Common Shares Shares repurchase

26,000

Dec. 31, 2023 Shares issued Dec. 31, 2024

172,000 250,000 396,000

(b)

Summerville Ltd. did a great job managing its noncash working capital efficiently. It decreased both its accounts receivable and inventory while at the same time increased its accounts payable. A creditor might find this alarming because suppliers don‘t look as if they are being paid on time. As well, a decline in inventory might not necessarily mean that the company is making sure that inventory is on hand to secure sales.

(c)

Summerville financed the majority of the purchase of the building by issuing common shares for $250,000 and by borrowing $300,000 from the bank. These two amounts are well balanced between debt and equity. Summerville had excellent performance in obtaining cash from operating activities. The amount of dividends paid is reasonable given the net income for the year.

LO 2,3,4,5 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.8B a. (USD millions)

Alphabet

Free cash flow

$91,652 – $24,099 – $0 = $67,553

Microsoft $76,740 – $21,544 – $16,521 = $38,675

Both Alphabet and Microsoft show strong cash flows from operations which are sufficient to cover capital expenditures and, in the case of Alphabet could have supported a proportional cash dividend. Alphabet has the higher free cash flow because is does not pay any dividends to shareholders. b.

Microsoft has been profitable for many years during its growth phase of its life cycle and has amassed significant amounts of cash allowing it to pay dividends. Microsoft is currently in the mature phase of its life cycle, with less growth year over year in its stock price. Consequently, shareholders are demanding a return on their investments in the form of dividends. Alphabet, on the other hand is in the growth phase of its life cycle and needs to use the cash it generates from operations to finance its growth. It is not unusual in that situation for companies not to pay dividends.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 13.9B a.

Both companies generated cash from operating activities and made significant investments back into the business. Both companies used substantial amounts of cash for financing activities. Both companies produced more cash from operating activities than net income as shown in the table below. ($ in USD millions) Net income Net cash provided by operating activities Net cash provided by operating activities in excess of net income Net cash provided by operating activities as a % of net income % increase (decrease) in cash and cash equivalents from prior year

McDonald‘s $7,545.2 $9,141.5

Wendy‘s $200.4 $345.8

$1,596.3

$145.4

121%

173%

37%

(12)%

McDonald‘s is in the stronger position. Its net income is about 38 times higher than Wendy‘s. Its cash provided by operating activities is about 26 times higher than Wendy‘s. And McDonald‘s cash and equivalents increased, while Wendy‘s decreased. One would need to look at the detailed information behind the totals of each activity. Specific large transactions may have offsetting effects in a particular cash flow activity. As a consequence, the netting of amounts masks the real effects of those transactions, which may have been unique to that fiscal year. More information in terms of past trends would also be helpful to properly compare these two companies.

LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 13.10B a. (1) HANALEI INTERNATIONAL INC. Statement of Cash Flows (Partial) Year Ended December 31, 2024

Operating activities Net income ....................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense .............................................. Amortization expense .............................................. Gain on disposal ...................................................... Decrease in accounts receivable ............................. Decrease in prepaid insurance ................................ Increase in accounts payable .................................. Increase in salaries payable .................................... Decrease in deferred revenue ................................. Increase in income tax payable ............................... Net cash provided by operating activities .................................. (2)

$142,500

$45,000 5,000 (25,000) 10,000 3,000 9,000 3,000 (4,000) 1,000

47,000 $189,500

HANALEI INTERNATIONAL INC. Statement of Cash Flows (Partial) Year Ended December 31, 2024

Operating activities Cash receipts from customers ............................ Cash payments For other operating expenses .................... To employees ............................................ For interest expense .................................. For income tax ........................................... Net cash provided by operating activities ....................

$571,000 (1) $(28,000) (2) (297,000) (3) (10,000) (46,500) (4)

(381,500) $189,500

Note: Calculations follow below.

*PROBLEM 13.10B (CONTINUED) a. (continued) Calculations (1)

(2)

(3)

(4)

Cash receipts from customers Fees earned.............................................................................. Add: Decrease in accounts receivable ($60,000 – $50,000) ... Deduct: Decrease in deferred revenue ($14,000 – $10,000) .... Cash receipts from customers ..................................................

$565,000 10,000 (4,000) $571,000

Cash payments for other operating expenses Other operating expenses ........................................................ Deduct: Decrease in prepaid expenses .................................... Increase on accounts payable .................................... Cash payments for other operating expenses ..........................

$40,000 (3,000) (9,000) $28,000

Cash payments to employees Salaries expense ...................................................................... Deduct: Increase in salaries payable ($10,000 – $7,000) ....... Cash payments to employees...................................................

$300,000 (3,000) $297,000

Cash payments for income tax Income tax expense .................................................................. Deduct: Increase in income tax payable ($4,000 – $3,000) .... Cash payments for income tax .................................................

$47,500 (1,000) $46,500

PROBLEM 13.10B (CONTINUED) b.

Both methods are acceptable under both IFRS and ASPE. I would recommend that the company use the direct method to prepare its operating activities section. Users usually find this method to be more informative because it shows cash receipts from customers and other sources, and cash payments for major categories. It is also the method preferred by the standard setters. Nonetheless, many companies prefer to use the indirect method because it is easier to prepare and their accounting system may not be adapted to capture the transaction data required in the direct method.

LO 1,2,6 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 13.11B a. GUM SAN LTD. Statement of Cash Flows (Partial) Year Ended December 31, 2024

Operating activities Cash receipts From customers .................................... Cash payments To suppliers .......................................... For other operating expenses ............... For interest............................................ For income tax ...................................... Net cash provided by operating activities ...............

$4,008,000 (1) $(2,120,000) (1,267,000) (7,000) (276,000)

(2) (3) (4) (5)

(3,670,000) $ 338,000

Calculations (1)

(2)

Cash receipts from customers Sales ....................................................................................... Add: Increase in deferred revenue.......................................... Deduct: Increase in accounts receivable ................................ Cash receipts from customers ................................................

$4,500,000 8,000 (500,000) $4,008,000

Cash payments to suppliers Cost of goods sold .................................................................. Deduct: Decrease in inventory ............................................... Cost of purchases ................................................................... Deduct: Increase in accounts payable ................................... Cash payments to suppliers....................................................

$2,390,000 (220,000) 2,170,000 (50,000) $2,120,000

*PROBLEM 13.11B (CONTINUED) a. (continued) (3)

(4)

(5)

(b)

Cash payments for other operating expenses Operating expenses ................................................................ Add: Gain on disposal .............................................................. Decrease in rent payable............................................... Increase in prepaid expenses ........................................ Deduct: Depreciation expense ............................................... Cash payments for other operating expenses .........................

$1,070,000 12,000 165,000 170,000 (150,000) $1,267,000

Cash payments for interest Interest expense ...................................................................... Deduct: Increase in interest payable ........................................ Cash payments for interest ......................................................

$12,000 (5,000) $ 7,000

Cash payments for income tax Income tax expense ............................................................... Add: Decrease in income tax payable .................................. Cash payments for income tax ..............................................

$260,000 16,000 $276,000

If Gum San were a publicly traded company following IFRS, it could choose to disclose interest expense as part of financing activities rather than operating activities. Reporting interest paid as in part (a) in the operating activities section above is the usual practice for a publicly traded company and the required practice followed by a private company using ASPE.

LO 6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 13.12B a. NACKAWIC INC. Statement of Cash Flows Year Ended December 31, 2024

Operating activities Cash receipts from customers (1) ......................................... Cash payments To suppliers (2) ............................................................ $(114,290) For other operating expenses (3)................................. (39,100) For interest................................................................... (12,940) For income tax ............................................................. (27,670) Net cash provided by operating activities ....................................... Investing activities Proceeds from sale of long-term investments........................ Proceeds from disposal of equipment.................................... Purchase of equipment .......................................................... Net cash used by investing activities ..............................................

$273,900

(194,000) 79,900

$ 5,000 15,550 (71,000) (50,450)

6,000 35,450 47,250 $ 82,700

Note X to the Statement of Cash Flows: Equipment costing $141,000 was purchased by paying $71,000 cash and issuing a bank loan payable for $70,000. Note: Calculations follow below.

*PROBLEM 13.12B (CONTINUED) a. (continued) Calculations (1)

(2)

(3)

Cash receipts from customers Sales ......................................................................................... Deduct: Increase in accounts receivable ................................. Add: Increase in refund liability ................................................. Cash receipts from customers ..................................................

$317,500 (43,800) 200 $273,900

Cash payments to suppliers Cost of goods sold .................................................................. Add: Increase in inventory ..................................................... Increase in estimated inventory returns ......................... Deduct: Increase in accounts payable ................................... Cash payments to suppliers....................................................

$ 99,460 28,650 600 (14,420) $114,290

Cash payments for other operating expenses Operating expenses .................................................................. Add: Decrease in property taxes payable ............................... Gain on disposal ............................................................ Deduct: Depreciation expense ................................................ Cash payments for other operating expenses ...........................

$82,120 6,930 8,750 (58,700) $39,100

LO 5,6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

ACR13.1 b. 1 Accounts Payable ............................................ Cash ........................................................

55,000

2 Inventory.......................................................... Accounts Payable ....................................

27,000

3 Accounts Receivable ....................................... Refund Liability ........................................ Sales........................................................

102,000

3 Cost of Goods Sold ......................................... Estimated Inventory Returns ........................... Inventory ..................................................

29,200 800

4 Cash ................................................................ Accounts Receivable ...............................

109,000

5 Allowance for Expected Credit Losses ............ Accounts Receivable ...............................

5,000

6 Refund Liability ................................................ Accounts Receivable ...............................

2,800

6 Inventory.......................................................... Estimated Inventory Returns ...................

900

7 Employee Income Tax Payable ....................... CPP Payable ................................................... EI Payable ....................................................... Cash ........................................................

6,800 3,200 1,200

8 Salaries Expense Employee Income Tax Payable ............... CPP Payable ........................................... EI Payable ............................................... Cash ........................................................

40,000

55,000

27,000

2,000 100,000

30,000

109,000

5,000

2,800

900

11,200

7,200 2,040 648 30,112

ACR13.1 (CONTINUED) b. (Continued) 9 Employee Benefits Expense............................ CPP Payable ........................................... EI Payable ($648 x 1.4) ...........................

2,947

10 Rent Expense .................................................. Cash ........................................................

9,000

11 Dividends Payable........................................... Cash ........................................................

5,000

12 Insurance Expense.......................................... Prepaid Insurance ...................................

1,000

13 Interest Expense ($120,000 x 4% x 1/12) ....... Cash ........................................................

400

14 Cash ................................................................ Accumulated Depreciation-Equipment ........... Gain on Disposal ..................................... Equipment ...............................................

14,000 8,000

15 Equipment ....................................................... Common Shares......................................

10,000

16 Depreciation Expense ($180,000 ÷ 6 x 1/12) .. Accumulated Depreciation-Equipment ...

2,500

17 Credit Losses ($4,200 - $8,000 + $5,000) Allowance for Expected Credit Losses ....

1,200

18 Income Tax Expense....................................... Income Tax Payable ................................

4,000

2,040 907

9,000

5,000

1,000

400

2,000 20,000

10,000

2,500

1,200

4,000

ACR13.1 (CONTINUED) a. and c. Dec. 31 4 14

Jan. 31

Dec. 31 3 Jan. 31

Cash 5,000 1 109,000 7 14,000 8 10 11 13

55,000 11,200 30,112 9,000 5,000 400

17,288 Accounts Receivable 120,000 4 102,000 5 6 105,200

109,000 5,000 2,800

Allowance for Expected Credit Losses 5 5,000 Dec. 31 8,000 17 1,200 Jan. 31 4,200

Dec. 31 2 6 Jan. 31

Inventory 60,000 3 27,000 900 57,900

Estimated Inventory Returns Dec. 31 1,000 3 800 6 Jan. 31 900

Dec. 31 Jan. 31

Prepaid Insurance 12,000 12 11,000

Dec. 31 15 Jan. 31

Equipment 180,000 14 10,000 170,000

30,000

900

1,000

20,000

Accumulated Depreciation—Equipment 14 8,000 Dec. 31 80,000 16 2,500 Solutions Manual 14-1530 Chapter 14 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Jan. 31

74,500

ACR13.1 (CONTINUED) a. and c. (continued) 1

Accounts Payable 55,000 Dec 31 2 Jan. 31

68,000 27,000 40,000

Income Tax Payable Dec. 31 18 Jan. 31

0 4,000 4,000

Employee Income Tax Payable 6,800 Dec. 31 6,800 8 7,200 Jan. 31 7,200

CPP Payable 3,200 Dec. 31 8 9 Jan. 31

3,200 2,040 2,040 4,080

EI Payable 1,200 Dec. 31 8 9 Jan. 31

1,200 648 907 1,555

Refund Liability 2,800 Dec. 31 3 Jan. 31

3,000 2,000 2,200

Dividends Payable 5,000 Dec. 31 Jan. 31

5,000 0

Notes Payable Dec. 31

120,000

Common Shares Dec. 31 15 Jan. 31

50,000 10,000 60,000

ACR13.1 (CONTINUED) a. and c. (continued) Retained Earnings Dec. 31

32,800

Sales 3

100,000

Cost of Goods Sold 29,200

Salaries Expense 40,000

Employee Benefits Expense 2,947

Credit Losses 1,200

Rent Expense 9,000

Insurance Expense 1,000

Depreciation Expense 2,500 Gain on Disposal 14

Interest Expense 400

Income Tax Expense 4,000

2,000

ACR13.1 (CONTINUED) d. LONG PLAIN CONVENIENCE STORE LTD. Trial Balance January 31, 2024 Debit Credit Cash $ 17,288 Accounts receivable 105,200 Allowance for expected credit losses $ 4,200 Inventory 57,900 Estimated inventory returns 900 Prepaid insurance 11,000 Equipment 170,000 Accumulated depreciation—equipment 74,500 Accounts payable 40,000 Income tax payable 4,000 Employee income tax payable 7,200 CPP payable 4,080 EI payable 1,555 Refund liability 2,200 Notes payable 120,000 Common shares 60,000 Retained earnings 32,800 Sales 100,000 Cost of goods sold 29,200 Salaries expense 40,000 Employee benefits expense 2,947 Credit losses 1,200 Rent expense 9,000 Insurance expense 1,000 Depreciation expense 2,500 Gain on disposal 2,000 Interest expense 400 Income tax expense 4,000 ‗ $452,535 $452,535

ACR13.1 (CONTINUED) e. (1) LONG PLAIN CONVENIENCE STORE LTD. Statement of Income Month Ended January 31, 2024 Sales Cost of goods sold Gross profit Operating expenses Salaries expense Employee benefits expense Credit losses Rent expense Insurance expense Depreciation expense Total operating expenses Income from operations Other income and expenses Gain on disposal Interest expense Income before income tax Income tax expense Net income

$100,000 29,200 70,800 $40,000 2,947 1,200 9,000 1,000 2,500 56,647 14,153 2,000 400

1,600 15,753 4,000 $ 11,753

(2) LONG PLAIN CONVENIENCE STORE LTD. Statement of Changes in Equity Month Ended January 31, 2024 Common Shares Balance, January 1, 2024 Issued common shares Net income Balance, January 31, 2024

$50,000 10,000 00 00000 $60,000

Retained Earnings $32,800 11,753 $44,553

Total Equity $ 82,800 10,000 11,753 $104,553

ACR13.1 (CONTINUED) e. (continued) (3) LONG PLAIN CONVENIENCE STORE LTD. Statement of Financial Position January 31, 2024 Assets Current assets Cash Accounts receivable Less: Allowance for expected credit losses Inventory Estimated inventory returns Prepaid insurance Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total assets

$ 17,288 $105,200 4,200

101,000 57,900 900 11,000 $188,088 $170,000 74,500

95,500 $283,588

Liabilities and Shareholders‘ Equity Current liabilities Accounts payable Income tax payable Employee income tax payable CPP payable EI payable Refund liability Total current liabilities Non-current liabilities Notes payable (due 2026) Total liabilities Shareholders‘ equity Common shares Retained earnings Total liabilities and shareholders‘ equity

$ 40,000 4,000 7,200 4,080 1,555 2,200 59,035 120,000 179,035 $ 60,000 44,553

104,553 $283,588

ACR13.1 (CONTINUED) e. (continued), f. (3) LONG PLAIN CONVENIENCE STORE LTD. Statement of Cash Flows Month Ended January 31, 2024 Operating activities Net income....................................................................... Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense ............................................. Gain on disposal of equipment ............................... Decrease in accounts receivable ............................ Decrease in inventory ............................................. Decrease in estimated inventory returns................. Decrease in prepaid insurance ............................... Decrease in accounts payable ................................ Increase in employee income tax payable .............. Increase in CPP payable ........................................ Increase in EI payable ............................................ Decrease in refund liability ...................................... Increase in income tax payable .............................. Net cash provided by operating activities ................................. Investing activities Proceeds from disposal of equipment .................... Net cash provided by investing activities .................................. Financing activities Dividends paid ........................................................ Net cash used by financing activities ........................................ Net increase in cash and cash equivalents ............................... Cash and cash equivalents, January 1 ..................................... Cash and cash equivalents, January 31 ...................................

$11,753

$ 2,500 (2,000) 11,000 2,100 100 1,000 (28,000) 400 880 355 (800) 4,000

(8,465) 3,288

14,000 14,000 (5,000) (5,000) 12,288 5,000 $17,288

Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing $10,000 by issuing common shares. LO 2,3,4 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT13.1

FINANCIAL STATEMENT IMPACT

Had difficulty in collecting accounts receivable Increased the level of insurance prepayments Reduced capital expenditures Lowered inventory levels Purchased a warehouse by issuing shares Paid down accounts payable faster Renegotiated a bank loan to reduce the interest rate and extend the term in order to reduce instalment loan payments each month

Operating cash flows Decrease

Investing cash flows No effect

Financing cash flows No effect

Decrease

No effect

No effect Increase No effect

Increase No effect No effect

No effect No effect No effect

Decrease Increase

No effect No effect

No effect Increase

LO 2,3,4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic and Communication CPA: cpa-t001 CM: Reporting

CT13.2

FINANCIAL REPORTING CASE

The North West Company Inc. uses the indirect method of calculating operating activities.

The change in cash in 2022 was a decrease of $(22,110,000); in 2021 it was an increase of $43,349,000. Although there was an overall decrease in cash in 2022, the category that contributed most to the increase in cash was Operating Activities, with cash flows of $224,135,000 in 2022 and $338,718,000 in 2021.

