ACCOUNTING PRINCIPLES 7TH CANADIAN EDITION (VOLUME 2) BY WEYGADNT DONALD KIESO KIMMEL TRENHOLM WARRE by QuentinAxel

ACCOUNTING PRINCIPLES 7TH CANADIAN EDITION (VOLUME 2) BY WEYGADNT DONALD KIESO KIMMEL TRENHOLM WARREN NOVAK CHAPTER 9_18) SOLUTIONS MANUAL

CHAPTER 9 Long-Lived Assets ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Brief Problems Problems Questions Exercises Exercises Set A Set B

1. Calculate the cost of property, plant, and equipment.

1, 2, 3, 4, 1, 2, 3, 4 5

2. Apply depreciation methods to property, plant, and equipment.

6, 7, 8, 9, 5, 6, 7, 8, 2, 3, 4, 5, 2, 3, 6, 7, 2, 3, 6, 7, 9 12 8, 9 8, 9, 12

3. Explain the factors that cause 9, 10, 11, 10, 11 12, 13, changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. 4. Demonstrate how to account 14, 15, 16, 17, for property, plant, and equipment disposals.

1, 2, 3, 12 1, 2, 3, 4, 1, 2, 3, 4, 6 6

6, 7, 8

12, 13, 14 9, 10

4, 5, 6, 12 4, 5, 6

6, 7, 8, 9 6, 7, 8, 9

5. Record natural resource transactions and calculate depletion.

18, 19, 20 15

6. Identify the basic accounting issues for intangible assets and goodwill.

21, 22

12, 13, 14 10, 11

7. Illustrate the reporting and 23, 24 analysis of long-lived assets.

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10, 11

9, 11, 12, 9, 11, 12, 13 13

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Difficulty Time Level Allotted (min.)

Description

Record property transactions.

Simple

20-30

Allocate cost and calculate partial period depreciation.

Moderate

20-30

Determine cost; calculate and compare depreciation under different methods.

Moderate

30-40

Account for operating and capital expenditures and asset impairments.

Moderate

20-30

Record impairment and calculate revised depreciation.

Moderate

20-30

Record acquisition, depreciation, impairment and disposal of land and building.

Moderate

25-35

Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.

Moderate

30-40

Record acquisition, depreciation and disposal of equipment.

Moderate

30-40

Record property, plant and equipment transactions; prepare partial financial statements.

Complex

40-50

10A

Correct errors in recording intangible asset transactions.

Complex

15-20

11A

Record intangible asset transactions; prepare partial balance sheet.

Moderate

30-40

12A

Record natural resource transactions; prepare partial financial Moderate statements.

25-30

13A

Calculate ratios and comment.

Moderate

15-25

Record property transactions.

Simple

20-30

Allocate cost and calculate partial period depreciation.

Moderate

20-30

Determine cost; calculate and compare depreciation under different methods.

Moderate

30-40

Account for operating and capital expenditures and asset impairments.

Moderate

20-30

Record impairment and calculate revised depreciation.

Moderate

20-30

Record acquisition, depreciation, impairment and disposal of land and buildings.

Moderate

25-35

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Difficulty Time Level Allotted (min.)

Description

Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.

Moderate

30-40

Record acquisition, depreciation and disposal of furniture.

Moderate

30-40

Record property, plant and equipment transactions; prepare partial financial statements.

Complex

40-50

10B

Correct errors in recording intangible asset transactions.

Complex

15-20

11B

Record intangible asset transactions; prepare partial balance sheet.

Moderate

30-40

12B

Record equipment, note payable, and natural resource transactions; prepare partial financial statements.

Moderate

25-30

13B

Calculate ratios and comment.

Moderate

15-25

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-ofChapter Exercises and Problems Learning Objective

1. Calculate the cost of property, plant, and equipment.

Knowledge Comprehension Q9-1 Q9-3 Q9-2 Q9-4 BE9-3 Q9-5 E9-3

2. Apply depreciation Q9-7 methods to property, Q9-9 plant, and equipment.

Q9-6 Q9-8 Q9-10 Q9-11 E9-3

3. Explain the factors Q9-9 that cause changes in Q9-12 periodic depreciation and calculate revised depreciation for property, plant, and equipment.

Q9-10 Q9-11 Q9-13

4. Demonstrate how to account for property, plant, and equipment disposals.

Q9-16

Q9-14 Q9-15 Q9-17

5. Record natural Q9-18 resource transactions and calculate depletion. 6. Identify the basic accounting issues for intangible assets and goodwill. 7. Illustrate the reporting Q9-23 and analysis of long- BE9-17 lived assets.

Q9-19 Q9-20

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Q9-21 Q9-22

Q9-24

9-4

Application BE9-1 P9-2A BE9-2 P9-3A BE9-4 P9-4A E9-1 P9-6A E9-2 P9-1B E9-12 P9-2B P9-1A P9-3B P9-4B P9-6B BE9-5 P9-3A BE9-6 P9-6A BE9-7 P9-7A BE9-8 P9-8A BE9-9 P9-9A E9-2 P9-2B E9-4 P9-3B E9-5 P9-6B E9-12 P9-7B P9-2A P9-8B P9-9B P9-12B BE9-10 P9-5A BE9-11 P9-6A E9-6 P9-12A E9-7 P9-4B E9-8 P9-5B P9-4A P9-6B

Analysis

BE9-12 BE9-13 BE9-14 E9-9 E9-10 P9-6A P9-7A BE9-15 E9-11

P9-8A P9-9A P9-6B P9-7B P9-8B P9-9B

BE9-16 E9-12 E9-13 E9-14 BE9-18 BE9-19 E9-15 P9-9A

P9-10A P9-11A P9-10B P9-11B P9-11A E9-16 P9-12A P9-13A P9-9B P9-13B P9-11B P9-12B

Synthesis Evaluation

P9-12A P9-12B

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BLOOM’S TAXONOMY TABLE (Continued) Learning Objective

Knowledge Comprehension

Broadening Your Perspective

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Application

Analysis Synthesis Evaluation BYP9-4 BYP9-5

BYP9-1 BYP9-2 BYP9-3

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ANSWERS TO QUESTIONS 1.

Three characteristics of property, plant, and equipment include: they (1) have a physical substance (a definite size and shape), (2) are used in the operations of the business, and (3) are not intended for sale to customers.

Examples of land improvements are: a road, driveway, sidewalks or parking lot on the property, fencing and underground sprinkler systems.

The invoice cost, the cost of the safety inspection, and the cost for the required logo painted on the vehicle are capitalized, as they are required costs to put the vehicle into use. The insurance costs benefit the business for the term of the policy and so the costs should be allocated to the period of benefit from the policy, typically by initially recording the payment as prepaid insurance and then reducing the prepayment, charging insurance expense as the policy expires.

The purpose of depreciation is not to accumulate the cash needed to replace an asset. Rather, depreciation is a cost allocation method which records an expense in those accounting periods where the asset has been used and has contributed to the earning of revenues. This charge also reduces the carrying amount of the asset, but it does not involve any cash.

The purchase cost must be split between the land and building because the building is depreciated and the land is not. In addition, the cost of each item will be needed to determine any gain or loss on disposal if either one is later sold.

Residual value is the estimated amount that a company would obtain from disposing of a long-lived asset at the end of its useful life. Residual value is not depreciated, since the amount is expected to be recovered at the end of the asset’s useful life. Residual value is used in the formula for calculating periodic depreciation using the straight line and unit-ofproduction methods. Residual value is used in an indirect way in the diminishing balance method. Rather than using residual value to reduce the depreciable amount, as is done using the other two methods, the amount of the depreciation recorded is limited to the amount that will cause the carrying amount to equal the residual value of the asset.

The three factors that affect the calculation of depreciation include: cost, useful life and residual value. The cost of a depreciable asset must include all necessary costs to get the asset ready for use. The useful life is the period of time an asset is expected to be available for use. This length may be measured as a function of time or number of units of production. The residual value is the estimated amount that a company would obtain from disposing of the asset at the end of its useful life.

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QUESTIONS (Continued) 8.

The amount of annual depreciation is different over the useful life of an asset depending on which of the three depreciation methods are being used. The straight-line method creates a constant amount of depreciation over the useful life. The diminishing-balance method is devised to charge a higher amount of depreciation in the earlier part of the useful life of the asset. Lastly, the unit-of-production method is less predictable in that it is based on the amount of use that is being made of the asset.

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.

10.

Operating expenditures are ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. Because they are recurring expenditures and normally benefit only the current accounting period, they are expensed when incurred. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Because they benefit future periods, capital expenditures are debited to the asset account affected. Once capitalized, these expenditures are depreciated over their benefiting period.

11.

Revision of the depreciation generally occurs when there is a change to any of the three factors that affect the calculation of depreciation: the asset’s cost, useful life, or residual value. Depreciation needs to be revised if there are capital expenditures, impairments in the asset’s recoverable amount, changes in the depreciation method, or changes in the estimated remaining useful life or residual value. The revisions are based on new information that will affect only current and future periods so there is no revision of depreciation previously recorded.