North West generated cash from operating activities in the amount of $224,135,000 for the year ended January 31, 2022 and $338,718,000 for the year ended January 31, 2021. Noncash working capital increased slightly in 2022 compared to a substantial and unusual decrease in 2021, likely due to the sale of Giant Tiger stores. However, since net income rose during 2022, the increase in noncash working capital may be reasonable. 2022

2021

Current assets

$403,358

$396,860

Current liabilities

294,490

315,135

Working capital

108,868

81,725

Less: Cash

(49,426)

(71,536)

Noncash working capital

59,442

10,189

The most significant investing activity for North West is cash used for the purchase of property and equipment, in the amount of $87,341,000 The largest use of cash from financing activities was from the repayment of debt in the amount of $85,393,000.

In 2022, Northwest acquired $87,341,000 of property and equipment, but the company was still able to maintain its dividend payments due to the strong cash inflows from operating activities. Long-term debt increased by $44,071,000.

The year in which capital expenditures were lower is 2021 at $70,886 (vs $87,341 in 2022). In 2021, the company had net repayments of $120,045 (decrease in long-term debt of $214,853 net of an increase in debt of $94,808) as opposed to net repayments of $41,322 in 2022 (increase in long-term debt of $44,071 less debt repayment of $85,393). So, they

borrowed more in 2021 even though their capital expenditures were lower.

CT13.2 (CONTINUED) g.

North West used the cash generated from operating activities to make capital expenditures and pay dividends as mentioned in e. above and repurchased common shares in the amount of $28 million. Besides these major cash flows, other cash trends were similar when comparing the two years. North West used much less cash in financing activities in 2021 in particular because they used much less cash to repurchase common shares and borrowed less.

LO 1,2,3,4,5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic and Communication CPA: cpa-t001 CM: Reporting

CT13.3

FINANCIAL ANALYSIS CASE

Companies following ASPE classify interest paid, interest income, and dividend income, as part of operating activities because they are disclosed on the statement of income as part of net income. Dividend payments are classified as financing activities. This is the most common practice for both publicly traded and private companies. Companies following IFRS may classify interest and dividend income as either investing activities or operating activities; and interest and dividend payments as either financing activities or operating activities. In order to present the strongest (largest) performance for cash obtained from operating activities, Discount Ltd.‘s management probably chose to classify interest and dividend income as operating activities as these can only be positive cash flows and likely would have chosen to classify interest and dividend payments under financing activities as these can only be negative cash flows.

Increasing the cash flows from operating activities by using the classification choices described in part (a) will provide for a larger (better) free cash flow as the amount of cash flow from operating activities will be larger, leaving more cash remaining after covering capital expenditures and dividend payments.

LO 1,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT13.4

PROFESSIONAL JUDGEMENT CASE

During 2023, the purchase of property, plant, and equipment in the amount of $2 billion dollars was financed differently by the three companies. While some of the financing came from using cash generated from operations, A Limited chose to finance the balance needed with a blend of debt and equity financing that was similar in amount. B Limited chose to use only equity and C Limited financed with mostly debt. For 2024, expansion continued at an even greater pace for A Limited, which spent $2,350 million on property, plant, and equipment, while B and C acquired far fewer of these assets. A Limited financed this higher level of expenditures by using net cash from operating activities and by issuing more common shares. Because the majority of the investments in 2023 made by C Limited were financed with debt, even though C Limited was able to pay down some of this debt in 2024 and reduce it to a lower amount than the debt held by A Limited, relative to its assets, of the three companies, C Limited still has the greatest percentage of its assets financed with debt as the other two companies have used equity more extensively than C Limited.

C Limited is the only company that had a decrease in the net cash from its operating activities in 2024. This happened because too much cash was tied up in accounts receivable and inventory. The increases in these current assets, particularly during 2024, caused a large reduction of cash that could have been used instead to reduce the high levels of debt.

C Limited likely did not have a choice to pay down its bank loans in 2024. It was forced to do so by the bank. C Limited had poor performance in managing accounts receivable and inventory that in turn caused a shortage of cash needed to satisfy the bank‘s concerns with regard to its liquidity and solvency. C Limited resorted to the desperate measure of selling off some its non-current assets at a loss of $70 million to raise the cash needed to pay down the bank loans.

CT13.4 (CONTINUED) d.

As a shareholder interested in dividends and not in growth in the value of my investment, I would consider investing in B Limited. The amount of dividends paid by B Limited in 2024 was $120 million, which is 10% of the total value of shares issued. This percentage is lower for the other two companies so shareholders in B Limited are receiving the largest dividend relative to the amount invested.

A Limited is the company most committed to growth as demonstrated by the large investment in property, plant, and equipment that continued into 2024. So long as shareholders feel that the cash spent provides for growth in the market value of the common shares issued, the pace of expansion is not excessive since it was financed with equity, which will not cause a reduction in cash flow from interest payments.

C Limited has the highest free cash flow.

Net cash provided by operating activities Purchases of property, plant, and equipment Dividends paid Free cash flow g.

A Limited $1,030 (2,350) (100) $(1,420)

B Limited $980 (830) (120) $30

C Limited $820 (430) (5) $385

If I was interested in owning the shares of one of these companies, I would likely not invest in C Limited due to the build up of inventory and accounts receivable shown in the operating activities section of the statement of cash flows. I would also be concerned about a management team that raised funds in 2023 to buy non-current assets, and then sold some of them in 2024 at a loss. As an investor, I would like the fact that A Limited is growing, but I would like to know at what point the expansion occurred in 2024. If it occurred early in the year, one would expect, given the larger asset base of this company, that net income would be higher. However, if the expansion occurred very late in 2024, the extra asset base could trigger much higher amounts of net income next year compared to 2024. On the other hand, B Limited seems to be conservatively financed with little debt, so it has the potential to expand very easily in the future. So before making a decision, I would need more information about the success of A Limited‘s 2024 expansion before buying their shares.

CT13.4 (CONTINUED) g. (continued) It should be noted that B Limited is probably the safest company to lend money to, given its low level of debt and its reasonably high operating cash flows. LO 5 BT: E Difficulty: C Time: 45 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT13.5 a.

FINANCIAL ANALYSIS CASE

Based on the changes in cash flows in the 10-year period, Apple was in its introductory phase of its operating cycle in 2005 and by 2010 through to 2021 continued to be in the growth phase of its operating cycle. In 2005 no dividends were paid, to assist in financing investments that exceeded cash generated from operations. In 2010, there were no dividends paid but Apple could likely have made such a payment and was under pressure from some shareholders to do so. Investors were satisfied with increases in stock prices and most shareholders bought the stock for price appreciation potential. The 2021 numbers seem to indicate that Apple is now a mature company as it is generating significant cash from operations and using cash in investing and financing activities as well as paying dividends to shareholders.

Free cash flow in millions of US dollars: 2021 Cash provided by operating cash flows $104,038 Capital expenditures paid during the year 11,085 Dividends paid during the year 14,467 Free cash flow $78,486 As a % of cash from operating cash flows 75.4%

2010 $18,595

2005 $2,535

2,759 ______ $15,836 85.2%

281 _____ $2,254 88.9%

The free cash flow as a percentage of operating cash flows is declining but not at the same rate as the rate of increase in the cash provided by operating cash flows. We can conclude that the amount of investments and distributions are in line with the performance of the business and its ability to generate cash from operations. Apple is reacting to the needs of its shareholders, which is consistent with the responses in part a. above. LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT13.6 a.

A company‘s dividend policy should be based on several factors other than the requirement to pay the ―usual‖ dividend. Some of these factors include: 

 

ETHICS CASE

Legal requirements such as the Business Corporations Acts for the jurisdiction in which the company is incorporated. For example, the Canada Business Corporations Act specifies certain requirements that must be met in order for companies to be able to pay dividends; these requirements include solvency and a positive (credit) balance in Retained Earnings. Creditor or other contractual requirements: some creditor loan agreements can specify financial ratios that must be maintained or limit the amounts of dividends that can be paid out to shareholders. The company‘s short-term and long-term budgets and goals. The payment of dividends uses the company‘s cash, and management has to ensure that sufficient cash remains to operate the business and meet its short-term and long-term goals, such as property, plant, and equipment purchases, expansion, and debt repayment.

The stakeholders in this situation are: Phillipa Monat, president and CEO of Onwards and Upwards Corporation Leland Yee, controller The board of directors The shareholders of Onwards and Upwards Corporation

The president‘s statement, ―We must get that amount above $1 million,‖ puts undue pressure on the controller. This statement along with his statement, ―I know you won‘t let me down, Leland,‖ encourages Leland to do something unethical. Controller Leland Yee‘s reclassification (intentional misclassification) of cash payments from interest as an operating activity to a financing activity is inappropriate and unethical. Although companies reporting under IFRS have the choice to show interest payments under either operating or financing activities, the presentation must be consistent from year to year.

CT13.6 (CONTINUED) d.

Yes. Under IFRS, it is permissible to show interest paid as a financing rather than an operating cash payment but such a change should be consistent from year to year. Companies reporting under ASPE must classify interest paid as part of operating activities and do not have the choice to show these payments as part of financing activities.

LO 1 BT: C Difficulty: M Time: 30 min. AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT13.7 a.

STUDENT VIEW CASE

Statement of Cash Flows—Direct Method Year Ended (date) Operating activities Cash receipts from salary ..................................... Cash payments For rent and utilities ..................................... For interest................................................... For car expenses ......................................... For food, entertainment, and recreation ....... Net cash provided by operating activities ......................

$45,000 $(16,600) (1,400) (4,800) (6,000)

Investing activities Purchase of car..................................................... Purchase of investments ...................................... Purchase of computer ........................................... Disposal of computer ............................................ Disposal of motorcycle .......................................... Net cash used in investing activities ..............................

$(20,000 ) (5,500) (1,500) 100 1,000

Financing activities Increase in credit card debt ($2,500 – $1,000) ...... Decrease in line of credit ($2,500 – $1,200) ......... Car loan obtained .................................................. Repayment of student loan ($15,000 – $10,000) ... Net cash provided by financing activities ........................

$ 1,500 (1,300) 15,000 (5,000)

(25,900)

Net increase in cash ....................................................... Cash, beginning of year .................................................. Cash, end of year ...........................................................

(28,800 ) 16,200

10,200 500 500 $ 1,000

Depending on the level of security for the large investment made during the year, your friend should likely consider the benefits of eliminating some interest expenses by reducing debt that carries a higher interest rate than the yield obtained from the investment.

LO 5,6 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-e003 CM: Reporting and Comm.

CT13.8

DATA ANALYTICS CASE

In order to maximize sales and corresponding cash flows from operations, Lasik MD would try to target customers who are the most likely to follow through with corrective surgery following their first appointment. The three key data points dealing with vision condition, age, and financing method are used. In the case of vision condition, those patients with the worst conditions would experience the most improvement from the procedure and therefore be the most motivated to elect for the surgery. Those patients who are very advanced in age may not perceive that the procedure is worthwhile, considering the risks and the discomfort from the procedure. Lasik would therefore target younger patients. Finally, very young patients might not be able to afford the cost of the procedure in spite of generous financing methods. Should the patient have health insurance coverage that would reimburse part of the cost of the procedure, this would increase the likelihood that the patient would proceed with the corrective surgery. LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT13.9

DATA ANALYTICS CASE

Beta invested the most in its business as the amount spent on investing activities of $540 million ($200+$220+$120) exceeds the amount that Gamma spent of $340 million ($200+$90+$50).

Gamma‘s financing activities in 2022 were positive because the company sold shares (it did not receive this cash by taking on debt). In subsequent years the financing activities showed that the company was spending cash on increasing dividend payments, representing a large portion of the company‘s operating cash flows. Notice that by the end of 2023 its cumulative cash received was $320 million ($100+$110+$110) while its cash payments were $330 million ($200+$40+$90) indicating a negative cumulative cash flow (likely financed with an operating line of credit). Because of the high dividends, the company did not have sufficient cash for investing activities and could not keep up with Beta which was investing heavily (see the large amounts mentioned in part (a) above). Therefore, the dividend policy was a disadvantage because it used up cash that it could spent in growing the business and keeping up with the competition.

Because Beta borrowed funds in 2023 (notice how the financing cash flows were positive that year) compared to Gamma which was paying out dividends), Beta was able to invest in more airplanes and this increased cash flows from operating activities by a significant amount in 2024.

The formula for free cash flow is: Free cash flow = Cash provided (used) by operating activities – Net capital expenditures – Dividends paid We will assume for these companies that the net capital expenditures = cash used by investing activities. Beta‘s free cash flow for each year is: 2022: Negative $100 million ($100-$200-$0) 2023: Negative $100 million ($120-$220-$0) 2024: Positive $70 million ($190-$120-$0) Gamma‘s free cash flow for each year is: 2022: Negative $110 million ($100-$200-$10) 2023: Positive $5 million ($110-$90-$15) 2024: Positive 45 million ($120-$50-$25)

CT13.9 (CONTINUED) d. (Continued) Typically, when a company is growing, its free cash flows will be negative (if a company is committed to growth, this amount will be significantly negative) but at some point, a successful company will have to begin generating positive free cash flows as seen above with Beta.

Beta is the most likely company to survive as it has grown its fleet of airplanes more quickly than Gamma and will be able to service more routes. Although both companies have increased their operating cash flows, in the long run, Gamma will continue to fall behind Beta in generating cash that it can use on investing activities primarily because of its dividend policy.

LO 2,3,4, 5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT13.10 SERIAL CASE a.

Free cash flow

ABC Ltd. $225,279 – $54,000 – $60,000 = $111,279

Software Solutions Inc. $6,821,000 – $3,414,000 – $580,000 = $2,827,000

Compuhelp Limited $159,400 – $144,800 – $0 = $14,600

ABC is able to generate a significant amount of cash from its operating activities—in excess of its net income. It uses cash for both its investing activities and financing activities. The use of cash in investing activities indicates that ABC is investing in its property and equipment, which is a good sign for future growth. Its use of cash in financing activities indicates that it is either repaying more debt than it is raising (through debt or equity) or using cash for dividends. From the additional information, we can determine that an $60,000 dividend was paid. Software Solutions is also generating a significant amount of cash from its operating activities—far in excess of its net income. It is also using cash in both its investing and financing activities. From this, it appears to be in the maturity stage of its corporate life cycle. Compuhelp‘s cash flows tell a bit of a different story. Although it is also generating a significant amount of cash from its operating activities in excess of its net income, it is insufficient to cover the investing and financing activities. It does not pay a dividend so most of its cash used for financing activities is likely repaying debt on its capital expenditures. All of this has resulted in a net decrease in cash during the year, leaving the company with a low ending cash balance and an inability to declare dividends.

CT13.10 (CONTINUED) c.

As we saw above, ABC is generating positive cash from its operating activities. While its free cash flow is reduced (because of its investment in capital expenditures and relatively large dividend), it has little debt and is able to pay a generous dividend. Overall, the company appears to report strong net income and cash flow, which are likely two of the financial reasons Software Solutions and Compuhelp are interested in acquiring ABC, in addition to strategic reasons discussed earlier.

The Anthonys will likely favour Software Solutions over Compuhelp. Software Solutions appears to have a stronger financial position. It has more cash available to pay for its investment in ABC. Compuhelp, a private company, does not pay a dividend and has decreased its overall cash position during 2025. Compuhelp‘s free cash flow is significantly less than that of Software Solutions. Other issues the Anthony family should consider before finalizing their decision could include:   

How will Emily and Daniel feel about the change in control? Will they be paid in cash for the purchase of their shares or will they be asked to take back a note or preferred shares in partial payment? What are the income tax consequences of this sale?

LO 5 BT: E Difficulty: M Time: 45 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005, cpa-e003 CM: Reporting, Finance, and Comm.

Legal Notice

CHAPTER 14 PERFORMANCE MEASUREMENT LEARNING OBJECTIVES 1. 2. 3. 4. 5.

Explain and apply comparative analysis. Calculate and interpret ratios that are used to analyze liquidity. Calculate and interpret ratios that are used to analyze solvency. Calculate and interpret ratios that are used to analyze profitability. Understand the limitations of financial analysis.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO

1. 2. 3.

1 1 1

C C C

7. 8. 9.

1,2 2 2

C C C

13. 14. 14.

3 3 4

C C C

19. 20. 21.

2,3,4 5 5

C C C

10.

16.

22.

11.

17.

23.

12.

18.

24.

25. 26.

5 4,5

C C

Brief Exercises 1. 2.

1 1

AN AN

5. 6.

1 2

AN AN

9. 10.

3 3,4

AN AN

13. 14.

4 4,5

AN AN

3. 4.

1 1

AN AN

7. 8.

2 2

AN AN

11. 12.

4 4

AN AN

15. 16.

5 5

AN AN

1. 2. 3. 4.

1 1 1 2,3,4

AN AN AN C

5. 6. 7. 8.

2 2 2 3

AN AN AN AN

9. 10. 11. 12.

13. 14. 15. 16.

4 2,3,4 2,3,4 5

AN AN AN AN

17.

1. 2.

1 1

AN AN

3. 4.

1 2,3,4

AN AN

2,3,4 2,3,4

AN AN

1 4

C AN

2,3,4,5

Exercises 3 3 4 4

AN AN AN AN

Problems: Set A and B 5. 6.

2,3,4 2,3,4,5

AN AN

7. 8.

Accounting Cycle Review 1.

1,2,3,4 AN

Cases 1. 2.

2,4 1

AN AN

3. 4.

2,3,4 E 2,3,4,5 AN

5. 6.

1,2,3,4 AN 1,2,3,4,5 C

7. 8.

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes

Difficulty:

Time: AACSB

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. Horizontal analysis measures items across years (or periods). Vertical analysis (also called common size analysis) expresses each item within a financial statement in terms of a percent of a relevant total, usually the largest item within the same statement. Vertical analysis measures items within the same year (or period).

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

(a)

Horizontal analysis is accomplished by expressing the dollar value of an item for a given year as a percentage of the dollar value of the same item in the base year. For example, assume that XYZ Inc. reported net income of $200,000 and $220,000 for 2023 and 2024, respectively. If 2023 is assumed to be the base year, the percent of base period amount is calculated as follows: $220,000 ÷ $200,000 = 110%, and expressed as a percentage.

(b)

Horizontal percentage change for a period is calculated by dividing the dollar amount of the change between the specific year under analysis and the base year by the base year amount. In calculating the percentage change for a period, each prior year is set as the base year in order to assess trends in changes between years. In the above example discussed in (a), the horizontal percentage change for the period would be 10% (($220,000$200,000)/$200,000).

(c)

In vertical percentage of a base amount, each item in a financial statement is expressed as a percentage of a base amount in the same financial statement, providing analysis of data within the same year. The base amount commonly used for the statement of financial position is total assets and the base amount commonly used for the statement of income is sales or revenues. For example, assume that XYZ Inc. reported merchandise inventory of $200,000 and total assets of $5,000,000 for 2023. The percent of base amount is calculated as $200,000 ÷ $5,000,000 = 4%, and expressed as a percentage.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

3. (a)

An answer cannot be calculated for the percentage change when there is no value in a base year, because division by 0 is mathematically impossible. However, the absolute dollar value of the change from the base year can be determined.

(b)

An answer cannot be calculated for the percentage change when there is a negative value in a base year and a positive value in the next year. However, the absolute dollar value of the change from the base year can be determined.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

(a)

The base amount assigned a 100% value in a vertical analysis of a statement of financial position is usually total assets.

(b)

The base amount assigned a 100% value in a vertical analysis of a statement of income is usually sales.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

When a company goes public, it will likely issue financial statements for the current and prior year, and depending on the jurisdiction, it may even release information for the second preceding year. At the most, users of the financial statements will have three years of financial statement information. There may be some quarterly information available as well. Because only a few years of information is available, horizontal trend analysis will be more difficult to prepare due to the short time frame covered. Horizontal analysis is definitely not as meaningful because by going public, comparison to historical information is not indicative of future performance especially when a company receives a large amount of investment dollars from the issuance of shares. However, vertical analysis is less

problematic because it is based on percentages determined with reference to a base amount in the current year. LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

Yes. Companies competing in the same industry that are different sizes and in different countries with different currencies can be compared. For instance, a company may want to know whether its gross profit margin percentage is in line with that of its competition. Vertical analysis uses percentages to place the results of both companies side by side, which allows for a comparison despite differences such as size and currency.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

(a)

Comparison of financial information can be made on an intracompany basis, intercompany basis, and industry average basis (using predetermined norms).   

The intracompany basis compares an item or financial relationship within the current year or with one or more prior periods, within the same company. The intercompany basis compares the same item or relationship with one or more competing companies. The industry average basis compares an item or relationship with that of the industry.

These three bases of comparison should be used together. (b) Horizontal analysis is useful in detecting significant trends within a company and in assessing the impact of economic changes that affect the industry. It is best used in intracompany comparisons, although it can also be used to compare with one or more competing companies. Vertical analysis is useful in detecting changes in financial relationships between years, with competitors and between companies in the same industry. It is best used in intercompany comparisons, although it can also be used to compare the company‘s data on an intracompany basis. Ratio analysis is useful to evaluate the significance of financial data within the same company across different years and to provide insight into a company's position relative to other companies and to the industry. Ratio analysis can be used with all three bases of comparisons— intracompany, intercompany, and industry averages. LO 1,2 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

A high current ratio is usually a good indicator of a company‘s liquidity. However, it might be hiding liquidity problems with inventory or accounts receivable. For example, an increasing level of inventory will cause the current ratio to increase. Increases in inventory can be because inventory is not selling and may be obsolete. Increases in the current ratio will also occur if the company‘s accounts receivable increase. An increase in accounts receivable could indicate the company is having trouble collecting its overdue accounts, which again would mean liquidity problems for the business.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

A lower result is better in the case of the following liquidity ratios: average collection period and days in inventory. The longer assets are held before they are converted to cash, the longer the business needs to finance these assets.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

10.

Increasing the inventory turnover will reduce the amount of inventory reported at cost on the statement of financial position, because the inventory is being sold more quickly. The accounts receivable are increased at the selling price of the inventory being turned over more quickly. Independent of the above, if the accounts receivable turnover increases, the cash will be increased more quickly and the accounts receivable will reduce more quickly from earlier collections. Taken together, total current assets should increase, by the amount of the additional gross profit that is being recorded more quickly. Consequently, the current ratio will improve (increase).

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

11.

A lower result is better in the case of the debt to total assets solvency ratio because debt gives rise to servicing charges such as interest and also requires principal repayments, which will have to be paid with cash. For the remaining solvency ratios, including times interest earned and free cash flow, a higher result is better.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

12.

Magna has a higher (worse) debt to total assets ratio than the industry average and a much higher (better) times interest earned ratio than the industry average. As a result, Magna‘s solvency is somewhat worse than other businesses in the auto parts industry. The company appears to have more risk from a higher proportion of debt financing but its ability to service the debt and pay interest is better than the industry average.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

13.

Amber has likely used the additional debt for investments in long-lived assets which in turn have increased income from operations. Although Amber would have incurred more interest expense from the increased debt, this additional debt (leverage) was used to produce a greater amount of income than the additional interest costs. Baxter on the other hand did not invest the additional debt in a way that increased net income as much as the additional interest expense incurred which caused the times interest earned ratio to fall. For example, the additional debt may have been used to buy unproductive assets or to pay dividends.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

14.

The profit margin and the asset turnover ratio combine mathematically (when multiplied) to equal the return on assets ratio. To increase its return on assets, a company can increase its profit margin or increase its asset turnover, or both at the same time.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

15.

The return on common shareholders‘ equity is affected by both the return on assets and the debt to total assets ratio. To increase its return on common shareholders‘ equity, a company can increase its return on assets or increase its leverage (as measured by the debt to total assets ratio). Leverage, however, should only be increased if the increased interest expense on the increased level of debt can be covered by higher income.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

16.

The difference between CIBC‘s return on assets of 0.8% and the return on common shareholders‘ equity of 16.3% means that the company must be using a substantial amount of debt to finance their assets and is using leverage effectively. This debt is likely in the form of customers‘ bank accounts, which are in turn lent out to others to earn a higher rate of interest than the one paid to customers on their deposits.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

17.

(a)

To consider company‘s growth potential, investors would focus primarily on the price-earnings ratio. If this ratio is high, it means that the market expects the company to grow rapidly.

(b)

To consider income potential, this generally refers to receiving dividends from the company. Investors would focus on the payout ratio to determine the extent to which the company pays dividends from the income earned and consider the dividend yield to measure the rate of return that a dividend gives the investor relative to the share‘s price.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

18.

Making a decision to buy shares based on a single ratio, the dividend yield ratio, is not recommended. Although the ratio is an indication of the relationship between the amount of past dividends compared to the market price of the shares, it is not intended to predict the dividend yield of the future. For example, if after the purchase of the shares, the market price of the shares drops 20%, the dividend yield will increase assuming the same amount of dividends are declared and paid. The investor might interpret an increase in the dividend yield as a positive outcome, but in reality, the consequence of a drop in the market price of the shares has severe adverse consequences to the initial investment. Additional ratios such as the price-earnings ratio can assist in determining the level of risk involved in the investment and should be used in conjunction with some additional analysis before making the purchase of the shares in order to earn dividend income.

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

19.

(a) (b) (c) (d) (e) (f) (g)

Asset turnover Inventory turnover, days in inventory Return on common shareholders‘ equity Times interest earned Current ratio Payout ratio Price-earnings ratio

LO 2,3,4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

20.

The factors that can limit the usefulness of financial analysis are the use of alternative accounting policies, professional judgement, comprehensive income, diversification, inflation, and economic factors. The use of different accounting policies can impact a company‘s results and, therefore, lessen comparability. The use of professional judgement may introduce the possibility of bias and impacts the many estimates made in preparing financial statements. Significant sources of comprehensive income should be considered in assessing a company‘s profitability, even though OCI is not typically used in ratios. Many companies are diversified, which makes it difficult to compare them since they cannot be classified to a single industry. Inflation is not considered in the preparation of financial statements so assessment of growth rates and trends may not be accurate if inflation is significant. Understanding the effect of the economy is also important in correctly interpreting financial information.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

21.

When using a conservative approach in estimating expenses, a company would select the estimate that produced the higher (larger) expense. Consequently, this approach would lead to a lower profit margin ratio.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

22.

(a)

Discontinued operations refers to disposal, or availability for sale, of an identifiable component or segment of a business, which comprises a major line of business or geographical area of operations.

(b)

Revenues and expenses of discontinued operations are presented in a separate line-item net of tax at the very bottom of the statement of income along with any gain or losses from the sale of the segment assets. The line item is called gain or loss from discontinued operations. Any assets or liabilities of a discontinued business, not yet disposed of, are presented separately on the statement of financial position.

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

23.

Other comprehensive income should be excluded in the determination of profitability ratios. It is common practice to use only information from the statement of income for analysis. In cases where significant amounts are included in other comprehensive income, these amounts may be included in the profitability ratios to try to understand their impact on the company‘s performance.

LO 5 BT: K Difficulty: S Time: 2 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

24.

The use of IFRS and ASPE limits comparability between companies and for comparison of a company‘s results to industry averages. Some accounting policies are different and certain ratios are not available (e.g., price-earnings ratio for a private company).

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

25.

Management uses the Management Discussion and Analysis (MD&A) portion of the annual report to the shareholders to show information considered to be more effective in communicating performance. MD&A contains information such as the company‘s mission, strategy, goals and objectives as well as progress reports on long-term strategies. The measures used in the MD&A reporting go beyond those measurements used under IFRS or ASPE and are often non-GAAP measures.

LO 5 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

26.

(a)

Nutrien Ltd.‘s profitability has improved as its profit margin including or excluding other comprehensive income has increased from 2020 to 2021.

(b)

It is common practice to calculate profitability ratios using net income rather than comprehensive income. Typically, items recorded in OCI are not largely significant and may not reflect the operations of a company. Sometimes they consist of non-recurring items. Another reason for excluding OCI from ratios is because companies reporting under ASPE do not use OCI so comparing a profitability ratio of a public company based on comprehensive income with a private company that reports only net income would not give a fair comparison. Nonetheless, if a public company does have a significant amount of OCI, we should strive to understand its impact on the company.

LO 4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14.1 a.

Horizontal percentage of a base year amount

Cash Accounts receivable Inventory Property, plant, and equipment Intangible assets

2024

2023

200.0%5 133.3%6 111.4%7 109.8%8

233.3%1 88.9%2 85.7%3 98.2%4

—

2022

—

$175,000 = 233.3% $75,000

$150,000 = 200.0% $75,000

$400,000 = 88.9% $450,000

$600,000 = 133.3% $450,000

$600,000 = 85.7% $700,000

$780,000 = 111.4% $700,000

$2,800,000 = 98.2% $2,850,000

$3,130,000 = 109.8% $2,850,000

100% 100% 100% 100% —

BRIEF EXERCISE 14.1 (CONTINUED) b.

Horizontal percentage change for each year

Cash Accounts receivable Inventory Property, plant, and equipment Intangible assets

2024

2023

(14.3)%5 50.0%6 30.0%7 11.8%8 (10.0 )%9

133.3%1 (11.1)%2 (14.3)%3 (1.8)%4 —

2022 0% 0% 0% 0%

—

($175,000 – $75,000) = 133.3% $75,000

($600,000 – $400,000) = 50.0% $400,000

($400,000 – $450,000) = (11.1)% $450,000

($780,000 – $600,000) = 30.0% $600,000

($600,000 – $700,000) = (14.3)% $700,000

($3,130,000 – $2,800,000) = 11.8% $2,800,000

($2,800,000 – $2,850,000) = (1.8)% $2,850,000

($90,000 – $100,000) = (10.0)% $100,000

($150,000 – $175,000) = (14.3)% $175,000

LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.2 Comparing the percentages presented results in the following conclusions: The net income for Coastal decreased in 2023 over 2022. Cost of goods sold and operating expenses increased faster than sales. In addition, income tax expense declined indicating that income from operations also declined, assuming no change in the income tax rate. Net income in 2024 increased over 2023. Sales increased faster than did cost of goods sold and operating expenses, which actually declined. Income tax expense increased indicating that income from operations also increased, assuming no change in the income tax rate. LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.3 a. 2024 125%

2023 96%

2022 100%

Property, plant, and equipment

110%

98%

100%

Goodwill

117%

100%

Current assets

Total assets

We did not calculate the change in goodwill since there was no goodwill in 2022. b. 2024 Current assets

Amount $1,530,000

Percentage 32.2%

Property, plant, and equipment

3,130,000

65.9%

90,000

1.9%

$4,750,000

100.0%

Goodwill Total assets

2023 Amount Current assets Property, plant, and equipment Goodwill Total assets

Percentage

$ 1,175,000

28.8%

2,800,000

68.7%

100,000 $ 4,075,000

2.5% 100.0%

2022 Current assets Property, plant, and equipment Goodwill Total assets

Amount $ 1,225,000

Percentage 30.1%

2,850,000

69.9%

0.0%

$ 4,075,000

100.0%

LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.4 Sales Cost of goods sold Gross profit Operating expenses Income before income tax Income tax expense Net income

2024 Amount Percentage $1,914 100.0% 1,612 84.2% 302 15.8% 218 11.4% 84 4.4% 17 0.9% $ 67 3.5%

2023 Amount Percentage $2,073 100.0% 1,674 80.8% 399 19.2% 210 10.1% 189 9.1% 38 1.8% $ 151 7.3%

LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.5 Net income as a percentage of sales for Waubon decreased in 2023 because cost of goods sold and operating expenses percentages increased. The decrease in income tax expense was too small to offset the increase in the other expenses. Net income as a percentage of sales increased in 2024 as both cost of goods sold and operating expenses as a percentage of sales decreased. The increase in income tax expense was too small to offset the decrease in other expenses. For information, the calculated net income as a percentage of sales is: 2022 = 16% (100% – 60% – 20% – 4%) 2023 = 15.3% (100% – 60.5% – 20.4% – 3.8%) 2024 = 16.8% (100% – 59.4% – 19.6% – 4.2%). LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.6 a. Current ratio Receivables turnover Inventory turnover 1

2024 2.1 : 1 8.0 times 4.5 times

$2,100,000 = 2.1 :1 $1,000,000 $2,000,000 = 1.8 :1 $1,100,000 $6,420,000 = 8.0 times ($850,000 + $750,000) ’ 2 b.

1 3 5

2023 1.8 : 1 8.9 times 5.0 times

2 4 6

$6,240,000 = 8.9 times ($750,000 + $650,000) ’ 2 $4,540,000 = 4.5 times ($1,020,000 + $980,000) ’ 2 $4,550,000 = 5.0 times ($980,000 + $840,000) ’ 2

The company‘s current ratio has improved from 2023 to 2024. However, the receivables turnover and inventory turnover have both deteriorated. Even though at first glance, the company‘s liquidity seems to have improved based on the improvement of the current ratio, an examination of the liquidity of the major current assets, accounts receivable and inventory, indicates that liquidity has deteriorated. The deterioration in the turnover of receivables and inventory leads to an increase in these assets and increases the current ratio.

LO BT: AN Difficulty: M Time: min. AACSB: CPA: CM:

BRIEF EXERCISE 14.7 Optimus Ltd. has experienced a decrease in sales. Because the volume of inventory sold has increased and the cost of that inventory remains the same as in the past, there will be an increase in the company‘s cost of goods sold. Meanwhile, because customers have more time to pay, the company‘s accounts receivable will increase even though sales have decreased and as stated, the company‘s inventory has fallen. Because of the above, if we were to calculate receivables turnover (Credit sales ÷ Average gross accounts receivable), we would find that the ratio has fallen because the credit sales have decreased while the gross accounts receivable have increased. If we were to calculate inventory turnover (Cost of goods sold ÷ Average inventory), we would find that the ratio has increased because cost of goods sold has increased because more products were sold, while the average inventory would have decreased because inventory levels fell. LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.8 Holysh‘s liquidity is probably deteriorating. The increase in the current ratio is likely caused by the deteriorating turnover of receivables and inventory. The decrease in the receivables turnover ratio may mean that the company is not collecting its accounts receivable on as timely a basis as in the past, or that some balances may be uncollectible. The decrease in the inventory turnover ratio implies the company is not selling its inventory as quickly as in the past or that it has too much inventory on hand at year end, or has increasing amounts of obsolete inventory. Further investigation into the cause for the slowdown in collections and inventory turnover will have to be made before it is possible to assess the company‘s liquidity. LO 2 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.9 CCL Industry‘s solvency improved in 2021 because of the decrease in its debt to total assets ratio. In addition, there has been a substantial improvement in the times interest earned ratio (higher), likely due to an increase in profitability or a decrease in debt. There is a decrease in the free cash flow, however. LO 3 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.10 a.

The company‘s investment in assets financed by debt is assumed to have been extremely successful. Success is measured by increases in profitability despite the increase in depreciation and interest expense. (1)

Debt to total assets will increase. Normally debt is smaller than assets so if both the numerator and denominator of this ratio are increased by the same amount, the numerator will increase by a greater percentage causing the overall ratio value to rise. For example, assume a company has total liabilities of $50 and total assets of $100 so the total debt to asset ratio will be 50%. Now if both liabilities and assets are increased by $50, the ratio will now be 67%.

(2)

Times interest earned is likely to increase as the amount of increased income from the new assets will exceed any increase in interest expense.

(3) There is not enough information to clearly determine the impact on free cash flow. Recall that free cash flow is equal to net cash from operating activities (this would have risen) less net capital expenditures (this would also have risen) less dividends paid (the company does not pay out dividends). However, since the capital expenditures were quite large it is likely that the free cash flow would have decreased. b.

Because of the increased net income, it is likely that both the return on assets ratio and return on common shareholder‘s equity ratio will increase. The increase in the return on common shareholder‘s equity ratio (which has a smaller denominator) will far outpace the increase in return on assets ratio because of the presence of leverage.

LO 3,4 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.11 a.

Return on assets is driven by profit margin and asset turnover. The increase in profit margin has increased the return on assets while the decrease in asset turnover has decreased the return on assets ratio. Because the increase in profit margin far outpaced the decrease in asset turnover ratio, the return on assets had an overall increase for the year.

Return on common shareholders‘ equity is affected by return on assets and debt to total assets. The return on assets has increased while the debt to total asset ratio has decreased. Because the decrease in debt to total assets ratio outpaced the increase in the return on assets ratio, the return on common shareholders‘ equity had an overall decrease for the year.

LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.12 For growth, I would purchase the shares of Amazon.com, Inc. as the priceearnings ratio is higher, suggesting investors are willing to pay more for the shares because the company has higher prospects for growth and income in the future. For income, I would purchase the shares of the Bank of Montreal as the dividend yield is higher. It should be noted that if a company pays out a larger portion of its net income as a dividend, less funds are available to invest in assets and grow the size of the company, so it is more likely that a company that pays out high dividends will tend to have a lower price-earnings ratio. LO 4 BT: AN Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.13 a.

It is likely that the return on common shareholder‘s equity ratio increased more in 2024. Because the increased net income of 20% is attributed to the successful investment in a new manufacturing plant financed mostly by debt, it is likely that the return on assets ratio and return on common shareholder‘s equity ratio will both increase. The increase in the return on common shareholder‘s equity ratio will outpace the increase in return on assets ratio because of the presence of leverage.

The payout ratio will decrease because the percentage increase in net income of 20% is greater than the percentage increase in dividends in 2024 of 3%. The price-earnings ratio will decrease because the market price of the shares increased only 6% when the net income increased by 20%. Finally, the dividend yield will decrease because the 6% increase in the market price of the shares outpaced the 3% increase in dividends.