12.

Factors that may contribute to an impairment loss include: obsolescence of a piece of equipment, loss of a market for a product manufactured, bankruptcy of the supplier of replacement parts for equipment, or environmental concerns causing extra costs of disposal at the end of the useful life.

13.

Extending the total service life and consequently the estimated remaining useful life of a depreciable asset will reduce the amount of depreciation recorded in the remaining years of use. The carrying amount of the asset will become the new basis to which the business will apply the formula of the depreciation method. The residual value may also be revised.

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QUESTIONS (Continued) 14.

Depreciation must be updated from the last time depreciation entries were 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 disposal.

15.

The asset and related accumulated depreciation should continue to be reported on the balance sheet, without further depreciation or adjustment, until the asset is retired. Reporting the asset and related accumulated depreciation on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully depreciated, no additional depreciation should be taken on this asset, even if it is still being used. In no situation can the accumulated depreciation exceed the cost of the asset.

16.

In a sale of property, plant, or equipment, the carrying amount of the asset is compared to the proceeds from the sale. If the proceeds of the sale 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. In an exchange, a new asset is received in an exchange for the old asset given up. The gain or loss is calculated by comparing the fair value of the asset given up to its carrying amount. The trade-in allowance on the asset given up is not relevant because it rarely reflects the fair value of the asset that is given up. Instead of using the trade-in allowance, the fair value of the asset given up is used to calculate the gain or loss on the asset being given up. A loss results if the carrying amount of the asset being given up is more than its fair value. A gain results if the carrying amount is less than its fair value.

17.

Carrying amount of an item of property, plant, or equipment is a sub-total amount representing the net amount of the cost less the accumulated depreciation. The amount is not a general ledger account and so is not used in journal entries used to record dispositions. Instead, the asset and accumulated depreciation accounts are used in the journal entry.

18.

Natural resources have two characteristics that make them different from other long-lived assets: (1) they are physically extracted in operations such as mining, cutting, or pumping; and (2) only an act of nature can replace them. Similar to property, plant, and equipment, natural resources are tangible long lived assets which are expected to last beyond one year and are therefore classified on the balance sheet as non-current. When natural resources are extracted, depletion is recorded, causing an increase in another asset, inventory, which is subsequently sold.

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QUESTIONS (Continued) 19.

The units-of-production method is a common and ideal method of recording the depletion of natural resources. There is a finite quantity of units of natural resource to be extracted. As extraction occurs, the conversion from one asset (natural resource) to another (inventory) can be measured in units and cost of the units can be fairly applied. Consequently, a more precise charge for depletion can be arrived at that corresponds to the asset created (inventory) when the natural resource is reduced.

20.

I disagree. The useful life of some intangible assets might be limited to the legal life of those assets and in that case, I would agree. I disagree with the limitation of the period of amortization to the legal life of intangibles. Some intangible assets have useful lives that are much shorter than their respective legal lives and so it is appropriate for the proper matching of expenses to revenues for the shorter length of benefiting periods to be used in the calculation of amortization. In some cases, the legal life could be without time limits. In that case it would not be possible to execute a calculation. Finally, in the case of goodwill, GAAP dictates that no depreciation can be recorded under any circumstances. Only impairment losses reduce the carrying amount of goodwill.

21.

The accounting for tangible and intangible assets is much the same. Tangible and intangible assets are reported at cost, which includes all expenditures necessary to prepare the asset for its intended use. Both tangible and intangible assets with finite lives are amortized over their useful life. In the case of long-lived tangible assets, the useful life or the physical life of the asset will be used as a limit of the length of time the assets will be depreciated. In the case of intangible life, there is no physical limitation in the usefulness of asset and the length of time the asset will be amortized is the shorter of its useful life or its legal life, usually on a straight-line basis. Due to their lack of substance, intangible assets are more likely to have indefinite useful lives and not need to be amortized, but only tested for impairment. This characteristic is the main difference between the accounting of tangible and intangible assets.

22.

Goodwill is the value of many favourable attributes that are intertwined in a business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill is only recorded on the purchase of a business if the purchaser pays a price that is greater than the fair value of the net assets of the business.

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QUESTIONS (Continued) 23.

Property, plant, and equipment and natural resources are often combined and reported in the balance sheet as “property, plant, and equipment” or “capital assets”. Intangible assets are listed separately after property, plant, and equipment. Goodwill must be disclosed separately. For assets that are depreciated or amortized, the balances of the accumulated depreciation and/or amortization must be disclosed in the balance sheet or in the notes to the financial statements. Depreciation and amortization expense for the period must also be disclosed either on the income statement, elsewhere in the financial statements or in the notes to the financial statements. When impairment losses have occurred they should be shown on a separate line on the income statement, with the details disclosed in a note. The notes to financial statements should disclose the depreciation or amortization methods and rates that are used. The carrying amount of each major class of long-lived assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements.

24.

I disagree. Higher turnover of assets does not necessarily result in increased profits. A higher asset turnover just means that more revenue or sales are being generated for each dollar of assets. On the other hand, a higher return on assets means a proportionately higher profit has been generated for each dollar of assets.

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 (a) (b)

The cost of the land is $95,000 ($85,000 + $1,500 + $5,000 + $3,500). The cost of the land improvements is $5,000 (parking lot).

BRIEF EXERCISE 9-2 The cost of the equipment is $42,000 (invoice price $40,375 + transportation $625 + installation and testing $1,000). The payment of $1,750 for the insurance should be recorded as prepaid insurance which will later be expensed as it is consumed.

BRIEF EXERCISE 9-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

O C C C O C O C C O

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BRIEF EXERCISE 9-4 Jan.

Land [$850,000 × ($352,000 ÷ $880,000)] .... 340,000 Building [$850,000 × ($396,000 ÷ $880,000)] .... 382,500 Equipment [$850,000 × ($132,000 ÷ $880,000)] .... 127,500 Cash................................................ Mortgage Notes Payable ($850,000 − $170,000) .................

170,000 680,000

BRIEF EXERCISE 9-5 Depreciable amount is $36,000 ($42,000 − $6,000). With a 4-year useful life, annual depreciation is $9,000 ($36,000  4). Under the straight-line method, depreciation is the same each year. Thus, depreciation expense is $9,000 for each year of the equipment’s life.

BRIEF EXERCISE 9-6 The diminishing-balance rate is 50% (200%÷ 4) and this rate is applied to the carrying amount at the beginning of the year. Depreciation expense for each year is as follows: Carrying Amount End of Year Beginning Depr. Depr. Accum. Carrying Year Of Year × Rate = Expense Depr. Amount $42,000 2017 $42,000 50% $21,000 $21,000 21,000 2018 21,000 50% 10,500 31,500 10,500 2019 10,500 50% 4,500¹ 36,000 6,000 ¹ Limited to the amount that reduces the carrying amount to the residual value of $6,000

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BRIEF EXERCISE 9-7 (a)

Depreciable amount per unit: ($38,950 − $4,300)  550,000 km. = $0.063/km.

(b)

Annual depreciation expense: 2016: 90,000 × $0.063 = 2017: 135,000 × $0.063 =

$5,670 $8,505

BRIEF EXERCISE 9-8 Depreciation expense for each year:

Depreciable Year Amount* × 2017 2018

$32,000 32,000

Depr. Rate

25% × 9/12 25%

Depr. Expense $ 6,000 8,000

End of Year Accum. Carrying Depr. Amount $38,000 $ 6,000 32,000 14,000 24,000

*Depreciable amount = $38,000 − $6,000 = $32,000

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BRIEF EXERCISE 9-9 The double diminishing-balance rate is 50% (25% × 2) and this rate is applied to the carrying amount at the beginning of the year. Depreciation expense for each year is as follows: Double Diminishing-balance Carrying Amount Beginning Year Of Year × 2017 2018 2019 2020

$38,000 28,500 14,250 7,125

Depr. Rate

50% × 1/2 50% 50% 50%

Depr. Expense $ 9,500 14,250 7,125 1,125¹

End of Year Accum. Carrying Depr. Amount $ 38,000 $ 9,500 28,500 23,750 14,250 30,875 7,125 32,000 6,000

¹ Limited to the amount that brings the carrying amount to the residual value of $6,000

BRIEF EXERCISE 9-10 (a)

Annual depreciation: ($250,000 − $10,000)  6 = $40,000 Equipment cost ............................................... Less accumulated depreciation ($40,000 × 3) for 2015 to 2017................. Carrying amount Dec. 31, 2017 ......................

(b) Impairment Loss......................................... Accumulated Depreciation—Equipment Carrying amount (a) ........................................ Less: Recoverable amount ............................ Impairment loss...............................................

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$250,000 120,000 $130,000 30,000 30,000 $130,000 100,000 $ 30,000

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BRIEF EXERCISE 9-11 Carrying amount, Jan. 1, 2017 ($32,000 − $9,000) ..............$23,000 Less: Residual value ....................................................... (2,000) Remaining depreciable amount ..................................... 21,000 Remaining useful life......................................................... ÷ 4 years Revised annual depreciation expense 2017 .................. $ 5,250

BRIEF EXERCISE 9-12 Accumulated Depreciation— Equipment................................................... Equipment ..............................................

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BRIEF EXERCISE 9-13 (a) Mar. 31

(b) Mar. 31

Depreciation Expense [($86,400 − $2,200) ÷ 5 × 3/12] ........ Accumulated Depreciation —Equipment .............................

4,210 4,210

Cash ................................................ 35,000 Accumulated Depreciation— Equipment ¹ .................................... 54,730 Gain on Disposal ...................... 3,330 Equipment ................................. 86,400

¹ [($86,400 − $2,200) ÷ 60 months × 39 months] = $54,730

$16,840 x 3 years (2014-2016) ........................... $50,520 Depreciation for 3 months in 2017 .................. 4,210 Accumulated Depreciation to March 31 .......... $54,730¹ Cost of equipment .................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Gain on disposal ...................................... (c) Mar. 31

Cash ................................................ 29,000 Accumulated Depreciation— 54,730 Equipment....................................... Loss on Disposal............................ 2,670 Equipment ................................. 86,400

Cost of equipment .................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Loss on disposal ......................................

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$86,400 54,730 31,670 35,000 $ 3,300

9-16

$86,400 54,730 31,670 29,000 $ 2,670

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BRIEF EXERCISE 9-14 Jan. 7

Equipment (new) ........................... Accumulated Depreciation —Equipment .................................. Loss on Disposal........................... Equipment (old) ........................ Cash...........................................

29,000** 30,000 7,000* 61,000 5,000

**Cost of new = consideration paid in cash plus fair value of old asset: ($5,000 + $24,000 = $29,000) *Loss on disposal = Carrying amount − fair value: [($61,000 − $30,000) − $24,000 = $7,000]

BRIEF EXERCISE 9-15 Depletion base = $6,500,000 − $500,000 = $6,000,000 Depletion per unit = $6,000,000 ÷ 25,000,000 tonnes = $0.24 per tonne Depletion expense for ore extracted in Year 1: $0.24 per tonne × 5,000,000 tonnes = $1,200,000 Aug. 31 Inventory ....................................... 1,200,000 Accumulated Depletion—Mine 1,200,000

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BRIEF EXERCISE 9-16 (a)

2017 Jan.

2 Patents .................................... Cash....................................

150,000

(b) Dec. 31 Amortization Expense ($150,000  8) .......................... 18,750 Accumulated Amortization— Patents ...............................

150,000

18,750

BRIEF EXERCISE 9-17 (a) (b) (c) (d) (e) (f)

PPE NA (expense) I NR NA (current asset) PPE

(g) (h) (i) (j) (k) (l)

PPE NA (investment) PPE I NA (expense) I

BRIEF EXERCISE 9-18 H. DENT COMPANY Balance Sheet (Partial) December 31, 2017 (in millions)

Property, plant, and equipment Land .......................................................... $ 400,000 Buildings .................................................... $1,100,000 Less: Accumulated depreciation ............ 600,000 500,000 Nickel mine............................................... 500,000 Less: Accumulated depletion ................. 108,000 392,000 Total property, plant, and equipment ...............1,292,000 Goodwill ............................................................................... 410,000 Solutions Manual .

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BRIEF EXERCISE 9-19 ($ in US millions)

Return on assets

$720 [($17,108 + $15,977) ÷ 2] = 4.35%

Asset turnover

$16,042 [($17,108 + $15,977) ÷ 2] = 0.97 times

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SOLUTIONS TO EXERCISES EXERCISE 9-1 (a)

The acquisition cost of a property, plant, and equipment includes all expenditures necessary to acquire the asset and make it ready for its intended use. This includes not only the invoice cost of acquisition, but any freight, installation, testing, and similar costs to get the asset ready for use. For example, the cost of factory equipment includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. Costs such as these benefit the life of the factory equipment and not just the current period. Consequently, they should be capitalized and depreciated over the equipment’s useful life.

(b) 1. 2. 3. 4. 5. 6. 7. 8.

Land Land Land Land ($4,800 − $900 = $3,900) Vehicles Vehicles Licence Expense Land Improvements

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EXERCISE 9-2 (a) Land Building Land Improvements

(b)

(c)

Appraised Value $ 476,000 748,000 136,000 $1,360,000

% of Total 35% 55% 10%

Land ......................................................... Building.................................................... Land Improvements ................................ Cash..................................................... Mortgage Payable ...............................

Cost Allocated $ 448,000 704,000 128,000 $1,280,000 448,000 704,000 128,000 255,000 1,025,000

Depreciable amount for the building is $654,000 ($704,000 – $50,000). With a 60-year useful life, annual depreciation expense is $10,900 ($654,000  60). Depreciable amount for the land improvements is $128,000. With a fifteen year useful life, annual depreciation expense is $8,533 ($128,000  15).

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EXERCISE 9-3 1.

False. The inverse is true. Depreciation is a process of cost allocation, not asset valuation.

True.

False. The fair value of a plant asset may exceed the carrying amount of that asset. The best example is land because it is not depreciated.

False. Depreciation does not apply to land because its revenue producing ability generally remains intact over time.

False. Buildings do not have indefinite physical life and must therefore be depreciated.

True. Although there could be exceptions due to the nature of the long-lived asset.

False. The process of depreciating a long-lived asset does not involve cash, but a charge as an expense on the income statement. No cash is being accumulated for the purpose of replacing the asset.

True.

False. Depreciation expense is reported on the income statement but the accumulated depreciation is reported on the balance sheet.

10.

False. The fair value of a depreciable asset is not a factor used in the calculation of depreciation.

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EXERCISE 9-4 (a) Straight-line

Depreciable Year Cost** ×

Depr. Rate*

Depr. Expense

2016 2017

20% × 1/2 20%

$33,000 66,000

$330,000 330,000

End of Year Accum. Carrying Depr. Amount $345,000 $33,000 312,000 99,000 246,000

* Straight-line rate = 100% ÷ 5 years = 20% ** $345,000 − $15,000 = $330,000 (b) Diminishing-balance Carrying Amount Beginning Year × of Year

Depr. Rate*

Depr. Expense

2016 2017

40% × 1/2 40%

$69,000 110,400

$345,000 276,000

End of Year Accum. Carrying Depr. Amount $345,000 $69,000 276,000 179,400 165,600

*Double diminishing balance rate = 200% ÷ 5 years = 40% (c)

Units-of-Production

Units-ofDepr. Year Production × Cost/Unit* =

Depr. Expense

2016 2017

$39,050 65,230

71,000 118,600

$0.55 0.55

End of Year Accum. Carrying Depr. Amount $345,000 $39,050 305,950 104,280 240,720

*Depreciable amount per unit is $0.55 per unit: [($345,000 − $15,000) ÷ 600,000 units = $0.55]

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-4 (Continued) (d)

In this particular case, the unit-of-production can be used as management is able to reliably estimate the amount of total production that will be obtained by using the equipment. This method allows for the best matching of depreciation costs with the related benefits obtained from the asset’s use. Another factor affecting the choice of depreciation methods is consistency with methods used in the past for similar type assets. Since this is a rather expensive piece of equipment, Blue Ribbon’s policy of recording a half year’s depreciation in the year of acquisition could conceivably bias the amount charged for depreciation in 2016. Coincidentally, the date of purchase happens to be within one month of the mid-point of the fiscal year. The choice of methods would consequently not differ tremendously between the unit-of-production and the straight-line methods. Future purchases of depreciable assets could nonetheless unfairly charge depreciation in the year of purchase. By choosing the unitof-production, the bias is removed.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-5 (a)

(1) Straight-line

Depreciable Year Amount* ×

Depr. Rate**

Depr. Expense

2016 2017 2018 2019 2020

25% × 8/12 25% 25% 25% 25% × 4/12

$19,200 28,800 28,800 28,800 9,600

$115,200 115,200 115,200 115,200 115,200

End of Year Accum. Carrying Depr. Amount $129,200 $19,200 110,000 48,000 81,200 76,800 52,400 105,600 23,600 115,200 14,000

* $129,200 − $14,000 = $115,200 **Straight-line rate = 100% ÷ 4 years = 25% (2)

Double diminishing-balance

Carrying Amount Beginning Year of Year × 2016 2017 2018 2019

$129,200 86,133 43,066 21,533

Depr. Rate* =

Depr. Expense

50% × 8/12 50% 50% 50%

$43,067 43,067 21,533 7,533**

End of Year Accum. Carrying Depr. Amount $129,200 $43,067 86,133 86,134 43,066 107,667 21,533 115,200 14,000

*Double diminishing rate = 200% ÷ 4 years = 50% ** Limited to the amount that brings the carrying amount to the residual value of $14,000.