LO 4 BT: AN Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.14 a. (in U.S. $ millions) (1) With discontinued income: Profit margin

2021

$11,504 $1,216,758

(1) Without discontinued income: Profit margin

$9,012 $1,216,758

(2) With OCI: Profit margin

$13,163

2020

.9%

.7%

1.1%

$1,216,758 Without discontinued income and without OCI: Profit margin

$9,012 $1,216,758

$54,189 $1,103,544

$42,450 $1,103,544

$52,035

4.9%

3.8%

4.7%

3.8%

$1,103,544

.7%

$42,450 $1,103,544

Most financial ratios exclude discontinued operations and total comprehensive income, or other comprehensive income, from the analysis. Profitability ratios, including industry averages, generally use data from the statement of income and not from the statement of comprehensive income, which includes both net income and other comprehensive income. In addition, there are no standard ratio formulas incorporating comprehensive income. Consequently, the profit margin without discontinued operation and other comprehensive gain or loss should be used in reliable financial analysis.

LO 4,5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance Solutions Manual 14-1578 Chapter 14 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

BRIEF EXERCISE 14.15 Able Ltd. has adopted an accounting policy that is different from that used by the industry. Using FIFO rather than an average cost formula for inventories in times of rising prices will result in lower cost of goods sold because older, cheaper inventory will be sold first, leaving more expensive, recently acquired inventory on the statement of financial position. This will increase gross profit and net income and produce higher inventory values on the statement of financial position along with higher retained earnings. a.

Inventory turnover will be lower because the cost of goods sold will be lower and the average inventory will be higher.

Asset turnover will be lower because the inventory will be higher by a greater amount.

Profit margin will be higher because cost of goods sold will be lower.

Return on assets will be higher. Recall that this ratio is determined by net income divided by average total assets. Both the numerator and denominator of this ratio will increase by approximately the same amount due to using FIFO, but because net income is usually much smaller than total assets, the change made to the numerator is more significant and the ratio will increase. For example, if net income without FIFO was $100 and average total assets was $1,000 and then we increased both amounts by $50, the return on total assets would increase from 10% to 14.3%.

LO 5 BT: AN Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 14.16 Bathurst Ltd. has used an estimate that is different from that used by the industry. By using an estimated useful life of equipment that is longer than the industry, Able will show lower depreciation expense, higher net income and higher carrying amounts for equipment on its statement of financial position. a.

Asset turnover will be lower because the higher carrying amount of the equipment.

Profit margin will be higher because depreciation expense will be lower.

Return on assets will be higher. Recall that this ratio is determined by net income divided by average total assets. The numerator is increased by the after-tax reduced amount of depreciation expense and denominator of this ratio is increased by the higher carrying amount of the equipment. Net income is usually much smaller than total assets, the change made to the numerator is more significant and the ratio will increase. For example, if net income prior to the changes made was $100 and average total assets was $1,000 and then we increased income by $15, while the denominator increased by $45 the return on total assets would increase from 10% to 11%.

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SOLUTIONS TO EXERCISES EXERCISE 14.1 a.

DRESSAIRE INC. Horizontal Analysis of Statement of Financial Position (% of base year amount)

Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings

2024

2023

2022

115.0 133.3 115.8 75.0 110.0 241.2

110.0 110.0 105.3 91.7 100.0 152.9

100.0 100.0 100.0 100.0 100.0 100.0

Dressaire shareholders should be pleased with the more than doubling of retained earnings in two years while at the same time steadily reducing total liabilities.

EXERCISE 14.1 (CONTINUED) b. DRESSAIRE INC. Horizontal Analysis of Statement of Financial Position (% change between periods)

2024

Increase (Decrease) Amount %

2023

Increase (Decrease) Amount %

2022

Assets Current assets Non-current assets Total assets Liabilities and Shareholders‘ Equity Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$115,000 400,000 $515,000

$ 5,000 70,000 $75,000

4.5% 21.2% 17.0%

$110,000 330,000 $440,000

$10,000 30,000) $ 40,000)

10.0% 10.0 % 10.0 %

$100,000 300,000 $400,000

$110,000 90,000 200,000

$10,000 (20,000) (10,000)

10.0% (18.2%) (4.8%)

$100,000 110,000 210,000

$ 5,000 (10,000) (5,000)

5.3% (8.3%) (2.3%)

$ 95,000 120,000 215,000

110,000 205,000 315,000

10,000 75,000 85,000

10.0% 57.7% 37.0%

100,000 130,000 230,000

0 45,000 45,000

0% 52.9% 24.3%

100,000 85,000 185,000

$515,000

$75,000

17.0%

$440,000

($40,000)

10.0%

$400,000

LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 14.2 a. FLEETWOOD CORPORATION Vertical Analysis of Statement of Income 2024

2023

Sales Cost of goods sold

Amount $800,000 550,000

Percent 100.0% 68.8%

Amount $600,000 375,000

Percent 100.0% 62.5%

Gross profit Operating expenses

250,000 155,000

31.3% 19.4%

225,000 125,000

37.5% 20.8%

Income before income tax

95,000

11.9%

100,000

16.7%

Income tax expense

15,000

1.9%

20,000

3.3%

Net income

$80,000

10.0%

$80,000

13.3%

Note: The percentages shown in the above table do not add perfectly because of discrepancies that occur from rounding the results to one decimal place.

The cost of goods sold percentage is increasing, and the gross profit percentage is decreasing as is the operating expenses percentage. Both income before income taxes and net income percentages are decreasing. The income tax expense has a lower percentage because the tax rate has decreased and the income before income tax has decreased. The most significant of the increases is the increase in the cost of goods sold which shows an increase from 62.5% of sales to 68.8% of sales.

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EXERCISE 14.3 a.

LABELLE LTD. Horizontal Analysis of Statement of Income (% of base year amount) Year Ended December 31

2024

2023

2022

Sales

133.3

116.7

100

Cost of goods sold

150.0

125.0

100

Gross profit

116.7

108.3

100

Operating expenses

130.0

102.5

100

Income from operations

90.0

120.0

100

Interest expense

200.0

125.0

100

Income before income tax

62.5

118.8

100

Income tax expense

62.5

120.0

100

Net income

62.5

118.3

100

b. LABELLE LTD. Vertical Analysis of Statement of Income 2022 Amount Sales

Percent

$1,200

100.0%

Cost of goods sold

600

50.0%

Gross profit

600

50.0%

Operating expenses

400

33.3%

Income from operations

200

16.7%

Interest expense

3.3%

Income before income tax

160

13.3%

Income tax expense

3.3%

$ 120

10.0%

Net income

EXERCISE 14.3 (CONTINUED) b. (continued) LABELLE LTD. Vertical Analysis of Statement of Income 2023 Amount Sales

Percent

$ 1,400

100.0%

Cost of goods sold

750

53.6%

Gross profit

650

46.4%

Operating expenses

410

29.3%

Income from operations

240

17.1%

Interest expense

3.6%

Income before income tax

190

13.6%

Income tax expense

3.4%

$142

10.1%

Net income

LABELLE LTD. Vertical Analysis of Statement of Income 2024 Amount Sales

Percent

$1,600

100.0%

Cost of goods sold

900

56.3%

Gross profit

700

43.8%

Operating expenses

520

32.5%

Income from operations

180

11.3%

Interest expense

5.0%

Income before income tax

100

6.3%

Income tax expense

1.6%

$ 75

4.7%

Net income

Note: The percentages shown in the above table do not add perfectly because of discrepancies that occur from rounding the results to one decimal place.

EXERCISE 14.3 (CONTINUED) c.

Comparing 2022 to 2024, we can use the horizontal analysis of part (a) which demonstrates to us how dramatically sales increased. Unfortunately, the increase in sales was far outpaced by the increase in cost of goods sold. We can see this effect when we look at the vertical analysis which shows a steady decline in the gross profit ratio from 50% in 2022 to 43.8% in 2024. The operating expenses increased, but at a slower rate than the increase in sales. The decline in gross profit resulted in a decline in income from operations from 16.7% in 2022 to 11.3% in 2024. Interest costs kept climbing and finally, after taxes the profit margin fell from 10% to 4.7%. Management should be pleased with the increase in sales, but it must investigate the source of the increases in costs, which brought about disproportionate costs of goods sold.

LO 1 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 14.4 Asset turnover Average collection period Basic earnings per share Current ratio Days in inventory Debt to total assets Dividend yield Free cash flow Gross profit margin Inventory turnover Payout ratio Price-earnings ratio Profit margin Receivables turnover Return on assets Return on common shareholders‘ equity Times interest earned Working capital

(a) P L P L L S P S P L P P P L P P S L

(b) B W B B W W N B B B N N B B B B B B

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EXERCISE 14.5 ($ in millions) a.

2024 2023

Working capital = $1,430 – $890 = $540

= $1,314 – $825 = $489

Current ratio = 1.61:1 ($1,430  $890)

= 1.59:1 ($1,314  $825)

Receivables turnover = 6.2 times $4,190  [($676 + $50 + $586 + $45) ÷ 2]

= 6.8 times $3,940  [($586 + $45 + $496 + $40) ÷ 2]

Collection period = 59 days (365 ÷ 6.2 times)

= 54 days (365 ÷ 6.8 times)

Inventory turnover = 5.0 times $2,900  [($628 + $525) ÷ 2]

= 4.8 times $2,650  [($525 + $575) ÷ 2]

Days sales in inventory = 73 days (365 ÷ 5.0 times)

= 76 days (365 ÷ 4.8 times)

b. Working capital Current ratio Receivables turnover Collection period Inventory turnover Days sales in inventory

Better Better Worse Worse Better Better

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EXERCISE 14.6 a.

The company‘s collection of its accounts receivable has deteriorated as it is taking the company longer to collect receivables as evidenced by the decrease in the accounts receivable turnover.

The company is selling its inventory slower as the inventory turnover is declining.

Overall, the company‘s liquidity has deteriorated. The increase in the current ratio is caused by the increase in inventory and receivables due to the slowdown in the movement of these assets. Even though the company‘s current ratio is higher, if the underlying assets cannot be converted to cash to repay current liabilities, then liquidity has deteriorated.

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EXERCISE 14.7 a.

Company #4 has the highest current ratio.

Company #2 has the lowest number of days in inventory.

Company #1 has the lowest average collection period.

Company #4 has the highest current ratio.

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EXERCISE 14.8 a. 2024 Debt to total assets

$2,175 $3,890

55.9%

Free cash flow

$850 – $400 – $110 =

$340

($405 + $15 + $175) $15

39.7

53.0%

Times interest = earned

times

2023 $1,960 $3,700

Debt to total assets

Free cash flow

= $580 – $300 – $90

$190

($375 + $25 + $150) $25

22.0

Times interest = earned

Debt to total assets Free cash flow Times interest earned

times

Worse Better Better

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EXERCISE 14.9 a.

The debt to total assets ratio has deteriorated over the past three years as the proportion of total debt to total assets has increased.

The increase in the times interest earned ratio indicates that it has improved over the past three years. This means that the company‘s income before interest and taxes has risen more than the increase in interest expense. The two main factors that could have led to this result are: 1) a reduction in interest rates or 2) the more likely reason which is the income before interest and taxes has been increasing over the period.

The company‘s solvency initially appears to be worsening as evidenced by its increased reliance on debt. However, the company‘s times interest earned is improving, so the company appears to be able to handle this increasing level of debt. Because of the offsetting impact of these two ratios, solvency has not deteriorated.

LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 14.10 a.

Company #1 has a substantial reduction in its debt to total assets ratio and succeeded in increasing its times interest earned ratio. The debt reduction strategy was successful.

Company #3 has the highest percentage increase in its debt to total assets ratio and succeeded in increasing both its times interest earned and free cash flow ratios in the same year.

Company #2‘s solvency decreased the most in 2024 because all three ratios are worse in 2024 when compared to 2023.

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EXERCISE 14.11 a. ($ in thousands) 2024 Gross profit margin

Profit margin

($500 - $375) $500

2023 ($400 - $290)

= 25.0%

$400

= 27.5%

$33.5 $500

= 6.7%

$30.0 $400

= 7.5%

Asset turnover

$500 ($350 + $275) 2

= 1.60 times

$400 ($275 + $274) 2

= 1.46 times

Return on assets

$33.5 ($350 + $275) 2

Return on common shareholders‘ equity

$33.5 ($133.5 + $100) 2

$30.0 ($275 + $274) 2

= 10.7%

$30.0 ($100 + $50) 2

= 28.7%

Gross profit margin Profit margin Asset turnover Return on assets Return on common shareholders‘ equity

= 10.9%

= 40.0%

Worse Worse Better Worse Worse

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EXERCISE 14.12 Overall, BetaCom is more profitable. While Top‘s gross profit margin is higher than BetaCom‘s and the industry, BetaCom‘s profit margin, return on common shareholder‘s equity, and return on assets are higher than Top‘s. Both company‘s ratios are better than the industry average with the exception of BetaCom‘s gross profit margin. LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 14.13 a.

Along with the increase in profit margin in 2020, there was a large increase in the debt to total assets. This increase in debt to total assets means that higher debt brings about higher interest expense. There could also have been a loss from discontinued operations during the year, causing a reduction in the profit margin. Finally, a rise in the operating expenses could have caused the modest increase in profit margin compared to 2019, in spite of the substantial increase in the gross profit margin.

Return on assets is influenced by the profit margin and asset turnover. Since asset turnover decreases in 2021, the main driver of the company‘s decline in the return on assets is its asset turnover.

During 2020, there was a substantial increase in the amount of total assets. This increase was financed with more debt, as evidenced by the increase in the debt to total assets. Return on common shareholders‘ equity is influenced by return on assets and debt to total assets. The use of leverage was the primary driver of the improvement in the return on common shareholders‘ equity ratio. In spite of the increased debt, the profit margin increased in 2020, which in turn increased the return on common shareholders‘ equity ratio.

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EXERCISE 14.14 a.

Nyarboro is the more liquid of the two despite Archers‘ current ratio being higher than that of Nyarboro and closer to the industry average. Nyarboro‘s receivables and inventory turnover ratios are substantially higher than Archers‘, which essentially means that it converts its receivables and inventory to cash much more quickly than does Archers. Although more information would be helpful before reaching a conclusion, Archers‘ higher current ratio could be the result of higher accounts receivable (possible collection problem) and higher inventory (slow moving due to lower demand).

It appears that Archers is the more solvent of the two. Because Nyarboro has a lower debt to total assets ratio, which is indicative of greater solvency, one would expect it to have a higher times interest earned ratio, indicating a greater ability to meet its interest commitments (because of the lower debt level). Yet, it is Archers that has a higher times interest earned ratio despite having a higher level of debt.

Archers is clearly the more profitable of the two, as all its profitability ratios are superior to those of Nyarboro and exceed the industry average.

Investors seem to favour Nyarboro as indicated by the price-earnings ratio. This ratio is higher than Archers‘ although not as high as the industry average. This finding is not consistent with the assessment of solvency and profitability. Investors believe that Nyarboro has the better prospects for future growth. Their assessment of a company‘s prospects is usually based on expectations of future results rather than an assessment based on historical results. Because the priceearnings ratio of Archers is lower, its shares are relatively less expensive than Nyarboro‘s shares, and because Archers has better profitability, an investor may be more likely to buy shares in Archers.

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EXERCISE 14.15 a. b. c. d. e.

Inventory turnover Days in inventory Current ratio Asset turnover Gross profit margin

increase decrease decrease increase increase

f. g. h. i. j.

Profit margin Return on assets1 Debt to total assets Times interest earned Return on common shareholders‘ equity

decrease increase increase decrease decrease

Payout ratio

increase

Average total assets decreased by a larger margin than the decrease in net income. LO 2,3,4 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 14.16 a. 1.

Realized gain on the sale of long-term investments

Included

A loss caused by a labour strike

Included

Other comprehensive income arising from the revaluation of a building Profitability ratios focus mainly on statement of income items.

Excluded

An operating loss from a discontinued business that has not yet been sold

Excluded

An impairment loss on goodwill

Included

If management felt that the items included in net income, as listed in part (a) above, distorted the measurement of the company‘s performance, non-GAAP measures such as normalized net income could be calculated for analysis. Management can also measure performance using adjusted earnings before income tax and depreciation (adjusted EBITDA) to exclude the effects of tax refunds and depreciation.

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EXERCISE 14.17 a. Event Increased estimate of allowance for expected credit losses Increased useful life of equipment Recorded an increase in other comprehensive income when adjusting an investment to its fair value

b. Ratio Receivables turnover Current ratio Profit margin Asset turnover Gross profit margin Profit margin Profit margin Return on assets

Effect Unchanged Decrease Decrease Decrease Unchanged Increase Unchanged Decrease

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SOLUTIONS TO PROBLEMS PROBLEM 14.1A a.

TWC ENTERPRISES LIMITED Horizontal Analysis of Statement of Financial Position (% of base year amount) December 31 2021

2020

2019

Current assets Non-current assets Total assets

151.2 93.4 110.5

83.6 97.8 93.6

100.0 100.0 100.0

Liabilities and Shareholders‘ Equity Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders‘ equity Total liabilities and shareholders‘ equity

184.2 73.4 101.8 115.3

105.3 86.3 91.2 94.9

100.0 100.0 100.0 100.0

110.5

93.6

Assets

100.0

PROBLEM 14.1A (CONTINUED) a. (continued) TWC ENTERPRISES LIMITED Horizontal Analysis of Statement of Comprehensive Income (% of base year amount) Year Ended December 31

Revenue Operating expenses Income from operations Interest expense Income before income tax Income tax expense Net income Other comprehensive income (loss) Comprehensive income

2021

2020

105.7 42.3 933.2 24.5 1,563.8 972.1 1,828.0 (71.2) 2,280.2

78.1 79.1 64.8 73.3 58.9 146.5 19.8 53.0 11.9

2019 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

PROBLEM 14.1A (CONTINUED) b. (in thousands) TWC ENTERPRISES LIMITED Horizontal Analysis of Statement of Financial Position (% change between periods) Year Ended December 31 2021

Increase (Decrease) Amount %

2020

Increase (Decrease) Amount %

Assets Current assets Non-current assets

$302,344 444,462

$135,133 (20,709)

80.8% -4.5%

$167,211 465,171

$(32,723) (10,501)

-16.4% -2.2%

$746,806

$114,424

18.1%

$632,382

(43,224)

-6.4%

Liabilities and Shareholders' Equity Current liabilities

$113,036

$48,397

74.9%

$64,639

$3,282

5.3%

Long-term liabilities

130,382

(22,992)

-15.0%

153,374

(24,345)

-13.7%

Total liabilities

243,418

25,405

11.7%

218,013

(21,063)

-8.8%

Shareholders' equity

503,388

89,019

21.5%

414,369

(22,161)

-5.1%

Total liabilities and shareholders' equity

$746,806

$114,424

18.1%

$632,382

$(43,224)

-6.4%

PROBLEM 14.1A (CONTINUED) b. (continued) TWC ENTERPRISES LIMITED Horizontal Analysis of Statement of Comprehensive Income (% change between periods) Year Ended December 31 2021 Revenue

$178,417

Increase (Decrease) Amount % $46,616 34.4%

2020 $131,801

Increase (Decrease) Amount % $(36,986) -21.9%

Operating expenses

66,278

(57,734)

-46.6%

124,012

(32,758)

-20.9%

Income from operations Interest expense

112,139 1,204

104,350 (2,405)

1,339.7% -66.6%

7,789 3,609

(4,228) (1,314)

-35.2% -26.7%

Income before income tax Income tax expense

110,935 21,288

106,755 18,079

2,553.9% 563.4%

4,180 3,209

(2,914) 1,019

-41.1% 46.5%

Net income Other comprehensive income (loss)

89,647

88,676

9,132.4%

971

(3,933)

-80.2%

671

1,171

234.2%

(500)

443

47.0%

Comprehensive income

$90,318

$89,847

19,075.8%

$471

$(3,490)

-88.1%

PROBLEM 14.1A (CONTINUED) c.