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EXERCISE 9-5 (Continued) (a) (Continued) (3) Units-of-Production

Year 2016 2017 2018 2019 2020

End of Year Units of Deprec. Depr. Accum. Carrying Production × Amt/Unit* = Expense Depr. Amount $129,200 1,900 $9.60 $18,240 $18,240 110,960 2,800 9.60 26,880 45,120 84,080 3,700 9.60 35,520 80,640 48,560 2,700 9.60 25,920 106,560 22,640 1,100 9.60 8,640** 115,200 14,000

* Depreciation amount per unit is $9.60/hour [($129,200 – $14,000)  12,000 hours = $9.60] ** Limited to the amount that brings the carrying amount to the residual value of $14,000 (actual production of 12,200 exceeded estimated total production of 12,000). (b)

Over the life of the asset, depreciation expense (in total) will be the same for all three methods, so the total profit will also be the same.

(c)

Cash flow is the same under all three methods. Depreciation is an allocation of the cost of a long-lived asset and not a cash expenditure.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-6 (a)

July 1 Equipment .................................. 500,000 2015 Cash.......................................

500,000

Dec. 31 Depreciation Expense ................. 25,000 2015 Accumulated Depreciation— Equipment ($500,000 ÷ 10 × 6/12)

25,000

Dec. 31 Depreciation Expense ................. 50,000 2016 Accumulated Depreciation— Equipment ($500,000 ÷ 10) ...

50,000

(b) Carrying amount of the equipment—Dec. 31, 2016 [$500,000 – ($50,000 × 1.5 years)] ............. $425,000 Recoverable amount .................................. 325,000 Impairment loss.......................................... $100,000 Dec. 31 Impairment Loss ........................ 100,000 2016 Accumulated Depreciation— Equipment ............................. (c)

100,000

January 1, 2017 Carrying amount is $325,000 Depreciation expense for 2017: $325,000 ÷ 8.5 years = $38,235. December 31, 2017 Carrying amount is $286,765 ($325,000 − $38,235).

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EXERCISE 9-7 (a)

Annual depreciation — current estimate Building: ($800,000 – $40,000) ÷ 20 yrs = $38,000 per year Equipment: ($125,000 – $5,000) ÷ 5 yrs = $24,000 per year

(b) Carrying amount — Building Jan. 1, 2017: $230,000 [$800,000 – ($38,000 × 15)] Carrying amount — Equipment Jan. 1, 2017: $77,000 [$125,000 – ($24,000 × 2)] (c)

Annual depreciation — revised estimate — 2017 Building: [($230,000 – $60,500) ÷ (30 − 15 yrs)] = $11,300 per year Equipment: [($77,000 – $4,000) ÷ (4 – 2 yrs)] = $36,500 Carrying amount — Building Dec. 31, 2017: $218,700 ($230,000 – $11,300) Carrying amount — Equipment Dec. 31, 2017: $40,500 ($77,000 – $36,500)

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EXERCISE 9-8 (a)

Annual depreciation — first two years of equipment’s life ($90,000 – $9,000) ÷ 6 yrs = $13,500 per year

(b) Carrying amount Building Sept. 30, 2017: $63,000 [$90,000 – ($13,500 × 2)] (c)

2017 Oct.

1 Equipment .................................... 15,000 Cash.......................................

15,000

(d) 2018 Sept. 30 Depreciation Expense ................. 24,333 Accumulated Depreciation —Equipment .........................

24,333

Carrying amount Sept. 30, 2017 (b)........................ Add: Upgrade ..........................................................

$63,000 15,000 78,000 Less: Revised residual value ................................ 5,000 Remaining depreciable amount ............................. $73,000 Remaining useful life (4 − 1) ................................... ÷ 3 years Revised annual depreciation expense ................... $24,333

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EXERCISE 9-9 (a) Apr.

1 Depreciation Expense ............................ 1,125 Accumulated Depreciation —Equipment................................... ($45,000 ÷ 10 years × 3/12)

July 30 Depreciation Expense ............................ 2,450 Accumulated Depreciation —Equipment................................... ($12,600 ÷ 3 years × 7/12) Nov. 1 Depreciation Expense ............................ 3,125 Accumulated Depreciation—Vehicles ($35,000 − $5,000) ÷ 8 years × 10/12)

1,125

2,450

3,125

(b) Apr.

1 Accumulated Depreciation —Equipment*...................................... Loss on Disposal................................ Equipment ...................................... *[($45,000 ÷ 10 years) × 9] + $1,125

July 30 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Loss on Disposal ............................... Equipment ...................................... *[($12,600 ÷ 3 years) × 2] + $2,450 Nov. 1 Vehicles (New) ($7,000+$36,000) ....... Accumulated Depreciation —Vehicles*.......................................... Loss on Disposal** ($7000-$12,500**) Vehicles (Old)................................. Cash................................................ *($35,000 − $5,000) ÷ 8 X 6 ** ($33,500 - $22,500) - $7,000 Solutions Manual .

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41,625 3,375 45,000

1,100 10,850 650 12,600

43,000 22,500 5,500 35,000 36,000

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EXERCISE 9-9 (Continued) *Accumulated depreciation on old truck: 2011 (3,750 x 2/12) 2012-2016 (3,750 x 5 years) 2017 (from part a) Total accumulated depreciation

$ 625 18,750 3,125 $22,500

**Carrying value of old truck on November 1, 2017 $12,500 (35,000-22,500)

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EXERCISE 9-10 (a) 2020 Jan. 2 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Gain on Disposal ........................... Equipment ...................................... *($65,000 − $5,000) ÷ 5 X 3

31,000 36,000 2,000 65,000

(b) 2020 May 1 Cash .................................................... 31,000 Accumulated Depreciation —Equipment*...................................... 40,000 Gain on Disposal ........................... 6,000 Equipment ...................................... 65,000 *($65,000 − $5,000) ÷ 5 = $12,000 $12,000 X (3 years + 4 months) = $40,000 (c) 2020 Jan. 2 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Loss on Disposal................................ Equipment ...................................... *($65,000 − $5,000) ÷ 5 X 3

11,000 36,000 18,000 65,000

(d) 2020 Oct. 1 Cash .................................................... 11,000 Accumulated Depreciation —Equipment*...................................... 45,000 Loss on Disposal................................ 9,000 Equipment ...................................... 65,000 *($65,000 − $5,000) ÷ 5 = $12,000 $12,000 X (3 years + 9 months) = $45,000

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EXERCISE 9-11 (a)

The units-of-production method is recommended for depleting natural resources because it best reflects the pattern over which the assets’ future economic benefits are expected to be consumed. It requires that an estimate can be made of the total number of units that are available to be extracted from the resource.

(b) Dec. 31 Inventory ($1.50 × 100,000) ....... 150,000 Accumulated Depletion—Resource

150,000

Depreciable amount $1,300,000 − $100,000 = $1,200,000 Depreciable amount per unit: $1,200,000 ÷ 800,000 tonnes = $1.50 per tonne (c) PHILLIPS EXPLORATION Income Statement (Partial) Year Ended December 31, 2017 Cost of goods sold: (will include this amount plus other costs) ($1.50 × 100,000 tonnes) ............................ $150,000 PHILLIPS EXPLORATION Balance Sheet (Partial) December 31, 2017 Assets Property, plant, and equipment Ore mine ................................................ $1,300,000 Less: Accumulated depletion ............ 150,000

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$1,150,000

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EXERCISE 9-12 1.

The original entry to add the cost of removing the old building, legal fees and clearing and grading the land to the Land account is correct. The student’s accounting treatment is incorrect. The costs involved must be added to the cost of land as they were necessary costs to acquire the land and get it ready for its intended use.

Although consistency is necessary in applying accounting policies, in this case it should not have been the basis for recording depreciation on the trademarks. Trademarks can have usefulness to the business indefinitely. This is the probable reason that depreciation had not been recorded for trademarks in the past. As long as trademarks continue to assist in producing revenue and their carrying amounts have not been impaired, they should not be depreciated. Rather they should be tested regularly for impairment. If a permanent decline in value has occurred, the trademarks must be written down and an impairment loss recorded on the income statement. Therefore, the depreciation entry should be reversed and no decline in value recorded unless an impairment occurs.

This student’s reasoning is faulty and an incorrect application of the principle of consistency in accounting. Adjusting property, plant, and equipment for increases to their fair value occurs when the business uses the revaluation model or fair value model under the International Financial Accounting Standards (IFRS). This is very unlikely the case for Chin Company. As well, current fair values are subjective and not reliable; they are not used to increase the recorded value of an asset after acquisition. The appropriate accounting treatment is to leave the building on the books at its zero carrying amount.

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EXERCISE 9-13 (a) 2016 Jan. 9

Patents ............................................. Cash.............................................

45,000

Goodwill ........................................... Cash.............................................

450,000

Dec. 31 Amortization Expense..................... Accumulated Amortization —Patents ($45,000 ÷ 5) ...............

9,000

May 15

45,000

450,000

9,000

Impairment Loss.............................. Goodwill ($450,000 − $400,000)..

50,000

Patents ............................................. Cash.............................................

30,000

Mar. 31 Research Expense .......................... Cash.............................................

175,000

Apr.

Copyrights ....................................... Cash.............................................

66,000

Trademark ........................................ Cash.............................................

275,000

2017 Jan. 2

July

Dec. 31

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50,000

30,000

175,000

66,000

275,000

Amortization Expense..................... 21,450 Accumulated Amortization—Patents [($45,000 – $9,000 + $30,000) ÷ 4] Accumulated Amortization— Copyrights [($66,000 ÷ 10) × 9/12]

16,500

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EXERCISE 9-13 (Continued) (b) Assets Intangible assets Patents ................................................. Less: Accumulated amortization ....... Copyrights............................................ Less: Accumulated amortization ....... Trademark ............................................ Total intangible assets ........................ Goodwill ....................................................

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$75,000 25,500 66,000 4,950

$49,500 61,050 275,000 $385,550 $400,000

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EXERCISE 9-14 (a) Patent Purchase price Jan. 1, 2014 Amortization 2014 (1) Amortization 2015 Amortization 2016 Balance Dec. 31, 2016 Amortization 2017 (2) Balance Dec. 31, 2017 (1) (2)

Cost $400,000

Carrying Amount

Amort. $50,000 50,000 50,000

$250,000 $83,333 $166,667

($400,000 ÷ 8 years) Carrying amount ÷ (6 – 3 years) = $250,000 ÷ 3

Trademark Purchase price during 2010 Legal defence during 2016 Balance Dec. 31, 2016 Balance Dec. 31, 2017 (3)

Cost $250,000 50,000 $300,000

(b) Income statement – December 31, 2017 Operating expenses: Amortization expense—Patents Impairment loss

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Carrying Impairment Amount $300,000 $25,000 $275,000

$83,333 25,000

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EXERCISE 9-15 (a)

Account Accumulated amortization— Buildings Accumulated amortization— Leasehold Improvements Accumulated amortization— Fixtures & Equipment Accumulated amortization— Computer Equipment Accumulated amortization— Software Accumulated amortization – Other intangibles

Financial Statement

Balance Sheet

Section Property, Plant and Equipment Property, Plant and Equipment Property, Plant and Equipment Property, Plant and Equipment

Balance Sheet

Intangibles

Balance Sheet

Intangibles Property, Plant and Equipment

Balance Sheet Balance Sheet Balance Sheet

Buildings Cost-U-Less banner (trademark)

Balance Sheet

Computer Equipment

Balance Sheet

Fixtures & Equipment Goodwill Interest expenses

Balance Sheet Balance Sheet Income Statement

Land

Balance Sheet

Leasehold improvements Other intangible assets Other non-current assets Software

Balance Sheet Balance Sheet Balance Sheet Balance Sheet

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Balance Sheet

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Intangibles Property, Plant and Equipment Property, Plant and Equipment Intangibles Operating Expenses Property, Plant and Equipment Property, Plant and Equipment Intangibles Non-current Assets Intangibles

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-15 (Continued) (b) The North West Company Inc. Balance Sheet (Partial) January 31, 2015 (in thousands)

Non-current assets: Other non-current assets................................................ Property, plant, and equipment Land ............................................................................. Buildings ....................................................... $377,061 Less: Accumulated amortization................. 209,584 Fixtures and equipment .......................... 265,706 Less: Accumulated amortization............ 186,617 Leasehold improvements........................ 51,845 Less: Accumulated amortization ........... 30,296 Computer equipment............................... 73,151 Less: Accumulated amortization ................. 62,074 Total property, plant, and equipment ...................

$12,555 16,041 167,477 79,089 21,549 11,077 295,233

Intangible assets Cost-U-Less banner (trademark) ............................... Software .......................................................... $28,376 Less: Accumulated amortization................... 17,032 Other intangible assets .............................. 7,989 Less: Accumulated amortization ................... 5,750 Total intangible assets...........................................

11,344

Goodwill ...........................................................................

33,653

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8,902

2,239 22,485

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-16 (a) (in millions) December 31, 2014 Asset $39,862 turnover [($79,671 + $78,315) ÷ 2]

Return on assets

December 31, 2013 $39,593 [($78,315 + $76,401) ÷ 2]

= 0.50 times

= 0.51 times

$2,699 [($79,671 + $78,315) ÷ 2]

$3,911 [($78,315 + $76,401) ÷ 2]

= 3.4%

= 5.1%

(b) Suncor’s asset turnover has essentially remained the same as revenues and total assets changed only slightly from 2013 to 2014. On the other hand, profits declined significantly, in spite of steady revenues. Return on assets has deteriorated from 5.1% to 3.4%.

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SOLUTIONS TO PROBLEMS PROBLEM 9-1A (a)

Jan. 12

Land ........................................... 420,000 Cash....................................... Notes Payable .......................

16 Land ............................................... Cash....................................... 31

Feb. 13

Mar. 14

Apr. 22

Sept. 26

8,500 8,500

Land ........................................... 25,000 Cash.......................................

25,000

Cash ........................................... 10,000 Land .......................................

10,000

Land ........................................... Cash.......................................

9,000

Building...................................... 38,000 Cash.......................................

38,000

Building...................................... 15,000 Cash.......................................

15,000

Building...................................... 17,000 Cash.......................................

17,000

Building...................................... 750,000 Cash....................................... Mortgage Payable .................

150,000 600,000

Sept. 30 Prepaid Insurance ..................... Cash.......................................

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95,000 325,000

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4,500 4,500

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PROBLEM 9-1A (Continued) (a) (Continued) Oct. 20 Land Improvements..................... 45,000 Cash.......................................

45,000

Nov. 15 Land Improvements..................... 12,000 Cash.......................................

12,000

(b) Date 2017 Jan. 12 16 31 Feb. 13 28

Date 2017 Mar. 14 31 Apr. 22 Sept.26

Date 2017 Oct. 20 Nov. 15

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Explanation

Land Ref.

Debit

Credit Balance

420,000 8,500 25,000 9,000

420,000 428,500 453,500 443,500 452,500

Debit

Credit Balance

38,000 15,000 17,000 750,000

38,000 53,000 70,000 820,000

Land Improvements Explanation Ref. Debit

Credit Balance

45,000 12,000

45,000 57,000

10,000

Explanation

Building Ref.

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PROBLEM 9-1A (Continued) (b) (Continued) The costs that will appear on Kadlec’s December 31, 2017 balance sheet will be: Land $452,500 Building 820,000 Land Improvements 57,000 Taking It Further: Companies should start to record depreciation when the asset is ready for use. In the case of Kadlec, the building was ready for use on September 26, 2017 and land improvements were completed on November 15, 2017 and so depreciation should be calculated from those dates. Kadlec should depreciate only the building and land improvements. Land has an indefinite useful life and therefore is not depreciated.

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PROBLEM 9-2A (a)

Land Building Equipment

Appraised Value $275,000 343,750 68,750 $687,500

% of Total 40% 50% 10%

Cost Allocated $260,000 325,000 65,000 $650,000

(b) Building: Straight-line 1. To the nearest whole month Depreciable Year Amount* × 2016 2017

$300,000 300,000

Depr. Rate

Depr. Expense

1/60 × 10/12 1/60

$4,167 5,000

End of Year Accum. Carrying Depr. Amount $325,000 $4,167 320,833 9,167 315,833

*$325,000 − $25,000 = $300,000 2. Half a year in the year of acquisition Depreciable Year Amount* × 2016 2017

$300,000 300,000

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Depr. Rate

Depr. Expense

1/60 × 6/12 1/60

$2,500 5,000

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End of Year Accum. Carrying Depr. Amount $325,000 $2,500 322,500 7,500 317,500

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PROBLEM 9-2A (Continued) (b) (Continued) Equipment: Double diminishing-balance 1. To the nearest whole month Carrying Amount Depr. Depr. Beginning Year of Year × Rate* = Expense 2016 2017

$65,000 51,458

25% × 10/12 25%

$13,542 12,865

End of Year Accum. Carrying Depr. Amount $65,000 $13,542 51,458 26,407 38,593

* 200% ÷ 8 = 25% 2. Half a year in the year of acquisition Carrying Amount Depr. Depr. Beginning Year of Year × Rate = Expense 2016 2017 (c)

$65,000 56,875

25% × 1/2 25%

$8,125 14,219

End of Year Accum. Carrying Depr. Amount $65,000 $8,125 56,875 22,344 42,656

Both options are acceptable. When deciding between adopting policy of recording depreciation to the nearest whole month or recording a half year of depreciation in the year of acquisition, ChalkBoard should consider, for purpose of consistency, the policy used in the past. Since this is the first year of business, ChalkBoard should consider what other categories or types of assets it will be purchasing in the current and future years that will be depreciated using this policy. If for example, the remaining categories of assets will be depreciated using the units-ofproduction method, the choice will not matter. The impact of the choice will not be significant in the long run, particularly if the assets are bought and sold frequently. Also, the impact is insignificant for assets with very long useful lives, as is demonstrated in part (b) for the building. No matter the choice taken by ChalkBoard, the policy must be followed consistently.