By expressing the amounts in the statements as a percentage of a base year amount, we can see that in the statement of financial position the most substantial change was the increase in current assets in 2021 and the increase in current liabilities in 2021. In the case of current assets in 2021, the increase is 80.8% over 2020. The most significant changes on the statement of income arose from increased in revenue in 2021, and decreases in operating expenses. The income tax expense increased as a result of the significant increase in income from operations.

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PROBLEM 14.2A a. WATERLOO BREWING LIMITED Vertical Analysis of Statement of Financial Position January 31 (in thousands) 2022 Accounts receivable Inventory Prepaids Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders‘ equity Total liabilities and shareholders‘ equity

2021

2020

$ 15,527 15,841 754 32,122 99,312 131,434

% 11.8% 12.1% 0.6% 24.4% 75.6% 100.0%

$ 9,871 14,345 729 24,945 90,519 115,464

% 8.5% 12.4% 0.6% 21.6% 78.4% 100.0%

$ 4,976 10,483 787 16,246 76,885 93,131

% 5.3% 11.3% 0.8% 17.4% 82.6% 100.0%

40,386 54,324 94,710 36,724

30.7% 41.3% 72.1% 27.9%

54,397 27,373 81,770 33,694

47.1% 23.7% 70.8% 29.2%

30,999 28,245 59,244 33,887

33.3% 30.3% 63.6% 36.4%

131,434

100.0%

115,464

100.0%

93,131

100.0%

PROBLEM 14.2A (CONTINUED) a. (continued) WATERLOO BREWING LIMITED Vertical Analysis of Statement of Income Year Ended January 31 (in thousands) 2022 Sales Cost of sales Gross profit Operating expenses Income from operations Interest expense Income before income tax Income tax expense Net income

$ 111,765 83,093 28,672 17,765 10,907 2,742 8,165 2,363 5,802

2021 % 100.0 74.3 25.7 15.9 9.8 2.5 7.3 2.1 5.2

$ 86,699 66,001 20,698 14,464 6,234 1,980 4,254 1,254 3,000

2020 % 100.0 76.1 23.9 16.7 7.2 2.3 4.9 1.4 3.5

$ 60,334 42,484 17,850 15,314 2,536 1,501 1,035 537 498

% 100.0 70.4 29.6 25.4 4.2 2.5 1.7 0.9 0.8

The most significant changes in Waterloo Brewing‘s statement of financial position have been the increase in non-current assets and the even larger increase in non-current liabilities in 2022. Also, accounts receivable has tripled and current assets have doubled in 2022 versus 2020. Waterloo‘s solvency has deteriorated in 2022 as demonstrated by the increase in the portion of total assets financed by liabilities (72.1% in 2022) compared to the amount financed by equity of 27.9% when compared with 2020. The company‘s gross profit percentage decreased in 2022 and 2021 compared to 2020, in spite of increased sales. Operating expenses as a percentage of sales have decreased so that overall there was an improvement in the profit margin percentage in 2021 and 2022.

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PROBLEM 14.3A a.

Although the operating expenses have been increasing over the past four years, when these are expressed as a percentage of revenues in the vertical analysis, it is clear that their proportion as a percentage of revenue is smaller in 2024 than in 2021, demonstrating that the company has a good control over the operating expenses.

The change in income before income tax, income tax expense, and net income is the same because the income tax rate has not changed. Therefore, the absolute amount of the tax expense will change in the same proportion as the change in income before income taxes. As demonstrated in the vertical analysis statement, when compared to revenues, the absolute amount of income tax expense will change since other variables, such as operating expenses, reduce revenues in different amounts and proportions each year.

Although most expenses have grown in similar proportions to the increase in revenue, this is not the case for interest expense. Interest expense is decreasing over the four-year period. This reduction is likely due to the reduction in interest rates charged and the amount of the debt on the statement of financial position. Although the horizontal analysis draws attention to a major increase in the rent income, that attention is later diminished when inspecting the vertical analysis statement of income. This statement reveals that in absolute terms, the amount of rent income involved is very small and so a major increase of 240% over a three-year period turns out to have a modest effect on the income.

Horizontal and vertical analysis of the statement of financial position, as well as the financial statements themselves, can be useful in assessing this company‘s performance and financial position. In addition, ratio analysis would help complete the picture. Comparisons of this company to other businesses in the industry, as well as understanding any external economic or other factors, would also be useful.

LO 1 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.4A a. Receivables turnover

Credit sales

Average gross accounts receivable

2022

Receivables turnover

2023

Receivables turnover

2024

Receivables turnover

$3,600 $500

$700

$900

+ 2

7.2 times

6.7 times

5.6 times

3.6

times

3.2

times

2.5

times

$500

$4,000 + 2 $4,500 +

$500

$700

Cost of goods sold Average inventory

Inventory turnover

2022

Inventory turnover

2023

Inventory turnover

2024

Inventory turnover

$500

$1,800 + 2

$500

$800

$2,100 + 2

$500

$2,500 $1,200 + 2

$800

PROBLEM 14.4A (CONTINUED) a. (continued)

Current ratio

Current assets Current liabilities

2022

Current ratio

$1,200 $500

2.4

2023

Current ratio

$1,580 $550

2.9

2024

Current ratio

$2,130 $600

3.6

Pronghorn‘s liquidity has deteriorated because both the receivable and inventory turnovers have steadily decreased. On the other hand, the current ratio has improved steadily. Overall, the liquidity has deteriorated.

PROBLEM 14.4A (CONTINUED) b. Gross profit margin

Gross profit Sales

2022

Gross profit margin

$1,800 $3,600

50.0%

2023

Gross profit margin

$1,900 $4,000

47.5%

2024

Gross profit margin

$2,000 $4,500

44.4%

Although the cost to Pronghorn of the goods being sold has remained constant, the gross profit margin has deteriorated. Because of selling price competition, Pronghorn had to reduce its selling prices. Consequently, the gross profit margin reduced from 50% in 2022 to 44.4% in 2024.

PROBLEM 14.4A (CONTINUED) c. Profit margin

Net income Sales

2022

Profit margin

$180 $3,600

5.0%

2023

Profit margin

$220 $4,000

5.5%

2024

Profit margin

$270 $4,500

6.0%

The profit margin has increased steadily from 5.0% in 2022 to 6.0% in 2024. This improvement is in the opposite direction of the trend experienced with the declining gross profit margin calculated in part (b) above. These opposing trends can only be achieved by reducing operating expenses. Although interest costs, income tax expense, and sales increased, Pronghorn managed to have declining operating expenses over the three-year period.

PROBLEM 14.4A (CONTINUED) d. Debt to total assets

= Total liabilities Total assets

2022

Debt to total assets

$2,000 $4,400

45.5%

2023

Debt to total assets

$2,870 $5,380

53.3%

2024

Debt to total assets

$3,670 $6,230

58.9%

Times interest earned

Net income + Interest expense + Income tax expense (EBIT) Interest expense

2022

Times interest earned

$180 + $70 + $60 $70

4.4

times

2023

Times interest earned

$220 + $130 + $75 $130

3.3

times

2024

Times interest earned

$270 + $190 + $90 $190

2.9

times

Pronghorn has been using debt to finance operations. As demonstrated by the comparisons of the return on assets ratio with the return on shareholders‘ equity ratio, [refer to part (g) below], Pronghorn has used leverage to produce additional income in excess of the cost to service the debt. Pronghorn is less solvent in 2024 than it was in 2022 because the debt to total assets ratio increased and the times interest earned decreased.

PROBLEM 14.4A (CONTINUED) e. 2022 $1,300 180 (1,400) $80

2023 $1,400 220 (1,510) $110

2024 $1,510 270 (1,560) $220

Cash dividends declared Net income 2022

2023

2024

Beginning balance retained earnings Add: Net income Less Ending balance retained earnings Dividends declared and paid Payout ratio

Payout ratio

44.4%

50.0%

81.5%

The payout ratio increased over the three-year period at a much higher rate than the level of increase in net income. Net income increased 22% in 2023 [($220 - $180) ÷ $180] and 23% in 2024 [($270 - $220) ÷ $220]. On the other hand, the amount of dividends declared and paid increased by 38% [($110 - $80) ÷ $80] in 2023 and 100% in 2024 [($220 - $110) ÷ $110]. Since there was no change in the share ownership in the threeyear period, shareholders would have likely insisted that more dividends be paid out as net income improved. The dividends paid would have adversely affected the liquidity of the business at the time of payment but overall the liquidity improved over the three years as is demonstrated in part (a) above for the current ratio.

PROBLEM 14.4A (CONTINUED) f. Asset Turnover

Sales

Average total assets

2022

Asset turnover

2023

Asset turnover

2024

Asset turnover

Asset turnover X Profit margin (c) above = Return on assets

$3,600 $4,400 + $4,400 2 $4,000 $5,380 + $4,400 2 $4,500 $6,230 + $5,380 2 2022 .82 5.0% 4.1%

0.82 times

0.78 times

2023 .82 5.5% 4.5%

2024 .78 6.0% 4.7%

The major driver of the return on assets is the profit margin.

PROBLEM 14.4A (CONTINUED) g. Return on common shareholders‘ equity

Net income – Preferred dividends declared Average common shareholders‘ equity

2022

Return on common shareholders' equity

2023

Return on common shareholders' equity

2024

Return on common shareholders' equity

$180 $2,400 + $2,400 2

$2,510

$220 + $2,400 2 $270

$2,560

7.5%

9.0%

10.7%

+ $2,510 2

The return on common shareholders‘ equity is higher each year than the return on assets due to the presence of leverage. Pronghorn has used debt to produce additional net income in an amount that exceeds the cost of the debt. The difference between the two ratios is increasing each year as the company is making more effective use of leverage. LO 2,3,4 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.5A

1. Current ratio

2. Receivables turnover 3. Inventory turnover

2024

2023

$186,000 = 1.8 :1 $102,000

$174,000 = 1.5 :1 $120,000

$890,000 *

$73,500* + $73,000* 2

$540,000 (

$90,000 + $76,500 2

$625,000

= 12.2 times *

$73,000* + $86,000* 2

$355,000

= 6.5 times )

= 7.9 times +

$76,500 + $105,000

(

= 3.9 times )

4. Debt to total assets

$288,000 = 28.1% $1,026,000

$247,500 = 29.7% $834,000

5. Times interest earned

$170,000 = 14.2 times $12,000

$144,000 = 9.6 times $15,000

6. Free cash flow

$125,000 - $200,000 - $125,900** = ($200,900)

$160,000 – $125,000 - $92,900 *** = ($57,900)

7. Gross profit margin

$350,000 = 39.3% $890,000

$270,000 = 43.2% $625,000

8. Profit margin

$136,400 = 15.3% $890,000

$110,400 = 17.7% $625,000

9. Asset turnover

$890,000

10. Return on assets

$1,026,000 + $834,000 2

$136,400 *

$1,026,000 + $834,000 2

$625,000

= 1.0 times

$834,000 + $725,000 2

$110,400

= 14.7% +

= 0.8 times +

$834,000 + $725,000 2

= 14.2% +

PROBLEM 14.5A (CONTINUED) 2. (continued)

* 2. Receivables turnover—Gross accounts receivable: 2024: $66,000 + $7,500 2023: $67,500 + $5,500 2022: $80,000 + $6,000 ** Dividends 2024: $198,000 – ($187,500 + $136,400) = $125,900 *** Dividends 2023: $187,500 – ($170,000 + $110,400) = $92,900 b.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Current ratio Receivables turnover Inventory turnover Debt to total assets Times interest earned Free cash flow Gross profit margin Profit margin Asset turnover Return on assets

Better Better Better Better Better Worse Worse Worse Better Better

2. Overall:

(1)

Liquidity improved in 2024. The current, accounts receivable turnover, and inventory turnover ratios were all better.

(2)

Solvency improved as a result of an improvement in the debt to total assets ratio and the times interest earned, both ratio trends were better. However, negative free cash flow increased. Further analysis shows the company invested in PPE and long term investments.

(3)

Profitability deteriorated because the gross profit margin ratio trend and profit margin ratio trends were worse. The company is making better use of its assets as the asset turnover and return on assets ratios improved. On the other hand, the profit margin ratio trend was worse. Overall, net income improved in 2024 on lower margins.

Although the operating line of credit offers the potential for enhanced liquidity, the fact that it is unused does not affect the current liquidity, solvency or profitability of Forest Hill Corporation.

LO 2,3,4 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.6A a.

We do not normally include the effects of other comprehensive income in the calculation of profitability ratios. It is common practice to use only information from the statement of income for analysis and exclude other comprehensive income amounts. In cases where significant amounts are included in other comprehensive income, these amounts may be included in the profitability ratios to try to understand their impact on the company‘s performance. For Weekender Ltd., the amounts included in other comprehensive income are not significant and should not be included.

Liquidity 2024

Working capital 

Current ratio

Receivables turnover

Average collection period Inventory turnover Days in inventory 

2023

$389,000 – $222,000 = $167,000

$368,000 – $210,400 = $157,600

$389,000 = 1.8:1 $222,000

$368,000 = 1.7:1 $210,400

(

)

365 = 44 days 8.3

( 365 = 78 days 4.7

($108,000 + $4,800 + $79,200 + $2,700) 2

365 = 53 days 6.9

)

(

)

365 = 89 days 4.1

Current assets, 2024 = $84,000 + $114,000 + $156,000 + $35,000 = $389,000 Current assets, 2023 = $80,000 + $108,000 + $147,000 + $33,000 = $368,000 Current liabilities, 2024 = $54,000 + $36,000 + $132,000 = $222,000 Current liabilities, 2023= $50,400 + $40,000 + $120,000 = $210,400

PROBLEM 14.6A (CONTINUED) b. (continued)

Solvency 2024

2023

Debt to total assets

$462,000 = 50.7% $911,000

$391,400 = 50.8% $770,600

Times interest earned

$141,200 = 3.5 times $40,000

$96,000 = 5.3 times $18,000

Free cash flow

$144,000 – $150,000 – $7,600 = $(13,600)

$127,500 – $60,000 – $10,8002 = $56,700

Dividends Paid in 2023 = $139,200 – ($90,000 +$60,000) =$10,800

PROBLEM 14.6A (CONTINUED) b. (continued) Profitability 2024 $74,800 Return on common shareholders‘ equity

$449,000 + $379,200

( 2 = 18.1%

$60,000 )

$74,800 Return on assets

Profit margin

$911,000 + $770,600

( 2 = 8.9%

$74,800 = 6.9 % $1,080,000 $1,080,000 $911,000 + $770,600

2023

$379,200 + $330,000

( 2 = 16.9%

)

$60,000 )

$770,000 + $680,000

( 2 = 8.3%

)

$60,000 = 8.0 % $750,000 $750,000 $770,600 + $680,000

Asset turnover

( 2 = 1.3 times

Gross profit margin

$362,000 = 33.5 $1,080,000

$240,000 = 32.0 % $750,000

Basic earnings per share

$74,800 = $1.87 40,000

$60,000 = $1.50 40,000

Payout

$7,600 = 10.2% $74,800

$10,800 = 18.0% $60,000

)

( 2 = 1.0 times

)

PROBLEM 14.6A (CONTINUED) c.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Working capital Current ratio Receivables turnover Average collection period Inventory turnover Days in inventory Debt to total assets Times interest earned Free cash flow Return on common shareholders‘ equity Return on assets Profit margin Asset turnover Gross profit margin

Better Better Better Better Better Better Better Worse Worse Better Better Worse Better Better

(1)

Weekender‘s liquidity has improved. The current ratio has risen slightly while the receivables turnover and the inventory turnover ratios have improved. Working capital has also improved, however further analysis is required to determine the cause of the improvement.

(2)

Overall, solvency has deteriorated slightly. While the debt to total assets ratio has improved marginally, the times interest earned and free cash flow ratios have deteriorated.

(3)

Weekender‘s profitability has improved as indicated by the increase in the return on common shareholders‘ equity, return on assets, asset turnover and gross profit margin ratios. The profit margin has decreased slightly.

LO 2,3,4,5 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.7A a.

Accounts receivable management can be assessed by reviewing a company‘s average collection period, which indicates how long the company is taking to collect its accounts receivable. Bureau Nouveau‘s average collection period of 31 days is excellent when compared to its credit terms of 30 days. As well, Bureau Nouveau‘s average collection period is better than Supplies Unlimited.

A company‘s ability to manage its inventory can be measured by the days in inventory ratio. Currently Bureau Nouveau is taking 61 days to turn over its inventory, which can also be expressed as approximately every 6 times per year (365 ÷ 61 days). When compared to the days in inventory for Supplies Unlimited of 122 days, it is clear that Bureau Nouveau is turning over its inventory much faster.

Supplies Unlimited has a higher current ratio than Bureau Nouveau. This would normally indicate a greater level of liquidity but in this case, it probably does not. The reason for the higher current ratio is likely due to higher accounts receivable because of a longer collection period and higher inventory due to its higher days in inventory. If a company is slower at collecting its accounts receivables and selling its inventory, it is less liquid. Therefore, Bureau Nouveau is more liquid.

Supplies Unlimited appears to be the more solvent of the two companies. Supplies Unlimited has a lower debt to total assets ratio indicating that Supplies Unlimited has a lower percentage of its assets financed by debt. As well, Supplies Unlimited has a higher times interest earned ratio, indicating that Supplies Unlimited has a better ability to service its debt as interest payments become due.

Supplies Unlimited likely has a higher gross profit margin because it sells a product that has a higher price relative to its cost allowing it to earn a higher gross profit margin. It is also possible to have a higher gross profit because the company can purchase inventory at a lower cost. The profit margin incorporates all of the elements of the gross profit margin in addition to operating expenses, other income and expenses, and income tax. If Supplies Unlimited, which has a higher gross profit margin, also has a lower profit margin, then it is most likely due to operating expenses, other expenses, and/or income tax expense being larger relative to sales for this company and this has caused the profit margin to fall.

PROBLEM 14.7A (CONTINUED) f.

The return on assets can be calculated by multiplying the profit margin by asset turnover. Bureau Nouveau‘s higher return on assets is almost equally due to its higher profit margin and asset turnover ratios, which are both approximately 17%-18% higher than those of Supplies Unlimited.

If a company‘s return on common shareholders‘ equity is greater than its return on assets, this excess arose from the advantage of leverage. The return on assets is 14.3% while the return on common shareholders‘ equity is 26.1%. The 11.8% difference arose because of that company‘s use of debt. The equivalent difference for Supplies Unlimited is only 2.6% because it uses much less debt. Therefore, the use of debt is the larger contributing factor to the return on common shareholders‘ equity than the return on assets.

Bureau Nouveau may have a lower payout ratio than Supplies Unlimited because Bureau Nouveau‘s management has decided to retain income in the business to finance future growth.

Market price per share = Price-earnings ratio × Basic earnings per share Bureau Nouveau‘s market price per share = 29 × $3.50 = $101.50 Supplies Unlimited‘s market price per share = 45 × $2.40 = $108.00

The price-earnings ratio reflects investors‘ assessment of the future prospects of a company. As indicated by its higher price-earnings ratio, investors appear to believe that Supplies Unlimited has the better possibility for growing its income.

LO 2,3,4 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.8A a.

Despite Buck‘s having a higher current ratio, one may argue that Buck‘s has less liquidity than Filo‘s or the industry average because of its higher average collection period and days in inventory. Buck‘s receivables and inventory turnover are more or less in line with the industry average, however, Filo‘s metrics are better than of the industry average.

Buck‘s is more solvent than Filo‘s. Although its debt to total assets ratio is higher than Filo‘s (but less than the industry average), this indicates that Buck‘s finances more of its assets than Filo‘s does but less than the industry does. However, Buck‘s times interest earned is much better than Filo‘s and is also better than the industry average. Filo‘s times interest earned ratio is significantly lower than the industry average. This indicates that Buck‘s has a higher capacity to service its debt because its income before income tax and interest is much higher relative to its interest expense and because of this, it is more solvent than Filo‘s.

Buck‘s is the more profitable of the two companies. Buck‘s has a higher gross profit margin and this likely is the reason for its higher profit margin than Filo‘s. However, despite Filo‘s having a significantly lower gross profit margin than Buck‘s, this disadvantage narrows to only 2.3% (12.1% - 9.8%) when comparing the companies‘ profit margins. This is likely due to lower operating expenses and lower interest expense (due to its lower debt) for Filo‘s. Although the industry‘s gross profit is higher than Buck‘s and Filo‘s, its profit margin is lower (likely due to higher operating expenses and interest given the industry‘s high debt levels). Recall that the return on assets is equal to the profit margin times the asset turnover. Although Buck‘s has a high profit margin, its return on assets is lower than Filo‘s because its asset turnover is lower than Filo‘s and the industry average. The industry average for return on assets is the lowest and this is due mainly to its lower profit margin ratio. Buck‘s leverage increases its return on common shareholders‘ equity to 15.4% but even though Filo‘s has less leverage its return on common shareholders‘ equity is 17.7%, primarily due to its higher return on assets. However, the industry has a very high degree of leverage and this boosts the return for common shareholders‘ equity to 19.8% which exceeds that of both Buck‘s and Filo‘s. Filo‘s is more profitable than Buck‘s when measured by the return on common shareholders‘ equity, but both companies are less profitable than the industry.

PROBLEM 14.7A (CONTINUED) d.

Investors seem to favour Filo‘s as it has a slightly higher price-earnings ratio and significantly higher dividend yield. Buck‘s price-earnings ratio is lower than the industry average, showing that investors on average favour other competitors in the industry and this is most likely due to Buck‘s lower return on shareholders‘ equity and lower dividend yield. Because Filo‘s is more profitable than Buck‘s, one would expect Filo‘s to have a higher priceearnings ratio than Buck‘s, which it does. Filos‘ price-earnings ratio is only slightly higher than the industry average, which is surprising, given the industry‘s higher return on common shareholders‘ equity but another factor that may make investors favour Filo‘s is its higher dividend yield. LO 2,3,4 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.9A a. and b.

(a) Higher

(b) Higher

(1) Working capital

no impact

Company B

(2) Profit Margin

Company B

(3) Debt to total assets

Company A

Companies may calculate and measure performance using normalized earnings to remove the effect of nonrecurring items. Since these items are often not comparable among other companies, comparing normalized earnings may be more useful than comparing net incomes.

d. Yes. The impact that different accounting policies and estimates will have on each company‘s net income and ratios must be considered so that the comparison is meaningful. e. An analyst must also consider the use of professional judgement by management in determining the estimates it makes in preparation of the financial statements and whether the company is involved in more than one industry, (that is, how diversified the company is). LO 5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.1B a.

LULULEMON ATHLETICA INC. Horizontal Analysis of Statement of Financial Position (% of base year amount) January 30, 2022, January 31, 2021 and February 2, 2020 2022

2021

2020

Assets Current assets Non-current assets Total assets

144.6 158.0 150.6

117.5 139.9 127.6

100.0 100.0 100.0

Liabilities and Shareholders‘ Equity Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders‘ equity Total liabilities and shareholders‘ equity

226.6 112.4 165.7 140.4

142.4 104.9 122.4 131.0

100.0 100.0 100.0 100.0

150.6

127.6

100.0

PROBLEM 14.1B (CONTINUED) a. (continued) LULULEMON ATHLETICA INC. Horizontal Analysis of Comprehensive Statement of Income (of base year amount) Year Ended January 30, 2022, January 31, 2021 and February 2, 2020 2022 2021 2020 Sales Cost of goods sold Gross profit Operating expenses Income from operations Other income Income before income tax Income tax expense Net income Other comprehensive loss Comprehensive income

157.3 150.8 162.3 170.6 149.9 12.5 148.7 143.0 150.9 237.5 149.8

110.6 110.4 110.8 123.2 92.2 -12.5 91.3 91.6 91.2 -587.5 99.7

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

PROBLEM 14.1B (CONTINUED) b. (in U.S. $ millions) LULULEMON ATHLETICA INC. Horizontal Analysis of Comprehensive Statement of Financial Position ((% change between periods) January 30, 2022 and January 31, 2021 2022 Increase (Decrease) 2021 Amount % Assets Current assets Non-current assets

Increase (Decrease) Amount %

$2,615 2,327

$491 266

23.1 12.9

$2,124 2,061

316 588

17.5 39.9

$4,942

757

18.1

$4,185

904

27.6

Liabilities and Shareholders' Equity Current liabilities Long-term liabilities

$1,405 797

$522 53

59.1 7.1

$883 744

$263 35

42.4 4.9

Total liabilities Shareholders' equity

2,202 2,740

575 182

35.3 7.1

1,627 2,558

298 606

22.4 31.0

Total liabilities and shareholders' equity

$4,942

$757

18.1

$4,185

904

27.6

PROBLEM 14.1B (CONTINUED) b. (continued) LULULEMON ATHLETICA INC. Horizontal Analysis of Statement of Comprehensive Income (% change between periods) Year Ended January 30, 2022 and January 31, 2021 2022

Increase (Decrease) Amount %

2021

Increase (Decrease) Amount %

Sales Cost of goods sold

$6,257 2,648

$1,855 710

42.1 36.6

$4,402 1,938

$423 182

10.6 10.4

Gros profit Operating expenses

3,609 2,276

1,145 632

46.5 38.4

2,464 1,644

241 310

10.8 23.2

Income from operations Other income

1,333 1

513 2

62.6 200.0

820 (1)

(69) (9)

-7.8 -112.5

Income before income tax Income tax expense

1,334 359

515 129

62.9 56.1

819 230

(78) (21)

-8.7 -8.4

Net income Other comprehensive income (loss)

975 (19)

386 (66)

65.5 -140.4

589 47

(57) 55

-8.8 687.5

Comprehensive income

$956

$320

50.3

$636

$(2)

-0.3

PROBLEM 14.1B (CONTINUED) b.

The primary driver of the company‘s net income appears to be the increase in sales. In 2021 and 2022, cost of goods sold increased at a slower rate than did sales, which resulted in an increase in the gross profit margin ratio. For the line item Other income, because the actual amounts are so small, they are often left out of the horizontal analysis because their presence becomes a distraction. The practice is not to show the figures so that the reader can concentrate exclusively on the relevant information, while still being informed why a blank entry appears in the analysis. Alternately, the amounts are grouped with operating expenses. In the statement of financial position, total liabilities increased at a faster rate than did total assets in 2022. There was a decrease in income from operations and net income in 2021, in spite of the increase in sales. The remaining elements on the statement of financial position show increases in line with the increased volume of business demonstrated on the statement of income.

LO 1 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.2B a.

CANADIAN PACIFIC RAILWAY LIMITED Vertical Analysis of Statement of Financial Position December 31 (in millions) 2021

2020

82 819 451 1,352 66,825 68,177

0.1 1.2 0.7 2.0 98.0 100.0

Liabilities and Shareholders‘ Equity Liabilities Current liabilities 3,159 Non-current liabilities 31,189 Total liabilities 34,348 Shareholders‘ equity 33,829 Total liabilities and shareholders‘ equity 68,177

Assets Cash Accounts receivable Supplies and other Current assets Non- current assets Total assets

2019

147 825 349 1,321 22,319 23,640

0.6 3.5 1.5 5.6 94.4 100.0

133 805 272 1,210 21,157 22,367

0.6 3.6 1.2 5.4 94.6 100.0

4.6 45.7 50.4 49.6

2,653 13,668 16,321 7,319

11.2 57.8 69.0 31.0

2,292 13,006 15,298 7,069

10.2 58.1 68.4 31.6

100.0

23,640

100.0

22,367

100.0

PROBLEM 14.2B (CONTINUED) a. (continued) CANADIAN PACIFIC RAILWAY LIMITED Vertical Analysis of Statement of Comprehensive Income Year Ended December 31 (in millions) 2021 Revenues Operating expenses Income from operations Other income Interest expense Income before income tax Income tax expense Net income Other comprehensive Income (loss) Comprehensive income

$ 7,995 4,789 3,206 854 (440) 3,620 768 2,852 711 3,563

2020 100.0 59.9 40.1 10.7 (5.5) 45.3 9.6 35.7

$ 7,710 4,399 3,311 349 (458) 3,202 758 2,444

8.9 44.6

(292) 2,152

2019 100.0 57.1 42.9 4.5 (5.9) 41.5 9.8 31.7

$ 7,792 4,668 3,124 470 (448) 3,146 706 2,440

100.0 59.9 40.1 6.0 (5.7) 40.4 9.1 31.3

(3.8) 27.9

(479) 1,961

(6.1) 25.2

Note: The percentages shown in the above table do not add perfectly because of discrepancies that occur from rounding the results to one decimal place.

Canadian Pacific Railway operates in very capital-intensive industry. Non-current assets are expected to be very high, as is debt to finance these assets. The percentage of assets dedicated to non-current assets increased in 2021. On the other hand, the percentage of noncurrent liabilities declined in 2020 and in 2021. On the statement of comprehensive income, we note that income from operations, as a percentage of revenue, increased in 2020 and returned to the same level in 2021 as was experienced in 2019. Income before income tax increased in both 2020 and 2021 due to higher other income and lower interest expense. The most significant changes occurring in 2021 was the strong other comprehensive income following two years of other comprehensive losses.

LO 1 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.3B a.

Cost of goods sold grew a bit faster than sales in 2022 and 2023 but got worse in 2024, when costs of goods sold increased by 2.4% of revenue.

Although the income before income tax has remained constant as a percentage of each year‘s revenue over the past four years, the amounts have increased in absolute terms each year, as shown in the horizontal analysis statement. This demonstrates that the percentage increase in income before income tax is increasing at about the same pace as the percentage increase in revenue.

Although most expenses have grown in proportion to the increase in revenue, this is not the case for interest expense. Interest expense is decreasing over the four-year period. This reduction is likely due to the reduction in interest rates charged and the amount of the debt on the statement of financial position. Operating expenses have been growing at a faster rate than revenue. Although the horizontal analysis draws attention to a major increase in the dividend income, that attention is later diminished when inspecting the vertical analysis statement of income. That statement reveals that in absolute terms, the amount of dividend income involved is very small and so a major increase of 140% over a three-year period turns out to have a modest effect on the net income.

The financial statements themselves, along with some ratio analysis, would also be useful in assessing this company‘s performance and financial position. Comparisons of this company to other businesses in the industry, as well as understanding any external economic or other factors, would also be useful.

LO 1 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.4B a. Receivables turnover

Credit sales

Average gross accounts receivable

2022

Receivables turnover

2023

Receivables turnover

2024

Receivables turnover

Inventory turnover

2022

Inventory turnover

2023

Inventory turnover

2024

Inventory turnover

$3,600 $500

+ 2

$500

$550

$4,000 + 2

$500

$600

$4,500 + 2

$550

$800

$1,800 + 2

$800

$700

$1,900 + 2

$800

$700

$2,000 + 2

$700

7.2

times

7.6

times

7.8 times

Cost of goods sold Average inventory

2.3 times

2.5 times

2.9 times

PROBLEM 14.4B (CONTINUED) a. (continued)

Current ratio

Current assets Current liabilities

2022

Current ratio

$1,380 $400

3.5

2023

Current ratio

$1,480 $500

3.0

2024

Current ratio

$1,680 $600

2.8

St. Lawrence‘s liquidity has improved because both the receivable and inventory turnovers have steadily increased. On the other hand, the current ratio has deteriorated steadily but is still acceptable. Overall, the liquidity has improved. b. Gross profit margin

Gross profit Sales

2022

Gross profit margin

$1,800 $3,600

50.0%

2023

Gross profit margin

$2,100 $4,000

52.5%

2024

Gross profit margin

$2,500 $4,500

55.6%

St. Lawrence must have negotiated reduced prices for the goods they purchase because the gross profit margin keeps improving. The gross profit margin increased from 50% in 2022 to 55.6% in 2024.

PROBLEM 14.4B (CONTINUED) c. Profit margin

Net income Sales

2022

Profit margin

$180 $3,600

5.0%

2023

Profit margin

$250 $4,000

6.3%

2024

Profit margin

$320 $4,500

7.1%

The profit margin has increased steadily from 5.0% in 2022 to 7.1% in 2024. This improvement is consistent with the direction of the trend experienced with the increasing gross profit margin calculated in part (b) above.

PROBLEM 14.4B (CONTINUED) d. Debt to total assets

= Total liabilities Total assets

2022

Debt to total assets

$2,180 $4,580

47.6%

2023

Debt to total assets

$2,810 $5,380

52.2%

2024

Debt to total assets

$3,470 $6,280

55.3%

Times interest earned

Net income + Interest expense + Income tax expense (EBIT) Interest expense

2022

Times interest earned

$180 + $70 + $60 $70

4.4

times

2023

Times interest earned

$250 + $80 + $90 $80

5.3

times

2024

Times interest earned

$320 + $100 + $110 $100

5.3

times

St. Lawrence has been using debt to finance operations. As demonstrated by the comparisons of return on assets ratio with the return on shareholders‘ equity ratio, [refer to part (g) below], St. Lawrence has used leverage to produce additional income in excess of the cost to service the debt. St. Lawrence is less solvent in 2024 than it was in 2022 because the debt to total assets ratio increased but the times interest earned also increased.

PROBLEM 14.4B (CONTINUED) e. 2022 $1,300 180 (1,400) $80

2023 $1,400 250 (1,570) $80

Cash dividends declared Net income 2022

2023

Beginning balance retained earnings Add: Net income Less Ending balance retained earnings Dividends declared and paid Payout ratio

Payout ratio

44.4%

2024 $1,570 320 (1,810) $80

2024

32.0%

25.0%

The payout ratio decreased over the three-year period despite increasing net income in the same period. Net income increased 39% in 2023 [$250 - $180) ÷ $180] and 28% in 2024 [$320 - $250) ÷ $250]. On the other hand, the dividends declared and paid remained at $80 each year. Since net income increased and the amount of dividends remained the same, the payout ratio decreased. There was no change in the share ownership in the three-year period. Shareholders are likely satisfied with receiving the same amount of dividends each year. The payment of the dividends would have adversely affected the liquidity of the business at the time of payment but overall the current ratio remains extremely strong as demonstrated in part (a) above.

PROBLEM 14.4B (CONTINUED) f. Asset Turnover

Sales

Average total assets

2022

Asset turnover

2023

Asset turnover

2024

Asset turnover

Asset turnover X Profit margin (c) above = Return on assets

$3,600 $4,580 + $4,580 2 $4,000 $5,380 + $4,580 2 $4,500 $6,280 + $5,380 2 2022 .79 5.0% 4.0%

0.79 times

0.80 times

0.77 times

2023 .80 6.3% 5.0%

2024 .77 7.1% 5.5%

The major driver of the return on assets is the profit margin.