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PROBLEM 9-2A (Continued) Taking It Further: ChalkBoard should not consider depreciating to the exact day of acquisition as this level of precision is not relevant on the long-run particularly for assets with long useful lives, such as is the case for the building. Since the length of the useful life is an estimate, applying a policy of depreciating to the day will provide an amount for the depreciation expense that is insignificantly different from the amount arrived at using to the nearest month policy.

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PROBLEM 9-3A (a)

Invoice price $210,000 Delivery cost 4,400 Installation and testing 5,600 Cost of the equipment $220,000 The $1,975 insurance policy is an annual operating expenditure and not included in the cost of the asset.

(b) 1. STRAIGHT-LINE DEPRECIATION

Depreciable Year Amount ×

Depr. Rate

2016 2017 2018 2019

25%** 25% 25% 25%

* **

$205,000* 205,000 205,000 205,000

Depr. Expense $ 51,250 51,250 51,250 51,250

End of Year Accum. Carrying Depr. Amount $220,000 $ 51,250 168,750 102,500 117,500 153,750 66,250 205,000 15,000

$220,000 − $15,000 = $205,000 100% ÷ 4= 25%

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PROBLEM 9-3A (Continued) (b) (Continued) 2. DOUBLE DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2016 2017 2018 2019

50%* 50% 50% 50%

$220,000 110,000 55,000 27,500

End of Year Depr. Accum. Carrying = Expense Depr. Amount $220,000 $110,000 $110,000 110,000 55,000 165,000 55,000 27,500 192,500 27,500 12,500** 205,000 15,000

* 200% ÷ 4 = 50% ** Limited to the amount that brings carrying amount to the residual value of $15,000. 3. UNITS-OF-PRODUCTION End of Year Units of Depr. Depr. Accum. Carrying Year Production × Amt/Unit* = Expense Depr. Amount $220,000 2016 16,750 $2.50* $ 41,875 $ 41,875 178,125 2017 27,600 2.50 69,000 110,875 109,125 2018 22,200 2.50 55,500 166,375 53,625 2019 16,350 2.50 38,625** 205,000 15,000 * Depreciable amount per unit is $2.50 per unit [($220,000 – $15,000)  82,000 = $2.50] ** Equal to the amount that brings the carrying amount to the residual value of $15,000 (actual production of 82,900 exceeded estimated total production of 82,000).

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PROBLEM 9-3A (Continued) (c)

The straight-line method of calculating depreciation provides the lowest amount of depreciation expense for 2017, which results in the highest amount of profit. Over the life of the asset, all three methods result in the same total depreciation expense (equal to the depreciable amount) and therefore the same amount of profit.

Taking It Further: The cost of recycling the equipment at the end of its useful life is an asset retirement cost and the amount must be estimated and added to the cost the equipment — part (a). These costs would consequently be added to the depreciable amount in the calculation of depreciation under all of the methods and would proportionately increase the amount of depreciation charge — part (b).

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PROBLEM 9-4A (a) Transaction

Land

Building

Equip. ment

Jan. 12 Feb. 6 Apr. 24 May 17 July 19 Aug. 21 Sept. 20 Oct. 25 Dec. 31 Dec. 31

NE NE NE NE NE NE NE NE NE NE

NE NE +$75,000 NE NE NE NE NE NE NE

NE NE NE NE NE NE NE NE NE NE +$26,000 NE NE NE +$20,000 NE NE NE NE +$37,500

Accum. Depr.

Total PP&E

NE −$2,200 NE −$5,400 +$75,000 NE NE −$3,100 NE −$5,900 +$26,000 NE NE −$2,700 +$20,000 NE NE NE −$37,500 −$37,500

(b) Jan. 12 Repairs Expense ....................... Cash.......................................

2,200

Feb.

5,400

6 Repairs Expense ....................... Cash.......................................

Apr. 24

Profit

2,200

5,400

Building...................................... 75,000 Cash.......................................

75,000

Note: Possibly add to as a separate component of the building depending on the type of system, and whether it has the same useful life as the rest of the building. May. 17 Training Expense ...................... Cash.......................................

3,100

July 19 Repairs Expense ....................... Cash.......................................

5,900

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PROBLEM 9-4A (Continued) (b) (Continued)

Aug. 21

Vehicles ..................................... 26,000 Cash.......................................

Sept. 20 Repairs Expense ....................... Cash....................................... Oct. 25

2,700

Equipment.................................. 20,000 Cash.......................................

Dec. 31 Impairment Loss ....................... 37,500 Accumulated Depreciation— Equipment ............................ [($150,000 − $62,500) − $50,000] Note:

26,000

2,700

20,000

37,500

ASPE does not allow the reversal of the impairment loss for the land.

Taking It Further: Given that the engine has to be replaced frequently, consideration should be given to depreciating this component of the equipment using a four year useful life and the remainder of the equipment the twelve year useful life. The major difficulty with this is determining how much of the cost of the equipment to allocate to the engine. One possibility is to use the value of a replacement motor to establish the cost of the original motor at the date of the purchase of the equipment.

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PROBLEM 9-5A (a)

Depreciable Year Amount ×

Depr. Rate*

2013 2014 2015 2016 2017

10%** 10% 10% 10% 10%

$700,000** 700,000 700,000 700,000 700,000

Depr. Expense $70,000 70,000 70,000 70,000 70,000

End of Year Accum. Carrying Depr. Amount $750,000 $70,000 680,000 140,000 610,000 210,000 540,000 280,000 470,000 350,000 400,000

** 100% ÷ 10 years = 10% ** Depreciable amount = $750,000 − $50,000 = $700,000 (b)

Dec. 31 Impairment Loss ....................... 2017 Accumulated Depreciation— Equipment ............................ ($400,000 − $320,000)

80,000 80,000

(c)

On Slope’s income statement will be reported depreciation expense in the amount of $70,000 and the impairment loss of $80,000. On Slope’s balance sheet, the equipment will be reported at its cost of $750,000 and accumulated depreciation of $430,000 ($350,000 + $80,000) so that the carrying amount will be $320,000 ($750,000-$430,000) and, equal to the impaired amount.

(d)

End of Year Accum. Carrying = Depr. Amount $430,000* $320,000 33.33%** $103,333 533,333 216,667 33.33% 103,333 636,666 113,334 33.33% 103,334 740,000 10,000

Depreciable Year Amount*** × 2018 2019 2020

$310,000 310,000 310,000

Depr. Rate

Depr. Expense

*Accumulated Depreciation = $350,000 end of year before impairment loss + $80,000 impairment loss ** 100% ÷ 3 years remaining (8 – 5 years) = 33.33% *** Carrying amount – revised res. value = $320,000 – $10,000 Solutions Manual .

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PROBLEM 9-5A (Continued) Taking It Further: One of the major differences between IFRS and ASPE concerns the measurement and reporting of depreciable assets. Under IFRS, it is possible to report these types of assets at their fair value, using the revaluation model, while under ASPE, no revaluation beyond a capital asset’s historical cost is possible. Consistent with this distinction, is the treatment of recoveries of previously recorded impairments. The basis for reporting depreciable assets at their fair value under IFRS is that the value used can be reliably measured. As well, under IFRS the frequency of the scrutiny of the assets to determine any impairment is greater and the measures taken more rigorous. Private companies reporting under ASPE typically do not have the same level of resources needed (as a public company reporting under IFRS) to determine if an impairment exists or if it has been reversed. Under ASPE, impairments are recorded less frequently and thus it is reasonable that ASPE does not allow the recording of reversals of impairment losses.

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PROBLEM 9-6A (a) 2015 Apr.

1 Land............................................ 150,000 Building ...................................... 235,000 Cash....................................... Notes Payable .......................

Dec. 31

Depreciation Expense ............... 6,000 Accumulated Depreciation—Building ($235,000 - $35,000) × 4% × 9/12 = $6,000)

31 Interest Expense .......................... 10,125 Cash....................................... ($270,000 × 5% × 9/12 = $10,125) 2016 Feb. 17 Dec. 31

Repairs Expense ....................... Cash.......................................

115,000 270,000 6,000

10,125

225 225

Depreciation Expense ............... 8,000 Accumulated Depreciation—Building ($235,000 - $35,000) × 4% = $8,000)

8,000

31 Interest Expense .......................... 13,500 Cash....................................... ($270,000 × 5% = $13,500)

13,500

31 Impairment Loss .......................... 30,000 Land ....................................... ($150,000 − $120,000)

30,000

Building — no entry as carrying amount = $221,000; ($235,000 − $6,000 − $8,000 = $221,000) which does not exceed the recoverable amount of $240,000.

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PROBLEM 9-6A (Continued) (a) (Continued) 2017 Jan. 31 Depreciation Expense ............... 667 Accumulated Depreciation—Building ($200,000 × 4% × 1/12) 31 Cash ........................................... 320,000 Accumulated Depreciation— Building*...................................... 14,667 Loss on Disposal (see below) ..... 20,333 Land ....................................... Building ................................. * ($6,000 + $8,000 + $667) Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 14,667 Carrying amount .................. Proceeds ............................... Loss on disposal .................. Feb.

(b)

1 Interest Expense ($270,000 × 5% × 1/12) .................. 1,125 Notes Payable ............................ 270,000 Cash.......................................

667

120,000 235,000

$120,000 220,333 340,333 320,000 $ 20,333

271,125

The land may have been impaired due to contamination found on it or surrounding properties. It may also have been because plans for a proposed new development on adjacent land that would have increased the value of NW Tool Supply’s property at the date of purchase, have been permanently shelved.

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PROBLEM 9-6A (Continued) (c)

Oct. 31 Depreciation Expense ................... 6,667 Accumulated Depreciation—Building ($200,000 × 4% × 10/12) Oct. 31 Cash ........................................... 400,000 Accumulated Depreciation —Building*................................. 20,667 Land ....................................... Building ................................. Gain on Sale (see below)...... * ($6,000 + $8,000 + $6,667) Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 20,667 Carrying amount .................. Proceeds ............................... Gain on disposal (sale) ........

6,667

120,000 235,000 65,667

$120,000 214,333 334,333 400,000 $ 65,667

Taking It Further: For purposes of calculating and recording impairments, the recoverable amount of a property is based on the comparison of the carrying amount of the asset against the higher of the fair value of the asset less the cost to sell it, or its value in use. In this case, the property is made up of land and a building which are somewhat inseparable. Consequently, the value in use to NW Tool Supply would be the amount management expects to recover in operations by using the assets together. As for establishing the fair value of the combined assets, property of similar location and type that have been recently sold can be used to make comparisons of what would be obtained on sale. Management should be diligent about looking for possible causes for impairment.

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PROBLEM 9-6A (Continued) Taking It Further: (Continued) When considering impairment of the land on its own, uninsured damages or conditions uncovered during the year may require management to recalculate the value in use or the resale fair value of the land. Under ASPE the review of property, plant, and equipment for possible impairment need not be performed each year, but must be performed on a regular basis, particularly when changes in circumstance or conditions occur. If the company is using IFRS, annual impairment testing is required.

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PROBLEM 9-7A

(a)

1. STRAIGHT-LINE DEPRECIATION

Year

Depreciable Amount ×

Depr. Rate

2015 2016 2017

$97,000* 97,000 97,000

33.33%** 33.33% 33.33%

Depr. Expense $32,333 32,333 32,334

End of Year Accum. Carrying Depr. Amount $107,500 $32,333 75,167 64,666 42,834 97,000 10,500

* $107,500 − $10,500 = $97,000 ** 100% ÷ 3 years = 33.33% 2. DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2015 2016 2017

40% 40% 40%

$107,500 64,500 38,700

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Depr. Expense $43,000 25,800 15,480

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End of Year Accum. Carrying Depr. Amount $107,500 $43,000 64,500 68,800 38,700 84,280 23,220

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PROBLEM 9-7A (Continued) (a) (Continued) 3. UNITS-OF-PRODUCTION Units of Depr. Depr. Year Production × Amt/Unit* = Expense 2015 2016 2017

10,000 20,000 29,000

$1.617* 1.617 1.617

$ 16,170 32,340 46,893

End of Year Accum. Carrying Depr. Amount $107,500 $ 16,170 91,330 48,510 58,990 95,403 12,097

* Depreciable amount per unit is $1.617 per unit [($107,500 – $10,500)  60,000 = $1.617] (b)

(1) (2) Straight- DiminishingLine Balance

Cost ...................................... $107,500 Accumulated depreciation.. 97,000 Carrying amount ................. 10,500 Cash proceeds .................... 15,000 Gain (loss) on sale .............. $ 4,500 (c)

$107,500 84,280 23,220 15,000 $ (8,220)

(1) (2) Straight- DiminishingLine Balance

Depreciation expense ......... $97,000 Add loss (less gain) on sale (4,500) Net expense ......................... $92,500

$84,280 8,220 $92,500

(3) Unit –ofProduction $107,500 95,403 12,097 15,000 $ 2,903 (3) Unit –ofProduction $95,403 (2,903) $92,500

The net expense is the same under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in turn causes a different gain or loss on sale. Consequently, the total depreciation expense recognized over the life of the asset, plus the loss on sale (or less the gain on sale), results in the same net expense of $92,500 over the life of the asset.

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PROBLEM 9-7A (Continued) Taking It Further: I disagree. Experiencing a gain or loss on the disposal of a depreciable asset is not the result of an error or mistake. Rather, a gain or loss is an expected outcome due to the limitations of the cost allocation that has occurred for the asset up to the date of its disposal. Since estimates are involved in arriving at the factors used in calculating depreciation, such as the estimated useful life and the estimated residual value, it is natural that some differences between the carrying amount and proceeds of disposition will occur when the asset is ultimately disposed of. Depreciation is a cost allocation process and is not intended to ensure the carrying amount of the asset reflects fair value.

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PROBLEM 9-8A (a)

(b)

2015 Mar.

1 Equipment .................................... 95,000 Accounts Payable .................

2015 Aug. 31 Depreciation Expense ................... 9,500 Accumulated Depreciation —Equipment ......................... $95,000 × 20% × 6/12 months = $9,500 2016 Aug. 31 Depreciation Expense ................. 17,100 Accumulated Depreciation —Equipment ......................... ($95,000 − $9,500) × 20% = $17,100

95,000

9,500

17,100

2017 Aug. 31 Depreciation Expense ................. 13,680 Accumulated Depreciation —Equipment ......................... 13,680 ($95,000 − $9,500 − $17,100) × 20% = $13,680 (c)

2018 Feb.

1 Depreciation Expense ................... 4,560 Accumulated Depreciation —Equipment ......................... 4,560 ($95,000 − $9,500 − $17,100 − $13,680) × 20% × 5/12 = $4,560 Accumulated Depreciation at February 1, 2018: $9,500 + $17,100 + $13,680 + $4,560 = $44,840 Carrying Amount at February 1, 2018: Cost – Accumulated Depreciation $50,160 = $95,000 − $44,840

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PROBLEM 9-8A (Continued) (c) (Continued) 1.

Feb.

1 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal* ....................... 50,160 Equipment .............................

95,000

*Proceeds – Carrying Amount = Gain (loss) $0 – [$95,000 – $44,840] = ($50,160) 2.

Feb.

1 Cash ............................................. 55,000 Accumulated Depreciation —Equipment ................................ 44,840 Gain on Disposal** .................... Equipment ............................. ** $55,000 – [$95,000 – $44,840] = $4,840 1 Cash ............................................. 45,000 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal*** ....................... 5,160 Equipment ............................. *** $45,000 – [$95,000 – $44,840] = ($5,160)

4,840 95,000

Feb.

1 Equipment (new) ($47,000 + $45,000) ...................... 92,000 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal**** ..................... 3,160 Cash ($97,000 − $52,000)...... Equipment (old) .................... **** $47,000 – [$95,000 – $44,840] = ($3,160)

95,000

Feb.

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PROBLEM 9-8A (Continued) Taking It Further: The following are the arguments in favour of recording gains and losses on disposal of property, plant, and equipment as: 1.

Part of profit from operations: Gains and losses are basically just adjustments to depreciation expense and should be recorded in the same section of the income statement. Classifying gains and losses as operations removes the potential for management bias in the selection of depreciation methods or in the estimates concerning useful lives and residual values of the assets. Bias might be at play concerning management’s unwillingness to show losses in operations because management bonuses may be based on the amount of profit from operations.

Non-operating items: The same management bias described above would be applied for gains recognized by the business. A common view is that the disposal of property, plant, and equipment is not an everyday occurrence and gains or losses are not predictable. It can also be argued that selling property, plant, and equipment is not part of normal operations and thus gains or losses should not be reported as part of profit from operations.