PROBLEM 14.4B (CONTINUED) g. Return on common shareholders‘ equity

Net income – Preferred dividends declared Average common shareholders‘ equity

2022

Return on common shareholders' equity

2023

Return on common shareholders' equity

2024

Return on common shareholders' equity

$180 $2,400 + $2,400 2 $250 $2,570 + $2,400 2 $320 $2,810 + $2,570 2

7.5%

10.1%

11.9%

The return on common shareholders‘ equity is higher each year than the return on assets due to the presence of leverage. St. Lawrence has used debt to produce additional net income in an amount that exceeds the cost of the debt. The difference between the two ratios is increasing each year as the company is making more effective use of leverage. LO 2,3,4 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.5B a. 2024

2023

1. Current ratio

$265,000 = 4.2 :1 $63,500

$194,000 = 3.8 :1 $51,000

2. Receivables turnover

$890,000

$800,000

3. Inventory turnover

$83,650* + $52,750* 2

$490,000 $85,000 + $45,000

(

= 13.0 times +

$450,000

= 7.5 times )

$52,750* + $55,400*

$45,000 + $50,000

(

= 14.8 times + = 9.5 times

)

4. Debt to total assets

$308,500 = 32.1% $960,000

$116,000 = 18.9% $615,000

5. Times interest earned

$134,000 = 4.8 times $27,750

$90,000 = 10.3 times $8,750

6. Free cash flow

$107,500 - $325,000 - $30,000** = ($247,500)

$91,000 – $75,000 - $15,000 *** =$1,000

7. Gross profit margin

$400,000 = 44.9% $890,000

$350,000 = 43.8% $800,000

8. Profit margin

$85,000 = 9.6% $890,000

$65,000 = 8.1% $800,000

9. Asset turnover 10. Return on assets

$890,000 *

$960,000 + $615,000 2

$85,000 $960,000 + $615,000

(

$800,000

= 1.1 times

$615,000 + $540,000 2

$65,000

= 10.8% )

= 1.4 times +

$615,000 + $540,000

(

= 11.3% )

PROBLEM 14.5B (CONTINUED) a. (continued)

1. Current ratio: 1 Current assets 2024 = $30,000 + $80,000 + $85,000 + $70,000 = $265,000 2 Current assets 2023 = $24,000 + $50,000 + $45,000 + $75,000 = $194,000 2. Receivables turnover—Gross accounts receivable: * 2024: $80,000 + $3,650 = $83,650 * 2023: $50,000 + $2,750 = $52,750 * 2022: $53,000 + $2,400 = $55,400 ** Dividends 2024: $235,000 – $180,000 – $85,000 = $30,000 *** Dividends 2023: $180,000 – $130,000 – $65,000 = $15,000

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Current ratio Receivables turnover Inventory turnover Debt to total assets Times interest earned Free cash flow Gross profit margin Profit margin Asset turnover Return on assets

Better Worse Worse Worse Worse Worse Better Better Worse Worse

PROBLEM 14.5B (CONTINUED) c.

Overall: (1)

Liquidity deteriorated in 2024. Although the current ratio improved, accounts receivable turnover and inventory turnover ratios were worse.

(2)

Solvency deteriorated because the debt to total assets ratio increased, the times interest earned ratio decreased and free cash flow is a large negative amount in 2024 compared to essentially nil in 2023.

(3)

Profitability improved because the gross profit and profit margin ratios trends were better. On the other hand, the asset turnover and return on assets ratios are worse. Overall, the profitability improved as the profit increased by a substantial amount in 2024.

LO 2,3,4 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.6B a.

We do not normally include the effects of other comprehensive income in the calculation of profitability ratios. It is common practice to use only information from the statement of income for analysis and exclude other comprehensive income amounts. In cases where significant amounts are included in other comprehensive income, these amounts may be included in the profitability ratios to try to understand their impact on the company‘s performance. For Clack Ltd., the amounts included in other comprehensive income are not significant and should not be included.

Liquidity 2024

Working capital 

2023

$575,000 – $443,750 = $131,250

$460,000 – $265,000 = $195,000

Current ratio

$575,000 = 1.3 :1 $443,750

$460,000 = 1.7 :1 $265,000

$1,100,000

$950,000

Receivables turnover

($100,000 + $10,000 + $87,000 + $5,000)

($87,000 + $5,000 + $80,000 + $3,000)

Average collection period

* = 10.9 times

365 = 33 days 10.9

(

Days in inventory

365 = 192 days 1.9



$400,000 + $300,000 2

* = 10.9 times

365 = 33 days 10.9

$650,000

Inventory turnover

$635,000

= 1.9 times )

$300,000 + $320,000

(

= 2.0 times )

365 = 183 days 2.0

Current assets, 2024 = $50,000 + $100,000 + $400,000 + $25,000 = $575,000 Current assets, 2023 = $42,000 + $87,000 + $300,000 + $31,000 = $460,000 Current liabilities, 2024 = $150,000 + $245,000 + $48,750 = $443,750 Current liabilities, 2023 = $50,000 + $190,000 + $25,000 = $265,000

PROBLEM 14.6B (CONTINUED) b. (continued) Solvency 2024

2023

Debt to total assets

$643,750 = 48.0 % $1,340,000

$390,000 = 39.6 % $985,000

Times interest earned

$165,000 = 5.5 times $30,000

$100,000 = 10.0 times $10,000

Free cash flow

$223,000 – $92,000 – $4,000 = $127,000

$135,500 – $50,000 – $4,000 = $81,500

PROBLEM 14.6B (CONTINUED) b. (continued) Profitability 2024 Return on common shareholders‘ equity

2023

$101,250

$67,500

$696,250 + $595,000

$595,000 + $531,500

( = 15.7%

)

( 2 = 12.0%

$101,250 Return on assets

Profit margin

Asset turnover

$1,340,000 + $985,000

( = 8.7%

$67,500 )

$101,250 = 9.2 % $1,100,000

(

)

$985,000 + $1,075,000

( = 6.6%

$67,500 = 7.1 % $950,000

$1,100,000

$950,000

$1,340,000 + $985,000

$985,000 + $1,075,000

)

(

)

= 0.9 times

Gross profit margin

$450,000 = 40.9 % $1,100,000

$315,000 = 33.2 % $950,000

Basic earnings per share

$101,250 = $1.01 100,000

$67,500 = $0.68 100,000

Payout

$4,000 = 4.0% $101,250

$4,000 = 5.9% $67,500

PROBLEM 14.6B (CONTINUED) c.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Worse Worse Unchanged Unchanged Worse Worse Worse Worse Better Better Better Better Unchanged Better

(1)

Track‘s overall liquidity has declined in 2024. Its working capital and current ratio have declined and it is taking longer to turn over its inventory. The receivables turnover and average collection period have stayed the same.

(2)

Track‘s overall solvency has deteriorated. This is evidenced by the increase in debt to total assets ratio and the decrease in times interest earned.

(3)

Track‘s overall profitability has improved as evidenced by the increase in return on common shareholders‘ equity, return on assets, profit margin, gross profit margin, and basic earnings per share. The asset turnover ratio has remained constant.

LO 2,3,4,5 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.7B a.

Accounts receivable management can be assessed by reviewing each company‘s receivables turnover ratio and average collection period. Flavour‘s receivables turnover of 10.4 times yields an average collection period of 35 days (365 ÷ 10.4) days. This is reasonable when compared to its credit terms of 30 days. Refresh‘s average collection period of 37 days (365 ÷ 9.8) days is worse than that of Flavour.

Flavour appears to be managing its inventories better than Refresh with days in inventory of 37 (365 ÷ 9.9) versus 63 (365 ÷ 5.8). This is assessed by reviewing the inventory turnover ratio and the average number of days in inventory.

Refresh likely has a higher current ratio than Flavour because of its lower receivables and inventory turnover as shown above. It is likely that the higher current ratio is therefore due to higher accounts receivable and higher inventory and not due to higher cash or lower current liabilities. In this case, having a higher current ratio is unfavourable.

Refresh appears to be the more solvent of the two companies. Refresh has a lower debt to total assets ratio, indicating that Refresh has a lower percentage of its assets financed by debt. As well, Refresh has a higher times interest earned ratio indicating that Refresh has a better ability to service its debt as interest payments become due.

Refresh could have a higher gross profit margin because it either sells its products at a higher price or obtains these products at a lower cost. It would have a lower profit margin because any advantage received from the higher gross profit margin was lost due to higher operating expenses, interest expense, or income tax expense, which caused the profit margin to be lower for this company. Refresh may sell a product that is more expensive and commands a higher gross profit margin. A clue to this is its significantly slower inventory turnover. On the other hand, to achieve sales of high priced items, more expenses have to be incurred in obtaining the sales, such as advertising, which then leads to a lower profit margin.

PROBLEM 14.7B (CONTINUED) f.

The asset turnover is the same for both companies. Therefore, Flavour‘s higher return on assets is attributable to Flavour‘s higher profit margin.

If a company‘s return on common shareholders‘ equity is greater than its return on assets, this excess arose from the advantage of leverage. The return on assets is only 10.2% while the return on common shareholders‘ equity is 29.8%. The difference between the two is 19.6% and arose because of that company‘s use of debt. The equivalent difference for Refresh is 16.4%. Therefore, the use of debt is a greater contributing factor to the return on common shareholders‘ equity than the return on assets.

Refresh may have a lower payout ratio than Flavour because Refresh‘s management decided to retain income in the business to finance future growth.

Market price per share Refresh = Price-earnings ratio × Basic earnings per share = 14.3 × $0.98 = $14.01 Flavour = Price-earnings ratio × Basic earnings per share = 20.3 × $1.37 = $27.81

The price-earnings ratio reflects investors‘ assessment of the future prospects of a company. As indicated by its higher price-earnings ratio, investors appear to believe that Flavour has the better possibility for growing its net income in the future.

LO 2,3,4 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.8B a.

Best Tools appears to be more liquid. Although Snappy Tools‘ current ratio is higher than Best Tools‘, its receivables turnover and inventory turnover are much lower than Best Tools‘. This indicates that some of the key current assets may not be as liquid and are inflating the current ratio.

By reviewing the debt to total assets ratio, we can see Snappy Tools has significantly more debt than Best Tools relative to its assets and a level of double the industry average. However, Snappy Tools has a higher times interest earned ratio which indicates it has a better ability to service its debt as interest payments become due and appears to be the more solvent of the two companies.

Snappy Tools has a higher return on common shareholders‘ equity, return on assets, profit margin, and gross profit margin than Best Tools and the industry. Best Tools‘ return on common shareholders‘ equity, return on assets, and profit margin ratios are lower than the industry average. All of this indicates that Snappy Tools is the more profitable company.

Investors seem to favour Snappy Tools as it has the higher priceearnings ratio, large payout ratio, and much higher dividend yield. This is consistent with (c), as you would expect investors to favour the more profitable company. Investors must be anticipating better future profitability from Snappy Tools.

LO 2,3,4 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 14.9B a. and b. (a) Higher No impact

(b) Higher

Debt to total assets

Company B

Company A

Profit margin

Company A

No impact

(1)

Current ratio No impact

(2) (3)

Yes. The impact the different accounting policies will have on each company‘s net income and ratios must be considered. Otherwise, the comparison would not be as meaningful.

Companies may calculate and measure performance using EBITDA to remove the effect of interest, income taxes, and depreciation. Since these items are often not comparable among other companies, comparing EBIDTA may be more useful than comparing net incomes.

An analyst must also consider the use of professional judgement by management in determining the estimates it makes in preparation of the financial statements and whether the company is involved in more than one industry, (that is, how diversified the company is).

LO 5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

ACR14.1

ACCOUNTING CYCLE REVIEW

a. MANUTECH LTD.

Vertical Analysis of Statement of Income Year Ended December 31 2024 Amount Percent

2023 Amount

Percent

$1,470,000

100.0%

$1,100,000

100.0%

Cost of goods sold

735,000

50.0%

655,000

59.5%

Gross profit

735,000

50.0%

445,000

40.5%

Operating expenses

313,500

21.3%

270,000

24.5%

Income from operations

421,500

28.7%

175,000

15.9%

Interest expense

61,500

4.2%

53,600

4.9%

Income before income tax Income tax expense

360,000 90,000

24.5% 6.1%

121,400 30,350

11.0% 2.8%

$ 270,000

18.4%

91,050

8.3%

Sales

Net income

Note: The percentages shown in the above table do not add perfectly because of discrepancies that occur from rounding the results to one decimal place.

As demonstrated in the vertical analysis above, the profit margin has increased as a percentage of sales from 8.3% to 18.4%. By 2024, the profit margin exceeds the industry average. The most apparent explanation for the substantial increase in profit margin is the 9.5% reduction in cost of goods sold as a percentage of sales. This may be a result of Manutech‘s investment in a customer relationship management system. It appears that the use of this system has resulted in a recovery from the decline in 2023 sales. The system should be able to provide management with the necessary feedback on purchasing trends and from repeat sales that have generated these positive results.

ACR14.1 (CONTINUED b. Ratio

Manutech Ltd.

$292,000

Current ratio

Industry

= 1.6:1

2.0:1

$185,000

Receivables turnover

$1,470,000 ($150,000 + $105,000) 2

Average collection period

= 11.5 times

365 = 32 days 11.5

Inventory

$735,000

turnover

($112,000 + $90,000)

28 days

= 7.3 times

Days in inventory

365 = 50 days 7.3

40 days

Compared to the industry average, Manutech has a lower current ratio, and is slower than the industry in collecting its accounts receivable and selling its inventory. Manutech is less liquid than the industry average.

ACR14.1 (CONTINUED) c. Ratio

Debt to total assets

Times interest earned

Manutech Ltd.

$815,000

= 53.9%

Industry

50.0%

$1,512,000

$421,500 = 6.9 times $61,500

5.0 times

Manutech slightly exceeds the industry average in the amount of assets financed by debt but can cover its interest costs more comfortably than others in its industry.

ACR14.1 (CONTINUED) d. Ratio Gross profit margin

Manutech Ltd.

$735,000

Industry

= 50.0%

44.5%

$1,470,000 Profit margin

$270,000 $1,470,000

= 18.4%

15.1%

Asset turnover

$1,470,000 ($1,512,000 + $1,359,500) 2

= 1.0 times

0.8 times

Return on assets

$270,000 ($1,512,000 + $1,359,500) 2

= 18.8%

12.5%

Compared to the industry averages, Manutech is stronger on all profitability ratios.

ACR14.1 (CONTINUED) e. MANUTECH LTD. Statement of Cash Flows—Partial Year Ended December 31, 2024

Net cash provided by operating activities

$355,500

Investing activities Purchase of management system Net cash used in investing activities

$(300,000)

Financing activities Issue of bank loan Repayment of mortgage payable Payment of dividends Net cash used in financing activities

$ 85,000 (20,000) (170,000)

(300,000)

Net decrease in cash Cash, January 1 Cash, December 31

(105,000) (49,500) 79,500 $ 30,000

As was explained in part (a), the major improvements in the profitability for Manutech were achieved following the $300,000 investment in a customer relationship management system. Although some of this investment seems to have been financed through a bank loan, the remainder was obtained from operations. In addition to this, almost half of the cash generated from operations was disbursed in dividends. The total amount of the dividends is extremely high compared to net income. These two factors are the main reasons why the cash position was not higher. LO 1,2,3,4 BT: AN Difficulty: M Time: 70 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.1

FINANCIAL STATEMENT IMPACT

A company is having difficulty in collecting accounts receivable A company is paying its accounts payable more slowly to maintain its cash at a constant amount A company has estimated a higher than normal allowance for expected credit losses this year A company has had significantly more inventory thefts this year A company's inventory has been piling up because demand for these items has fallen significantly A company has obtained an operating line of credit from its bank but has not used any portion yet

A company has increased its sales prices on the products it sells, and the cost of those products is unchanged A company's income tax rate has decreased A company has sold off warehouse locations that were too costly and this has had no effect on sales The interest rate on a company's debt has increased A company's operating expenses have decreased

Receivables Turnover Decrease

Inventory Turnover No effect

Current Ratio Increase

No effect

Decrease

No effect

Decrease

No effect

Increase

Decrease

No effect

Decrease

Increase

No effect

Gross Profit Margin Increase

Profit Margin Increase

Asset Turnover Increase

No effect

Increase

No effect

Increase

No effect

Decrease

No effect

Increase

No effect

CT14.1 (CONTINUED)

A company's net income increased by 10%. Its investors reacted favourably by increasing the share price by 20% A company had no change to its net income this year, and cut its dividend by 5%. Its share price fell by 10% A company's net income decreased by 50% this year but the company did not reduce its dividends. Its share price fell by 30% A company replaced its CEO and when this was announced, the share price increased by 10%

Price-Earnings Ratio Increase

Dividend Yield Decrease

Payout Ratio Decrease

Decrease

Increase

Decrease

Increase

Decrease

No effect

LO 2,4 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.2

FINANCIAL REPORTING CASE

a. THE KROGER CO. Horizontal Analysis of Statement of Income (% of base year amount) Year Ended

Statement of income Sales Cost of goods sold Gross profit Operating expenses Income from operations Other income and expenses1 Interest expense Income before income tax Income tax expense Net income

2022

2021

2020

112.8 112.8 112.4 108.6 154.5

108.4 106.6 114.5 113.7 123.5

94.7 103.5 82.1 110.2

90.2 170.1 166.7 171.2

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

2022 Statement of financial position Cash Accounts receivable Inventory Other Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders‘ equity Total liabilities and shareholders‘ equity 1

456.4 107.2 95.8 102.4 111.8 107.4 108.5 114.6 104.0 108.1 110.0 108.5

2021 422.8 104.4 99.7 115.9 114.8 105.2 107.5 107.9 105.8 106.6 111.4 107.5

2020 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

In instances where the amounts are so large they become a distraction, as is the case for other income and expenses, the practice is not to show the figures so that the readers can concentrate exclusively on the relevant information, while still being informed why a blank entry appears in the analysis.

CT14.2 (CONTINUED) b. (1)

THE KROGER CO. Vertical Analysis of Statement of Income Year Ended (in U.S. $ millions) 2022

Sales Cost of goods sold Gross profit Operating expenses Income from operations Other income and expenses Interest expense Income before income tax Income tax expense Net income

2021

137,888 107,539 30,349

100.0 78.0 22.0

26,872

2020 %

132,498 101,597 30,901

100.0 76.7 23.3

122,286 95,294 26,992

100.0 77.9 22.1

19.5

28,121

21.2

24,741

20.2

3,477

2.5

2,780

2.1

2,251

1.8

(855) (571)

-0.6 -0.4

1,134 (544)

0.9 -0.4

333 (603)

0.3 -0.5

2,051

1.5

3,370

2.5

1,981

1.6

385 1,666

0.3 1.2

782 2,588

0.6 2.0

469 1,512

0.4 1.2

CT14.2 (CONTINUED) (2) THE KROGER CO. Vertical Analysis of Statement of Financial Position (in U.S. $ millions) 2022 2021 $ % $ % Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders ' equity Liabilities and shareholders' equity

2020 $

12,174

24.8

12,503

25.7

10,890

24.1

36,912 49,086

75.2 100.0

36,159 48,662

74.3 100.0

34,366 45,256

75.9 100.0

16,323

33.3

15,366

31.6

14,243

31.5

23,334

47.5

23,746

48.8

22,440

49.6

39,657

80.8

39,112

80.4

36,683

81.1

9,429

19.2

9,550

19.6

8,573

18.9

49,086

100.0

48,662

100.0

45,256

100.0

Note: The percentages shown in the above table do not add perfectly because of discrepancies that occur from rounding the results to one decimal place. c.

The horizontal analysis of part (a) highlights how sales increased faster than cost of goods sold in 2021 but operating expenses rose faster than sales. The net effect was operating income grew faster than sales. In 2022, sales and cost of goods sold grew at the same rate, while operating expenses grew at a slower rate. This led to operating income growing faster than sales. On the statement of financial position, we can see liquidity deteriorating in 2022 with the increases in current assets outpaced by the increase in current liabilities. To some extent the vertical analysis of part (b) echoes the highlights of part (a). Whereas the gross profit ratio declined in 2022 when it increased in 2021, the profit margin has increased in 2021 and declined in 2022 to the level experienced in 2020. Kroger has improved its solvency in 2021 with debt to equity proportions declining slightly.

LO 1 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.3

FINANCIAL ANALYSIS CASE

a. amounts in U.S. $ Millions 2022 Liquidity ratios:

Current ratio

$12,174 = 0.7 :1 $16,323 $137,888

Receivables turnover

($1,828 + $1,781) 2

= 76.4 times +

$107,539 Inventory turnover

(

$6,783 + $7,063 2

= 15.5 times )

2022 Solvency ratios:

Debt to total assets

$39,657 = 80.8% $49,086

Times interest earned $1,666 + $571+ $385 $571 = 4.6 times

CT14.3 (CONTINUED) a. (Continued) 2022 Profitability: Gross profit margin

$30,349 = 22.0 % $137,888

Profit margin

$1,666 = 1.2 % $137,888 $137,888

Asset turnover

$49,086 + $48,662

(

)

= 2.8 times $1,666 Return on assets

$49,086 + $48,662

( 2 = 3.4%

)

$1,666 Return on common shareholders‘ equity

Earnings per share

$9,429 + $9,550

( = 17.6%

)

$1,666 = $2.21 754

Price-earnings ratio

$43 = 19.5 times $2.21

Payout ratio

$589 = 35.4 % $1,666

Dividend yield

($589 ’ 754) = 1.8 % $43

CT14.3 (CONTINUED) amounts in U.S. $ Millions 2021 Liquidity ratios:

Current ratio

$12,503 = 0.8 :1 $15,366 $132,498

Receivables turnover

($1,781 + $1,706) 2

= 76.0 times +

$101,597 Inventory turnover

(

$7,063 + $7,084 2

= 14.4 times )

2021 Solvency ratios:

Debt to total assets

$39,112 = 80.4% $48,662

Times interest earned $2,588 + $544 $544 = 7.2 times

$782

CT14.3 (CONTINUED) a. (Continued) 2021 Profitability: Gross profit margin

$30,901 = 23.3 % $132,498

Profit margin

$2,588 = 2.0 % $132,498 $132,498

Asset turnover

$48,662 + $45,256

( 2 = 2.8 Times

)

$2,588 Return on assets

48,662 + $45,256

( 2 = 5.5%

)

$2,588 Return on common shareholders‘ equity

$9,550 + $8,573

( = 28.6%

)

The information is not available to calculate: Earnings per share Price-earnings ratio Payout ratio Dividends yield Liquidity ratios only show subtle changes from 2021 to 2022 with a slight improvement in the accounts receivable turnover and in the inventory turnover. From a solvency standpoint there has been slight deterioration in the debt to total asset ratio and a substantial deterioration in the times interest earned in 2022. Profitability deteriorated in 2022 with in all ratios with the exception of asset turnover ratio, which remained the same. Operating expenses moderated in 2022. Other income and expenses went from a net 1.1 billion income amount in 2021 to a net expense of.9 billion in 2022.

CT14.3 (CONTINUED) b.

Kroger

Industry

1. Current ratio

0.7:1

1.7:1

Worse

2. 3. 4. 5. 6. 7.

76.4 15.5 80.8% 4.6 22.0% 1.2%

89.0 12.7 47.9% 6.7 24.1% 3.4%

Worse Better Worse Worse Worse Worse

8. Asset turnover 9. Return on assets 10. Return on shareholders‘ equity 11. Earnings per share 12. Price-earnings ratio

2.8 3.4% 17.6% $2.21 19.5

1.8 6.1% 11.6% N/A 19.4

Better Worse Better

13. Payout ratio 14. Dividend yield

35.4% 1.8%

29.9% 2.0%

Better Worse

Receivables turnover Inventory turnover Debt to total assets Times interest earned Gross profit margin Profit margin

Better

Kroger‘s overall liquidity is poor with a current ratio below 1:1. Most of its sales are for cash and so this explains the high receivable turnover. Inventory turnover is ahead of the industry. Kroger‘s solvency is poor with over 80% of its assets financed by debt. It is profitable enough to meet its obligation of paying interest 4.6 times and so is in a fair position from that perspective. Kroger‘s profitability from a gross profit percentage perspective is weaker than the industry average and the profit margin is about a third of the industry average. Asset turnover is ahead of the industry average and its return on equity is far ahead since the amount of equity is very low compared to total assets. On the other hand, return on assets is lower than the industry average. From the perspective of the company, the price earnings ratio is slightly higher than its peers. From an investor‘s point of view the payout ratio is 18% higher than other companies in the industry. This would be viewed as a positive trend to an investor. Finally, the dividend yield is lower than the industry average and would be viewed as negative by an investor. Overall profitability is fair in 2022.

LO 2,3,4 BT: E Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.4

FINANCIAL ANALYSIS CASE

FLL is reporting under IFRS because it uses the Other Comprehensive Income account, which is not used under ASPE. It also revalued equipment to fair value, which is allowed only under IFRS. Lastly, the company recorded a ―provision,‖ which is a term used only under IFRS. DLL has recorded none of these items allowed under IFRS and reports using ASPE.

Not all of the differences that are described relate to the use of IFRS and ASPE. The choice of inventory cost formulas is available under both sets of standards.

Current ratio: Due to the rising cost of inventory, FIFO will yield a higher value in inventory and so FLL will have a higher current ratio than DLL. Inventory turnover: Cost of goods sold will be lower under FIFO in times of rising prices and ending inventory will be higher. Therefore, FLL will likely experience a lower inventory turnover ratio. Debt to total assets ratio: FLL will likely have a lower debt to total assets ratio because the equipment value has been increased to fair value which has caused assets to increase. Offsetting this increase in property, plant, and equipment may be the reduction of those assets involved in the other comprehensive loss recorded during the year, which might not be triggered under ASPE. Profit margin: FLL will have a higher profit margin because of its choice to use FIFO, as explained in the inventory turnover ratio above. Asset turnover: FLL will have higher total assets as explained in the debt to total assets ratio above. Consequently, its asset turnover ratio will be lower (ignoring the possible impact of the comprehensive loss).

LO 2,3,4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.5

PROFESSIONAL JUDGEMENT CASE

Company A is the discount airline – clues to its identity include:  Discount airline would have a low gross profit  Administrative costs would be minimal as most employees would work on the airplanes or in maintenance – salaries for pilots, attendants, mechanics etc. would be included in cost of goods sold  If it has a December 31 year-end, which is right after the very busy Christmas travel season, cash levels would be very high  Accounts receivable would be very low as most customers pay with credit cards  Inventories would be minimal as products are not sold to customers except food on airplanes, and there may be some spare parts inventory for planes and equipment  Property, plant, and equipment would be high as the company operates airplanes  Current liabilities would be high because a large portion of this would be deferred revenue as tickets are sold in advance Company B is the developer of high tech communications equipment – clues to its identity include:  The only company with research and development costs  Products are not sold to consumers but retailers, and these types of sales are more likely to be on credit so accounts receivable would be fairly high  This is the company most likely to have intangible assets for the patents on its products  High tech companies usually do not rely as much on bank financing as other companies because they tend to have less tangible collateral, so we would expect to see lower levels of non-current liabilities

CT14.5 (CONTINUED) Company C is in the grocery industry – clues to its identity include:  The grocery industry is competitive so we would expect a lower gross profit margin and a lower profit margin ratio  Despite lower margins, such a company is less likely to be unprofitable given the predictability of revenues and expenses and the constant demand for its products  Selling costs should be a higher percentage of sales compared to other companies because grocery stores advertise (so do furniture companies but they would have higher gross profits).  Inventory would be high but not the highest of the five companies as inventory turnover would have to be high enough to prevent too much spoilage  Because it has private labels, it should have some intangible assets

Company D is the oil and gas producer – clues to its identity include:  Oil prices are high this year so a high gross profit margin is expected along with a high profit margin  Depreciation is the largest expense because the business is so capital intensive – oil sands plants are very expensive – this correlates with the large percentage of assets represented by property, plant, and equipment  Due to the large proportion of non-current assets, one would expect to see a correspondingly larger proportion of non-current liabilities compared to current liabilities  Due to the riskiness of oil prices it is more likely for an oil and gas company to have lower debt relative to liabilities than companies with more stable revenue streams like an airline or grocery chain

CT14.5 (CONTINUED) Company E is the furniture retailer – clues to its identity include:  Large selling expenses due to significant advertising that occurs in this industry  This company should have a reasonably high level of inventory as its turnover would be slower than the grocery chain  Accounts receivable would be low as sales are made to individuals and any special sales where payment is not needed for a certain period of time give rise to receivables that are often sold to financial institutions  A company that has operated for over 100 years may be more likely to have a higher level of retained earnings and equity and be less in need of bank financing than the other companies and would not need as many non-current liabilities LO 1,2,3,4 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.6 a.

ETHICS CASE

The stakeholders in this case are: Vern Fairly, president of Flex Industries Anne Saint-Onge, vice-president of communications You, as controller of Flex Industries Shareholders of Flex Industries Potential investors in Flex Industries Any readers of the press release

The president‘s press release is deceptive and incomplete and to that extent, his actions are unethical.

As controller, you should at least inform Anne Saint-Onge, the vicepresident of communications, about the biased content of the release. She should be aware that the information she is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the vice-president of communications (if she agrees) have the responsibility to inform the president of the bias in the about-to-bereleased information.

LO 1,2,3,4,5 BT: C Difficulty: M Time: 20 min. AACSB: Ethics CPA: cpa-t001, cpa-e001, cpa-t005 CM: Reporting, Ethics, and Finance

CT14.7

DATA ANALYTICS CASE

As requested, I have done some research and have come up with a list of considerations for your planned purchase of the coffee shop. I will concentrate on the three major expenses you were most concerned with: cost of coffee, salaries and rent. Because of its nature, the coffee has the most potential to cause increases in prices due to supply issues. These price changes may be due to supply shortages caused by weather changes in those areas where the coffee beans are grown. Data analytics could assist in determining the frequency and severity of the effect of weather events have had on the price of coffee. Large purchasers of coffee such as Starbucks enter into future purchase commitments to mitigate those risks. While your operations might not be large enough to justify entering into such contracts, it would be wise to look into sourcing coffee from more than one supplier to secure deliveries into the future. Data analytics could also assist you in making comparisons of current and future prices information from the commodities market. Stock analysis reports of companies in the industry could also give you some insight as to their views concerning prospects for the future. Finally, you should consider trends in exchange rates of the Canadian dollar as you would be paying your supplier in South America in other than Canadian dollars. Concerning salaries expenses, since you would operate the shop by keeping part-time staff paid minimum wages, you might consider what other small businesses are doing concerning maintaining a policy of paying minimum wage and what benefits, if any, those businesses offer their employees. Consider what the local unemployment rate is as well as published predictions for the future. Find out when was the last time minimum wage legislation was passed and how likely and when a rise in the rate is expected in the future. In addition, you can analyze the staffing levels required based on demand for your product and at what time of the day peak demand occurs. This would ensure that you have staff come in for peak periods and avoid paying staff when not required. Finally, on the subject of rent expense, data can be obtained from a real estate agent on the current market rates of rent paid for space similar to the shop. Some data on recent renewals rates by other businesses in the mall will be helpful in predicting what rent will likely have to be paid in the near future. You should also analyze the size of rental space required to generate maximum profitability as this will impact rental costs. LO 1 BT: C Difficulty: M Time: 20 min. AACSB: Communication CPA: cpa-t001, cpa-e003 CM: Reporting, Communication

CT14.8

DATA ANALYTICS CASE

XYZ has working capital of $70,000 ($100,000-$30,000) which is larger than ABC‘s working capital of $60,000 ($100,000 - $40,000), indicating that it may have greater liquidity. Furthermore, by looking at the components of the current assets XYZ also has greater liquidity because 48% of its current assets consist of cash compare to only 34% for ABC.

Since both companies sell their products at the same price, ABC must have a higher gross profit margin than XYZ because of its lower cost of goods sold, indicating that its suppliers sell inventory to ABC at a lower cost.

Since both companies only have current assets, we know that their total assets are each $100,000. Since it is the first year of operations for each company, we will use this amount as the average assets for the year. From the hint given in the question we know that the asset turnover is a component of the return on assets: Return on assets = Profit margin X Asset turnover For ABC: Return on assets is 7% = Profit margin of 7% X Asset turnover of ?? From the above we can derive the asset turnover at 1.0 times Since the asset turnover of 1.0 = revenues of ?? ÷ average assets of $100,000, the company‘s sales revenues must be $100,000. For XYZ: Return on assets is 8% = Profit margin of 8% X Asset turnover of ?? From the above we can derive the asset turnover at 1.0 times Since the asset turnover of 1.0 = revenues of ?? ÷ average assets of $100,000, the company‘s sales revenues must be $100,000.

Operating expenses is a major item that is in the profit margin ratio but is not in the gross profit margin ratio. Notice how ABC‘s gross profit margin of 20% decreased to 7% for its profit margin ratio. This decrease is most likely attributable to its operating expenses (and not attributable to income tax because the income tax rate is the same for both companies and not attributable to interest expense because ABC has less interest paying debt). XYZ had a much smaller difference between its gross profit ratio of 15% and its profit margin of 8%, and the reason for this is likely due to having lower operating expenses.

XYZ is likely to have the higher interest expense because a larger portion of its liabilities consist of notes payable which bear interest unlike

accounts payable which normally do not bear interest unless they become overdue.

CT14.8 (CONTINUED) f.

ABC has a larger difference between its return on common shareholders‘ equity and its return on assets because it is using leverage to its advantage. This company has more debt and most of that debt consists of accounts payable that does not incur interest costs – so ABC is borrowing inventory (rather than cash) from its suppliers without interest, and this benefits the shareholders and improves their return.

LO 1,2,3,4 BT: E Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.9

STUDENT VIEW CASE

a. The software company should have a higher price-earnings ratio because the market expects this company to have opportunities to grow faster than a more established company. b. More established companies like this bank tend to have stable income and cash flows and are not in the same growth phase that a newly public company would be. Consequently, such a company can distribute some of its cash flows to shareholders by paying out a dividend. A newly public company typically obtains a listing on a stock exchange to raise capital from investors to expand their operations and would therefore, be using all available cash for expansion and would not want to diminish available cash by returning any to shareholders through dividends. c. The software company has yet to reach its normal levels of activity and profitability so one would expect such a company to have low income (and perhaps even losses), which in turn will make any ratio based on profitability, such as return on common shareholders‘ equity or return on assets, lower than more established companies with a record of profitability. d. A bank uses leverage (borrowed funds) extensively. Every savings account that a bank has is a liability on the bank‘s statement of financial position. Therefore, the debt that a bank has is usually much larger than its equity. Normally, the bank will earn a higher return on the borrowed money than it pays to its customers in interest. Because of this, the return on common shareholders‘ equity will be higher than the return on assets.

CT14.9 (CONTINUED) e.

There really is no ―right‖ answer to this question. It really depends on how much risk an investor is willing to undertake. The bank may provide a nice dividend and its share price may rise in the future but not at a very fast rate because the ability of a bank to grow rapidly is limited due to the large number of competing banks that exist. On the other hand, if the software company makes a very good game and there exists a large demand for that game, then the software company‘s share price will rise dramatically. However, there is a risk that the game may not be popular and the share price may then collapse. Such a drop in share price may not occur for the bank‘s shares given the steady demand that exists for its services. So, if you feel comfortable with the risk implicit in buying the software company‘s shares and believe that their games will indeed be popular, buy those shares. If you are more conservative and don‘t mind earning a more modest income or incurring a modest rather than severe loss, you may want to buy the bank shares. Your aversion to risk may also be a function of age. For example, a senior should probably not invest extensively in software company shares because if the price falls dramatically, that lost income can‘t be replaced because the senior may be unable to work. Furthermore, the senior may need dividend income to meet living expenses, whereas a younger person can take on more risk with their investments because they have alternative sources of income.

LO 4 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT14.10 SERIAL CASE a.

At first glance, Software Solutions appears to be more liquid than Micro Inc. Its current ratio is significantly higher than the industry ratio. However, the current ratio may be artificially high because its receivables turnover and inventory turnover are both lower than those of Micro and the industry average. This indicates that Software Solutions is collecting its accounts receivable and turning over its inventory less quickly than its competitor. It would be important to look at the composition of Software Solutions‘ current assets and current liabilities. It could be that it is the stronger of the two companies—it depends on what other types of assets, besides receivables and inventory, make up its total current assets and how liquid they are.

It appears that Software Solutions is the less solvent of the two companies. Micro has a lower debt to total assets ratio, which is indicative of greater solvency and has a higher times interest earned ratio. Micro‘s higher times interest earned ratio indicates that it can service its debt load. Micro‘s and Software Solutions‘ times interest earned ratio fall short of the industry average. Nonetheless, Software Solutions debt to total assets ratio is not far off that of the industry and it is still able to handle its interest with a strong times interest earned ratio of 10.8 times.

Software Solutions is clearly the more profitable of the two companies, as all of its profitability ratios are superior to those of Micro and of the industry.

If Emily and Daniel are interested in receiving dividend income rather than appreciation in the share price, they would favour Software Solutions as indicated by its higher dividend yield ratio. The company‘s dividend yield ratio is also higher than the industry average.

If Emily and Daniel are interested in appreciation in the share price rather than receiving dividend income, they would favour Micro as indicated by its higher price-earnings ratio. This means that investors have positive expectations of Micro‘s performance in the future.

CT14.10 (CONTINUED) f.

Emily and Daniel should be aware that financial statements prepared under IFRS can contain accounting policy choices and financial statement items (such as other comprehensive income) that may be different from those applied by companies using ASPE. Consequently, some of the above ratios might not be comparable. They should also inquire whether the industry averages are applicable given that they likely relate only to publicly-traded competitors. In preparing their analysis, they should also be aware of what items under IFRS may be subject to additional volatility and how they will interpret the change in the trends for the ratios affected.

Emily and Daniel should consider some of the following factors related to making an investment in Software Solutions: -

their risk tolerance (can they tolerate the fluctuations inherent in share investments). their profile as investors (are they investing for growth or income). their goals for this investment (are they investing for short-term appreciation or long-term growth). is this the right time to be purchasing the shares (are they currently overvalued by other investors)? there is added risk to investing in the company that employs you. If something were to happen to Software Solutions, it could affect both their employment and investment.

In addition, before concluding their analysis, Emily and Daniel should obtain additional information to supplement the ratio analysis. This could include detailed financial statements, a horizontal and vertical analysis, as well as relevant non-financial information. They likely already have a very good understanding of the business and the economy from their involvement with Anthony Business Company Ltd (ABC). LO 2,3,4,5 BT: E Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

Legal Notice