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PROBLEM 9-9A (a)

April

1 Land............................................2,200,000 Cash....................................... 550,000 Notes Payable ....................... 1,650,000

May

1 Depreciation Expense .................. 46,667 Accumulated Depreciation—Equip. ($1,400,000 ÷ 10 × 4/12) ........

46,667

1 Cash .............................................150,000 Accumulated Depreciation —Equipment. ............................1,166,667 Loss on Disposal .......................... 83,333 Equipment ............................. 1,400,000 Cost Accumulated depreciation—equip. [($1,400,000 ÷ 10) × 8 + $46,667)] Carrying amount Cash proceeds Loss on disposal

$1,400,000 1,166,667 233,333 150,000 $ (83,333)

June

1 Cash .............................................450,000 Notes Receivable ......................1,350,000 Land ....................................... 700,000 Gain on Disposal .................. 1,100,000

July

1 Equipment .................................1,100,000 Cash....................................... 1,100,000

Dec. 31 Depreciation Expense .................. 50,000 Accumulated Depreciation —Equipment ($500,000 ÷ 10)

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PROBLEM 9-9A (Continued) (a) (Continued) Dec. 31 Accum. Depr.—Equipment..........350,000 Loss on disposal* ........................150,000 Equipment ............................. 500,000 Cost $500,000 Accumulated depreciation—equipment ($500,000 ÷ 10 × 7) 350,000 Carrying amount 150,000 Cash proceeds 0 Gain (loss) on disposal $ (150,000)* (b) Dec. 31 Depreciation Expense .................974,000 Accumulated Depreciation —Building ($48,700,000 ÷ 50) 974,000 31 Depreciation Expense ..............7,365,000 Accumulated Depreciation —Equipment ......................... 7,365,000 $73,100,000* ÷ 10 $1,100,000 ÷ 10 × 6/12

$7,310,000 55,000 $7,365,000

*$75,000,000 − $1,400,000 − $500,000 = $73,100,000

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31 Interest Expense ........................... 74,250 Interest Payable .................... ($1,650,000 × 6% × 9/12)

74,250

31 Interest Receivable ....................... 39,375 Interest Revenue................... ($1,350,000 × 5% × 7/12)

39,375

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PROBLEM 9-9A (Continued) (c) HAMSMITH CORPORATION Balance Sheet (Partial) December 31, 2017 Property, plant, and equipment1 Land................................................ Buildings .......................................... $48,700,000 Less: Accumulated depreciation.. 32,074,000 Equipment ........................................ $74,200,000 Less: Accumulated depreciation.. 32,945,000 Total property, plant, and equipment 1

$11,500,000 16,626,000 41,255,000 $69,381,000

See T accounts that follow for balances.

Land Jan. 1, 2017 April 1, 2017

10,000,000 June 1, 2017 2,200,000

700,000

Dec.31, 2017 Bal. 11,500,000 Building J an. 1, 2017

48,700,000

D ec. 31, 2017 Bal. 48,700,000

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PROBLEM 9-9A (Continued) (c) (Continued) Equipment Jan. 1, 2017 July 1, 2017

75,000,000 1,100,000

May 1, 2017 Dec. 31, 2017

1,400,000 500,000

Dec.31, 2017Bal. 74,200,000

Accumulated Depreciation—Building Jan. 1, 2017 Dec. 31, 2017

31,100,000 974,000

Dec. 31, 2017 Bal. 32,074,000

Accumulated Depreciation—Equipment May 1, 2017 Dec. 31, 2017

1,166,667 350,000

Jan. 1, 2017 May 1, 2017 Dec. 31, 2017 Dec. 31, 2017

27,000,000 46,667 50,000 7,365,000

Dec. 31, 2017 Bal. 32,945,000

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PROBLEM 9-9A (Continued) Taking It Further: Although the use of the revaluation model is permitted for public companies following International Financial Reporting Standards (IFRS), its adoption is voluntary, and somewhat rare. The revaluation model results in more relevant information on the balance sheet, because the long-lived assets are revalued to fair value on a regular basis. An investor may be better able to assess the current economic position of the company with this information. However, the revaluation model increases the risk of error and bias in the financial statements because the revaluation model uses a fair value amount that is not necessarily supported by a transaction with an independent buyer.

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PROBLEM 9-10A 1.

Research Expense ($160,000 × 55%) ........ 88,000 Patents.................................................... Accumulated Amortization—Patents........ Amortization Expense ........................... $88,000 ÷ 15 years = $5,867

5,867

Goodwill ...................................................... Amortization Expense ........................... ($400,000 ÷ 40 years) × 6/12 = $5,000

5,000

88,000

5,867

Impairment Loss ($80,000 − $70,000)........ 10,000 Licence ...................................................

5,000

10,000

Taking It Further: The majority of intangible assets that are developed internally cannot be recognized as intangible assets on the balance sheet because the expenditures on internally developed intangibles cannot be distinguished from the cost of other research and development performed by the business. The costs cannot be separately measured and must be expensed as incurred.

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PROBLEM 9-11A (a)

Jan.

Patent #1 .................................... 23,200 Cash.......................................

23,200

June 30 Research Expense .................... 180,000 Cash.......................................

180,000

Patent #2 .................................... 60,000 Cash.......................................

60,000

Sept. 1 Advertising Expense ................. 12,000 Cash.......................................

12,000

Oct.

(b) Dec. 31 Amortization Expense............... 12,400 Accumulated Amortization— Patent #1* .............................. Accumulated Amortization— Patent #2**.............................

18,000

10,900 1,500

* [($80,000 × 1/10) + ($23,200 × 1/8)] At Jan. 1, 2017 Patent # 1 has been amortized 2 years ($16,000 ÷ $80,000 = 2/10) — remaining period to amortize is 8 years. ** [$60,000 × 1/20 × 6/12 = $1,500] 31 Amortization Expense............... Accumulated Amortization— Copyright #1* ........................ Accumulated Amortization— Copyright #2** ....................... *($48,000 × 1/10) **($18,000 × 1/6 × 3/12)

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PROBLEM 9-11A (Continued) (c) IP COMPANY (Partial) Balance Sheet December 31, 2017

Assets Intangible assets Patents1 ................................................ Less: Accumulated amortization2...... Copyrights3 .......................................... Less: Accumulated amortization4...... Total intangible assets ........................ Goodwill ....................................................

$163,200 28,400 66,000 34,350

$134,800 31,650 $166,450 $220,000

Cost: Patent #1 ($80,000 + $23,200) + Patent #2 ($60,000) = $163,200 2 Accumulated Amortization: Patent #1 ($16,000 + $10,900) + Patent #2 ($1,500) = $28,400 3 Cost: Copyright #1 ($48,000) + Copyright #2 ($18,000) = $66,000 4 Accumulated Amortization: Copyright #1 ($28,800 + $4,800) + Copyright #2 ($750) = $34,350

Taking It Further: Although intangible assets do not have physical substance, they have characteristics common to other assets in that they contribute to the revenue producing ability of a business that owns them. They are owned and controlled by the business and therefore fit the definition of assets.

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PROBLEM 9-12A (a)

2016 Mar. 31 Resource ................................... 2,860,000 Cash.................................. 2,860,000 ($2,600,000 + $260,000) Dec. 31 Inventory ................................. Accumulated Depletion— Resource ..........................

570,000 570,000

($2,860,000 − $200,000) ÷ 560,000 t = $4.75/t $4.75/t × 120,000 t = $570,000 Dec. 31 Cost of Goods Sold ................ Inventory .......................... 2017 Dec. 31 Inventory ................................. Accumulated Depletion— Resource ..........................

570,000 570,000 380,000 380,000

($2,860,000 − $570,000 − $200,000) ÷ 550,000 t = $3.80/t $3.80/t ×100,000 t = $380,000 Dec. 31 Cost of Goods Sold ................ Inventory ..........................

380,000 380,000

(b) RIVERS MINING COMPANY Income Statement (partial) Year Ended December 31, 2017 Cost of goods sold ........................................

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PROBLEM 9-12A (Continued) (b) (Continued) RIVERS MINING COMPANY (Partial) Balance Sheet December 31, 2017 Property, plant, and equipment Resource ................................................ $2,860,000 Less: Accumulated depletion* ........... 950,000 $1,910,000 * $570,000 + $380,000 = $950,000 Taking It Further: Due to its nature, it is expected that the estimate of the total amount of ore to be extracted from a mine would need to be adjusted as extraction occurs and better estimates can be made. Management should not be influenced by the need for changes in estimates when choosing the units-of-production method for recording depletion of the resource. It is the method that best allocates the cost of the mine to the units of ore that are recorded in inventory.

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PROBLEM 9-13A (a) (in thousands) Andruski Company

Brar Company

$552.0 [($702.5 + $662.8) ÷ 2]

$1,762.9 [($1,523.5 + $1,410.7) ÷2]

= 0.81 to 1

= 1.20 to 1

$515.9 [($662.8 + $602.5) ÷ 2]

$1,588.2 [($1,410.7 + $1,318.4) ÷2]

= 0.82 to 1

= 1.16 to 1

Return on assets 2017

$21.4 [($702.5 + $662.8) ÷ 2]

$96.5 [($1,523.5 + $1,410.7) ÷2]

= 3.13%

= 6.58%

Return on assets 2016

$20.6 [($662.8 + $602.5) ÷ 2]

$85.4 [($1,410.7 + $1,318.4) ÷2]

= 3.26%

= 6.26%

Asset turnover 2017

Asset turnover 2016

(b) Brar Company is far more efficient in using its assets to generate sales–its assets turnover of 1.20 times is higher than 0.82 times for Andruski Company and is increasing, while Andruski’s is decreasing. Brar is also more efficient in using assets to produce profit–with a return on assets of 6.58% compared to 3.13% for Andruski Company. Brar’s ratio is increasing while Andruski’s in decreasing.

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PROBLEM 9-13A (Continued) Taking It Further: Although the ability to compare two companies in the same industry using ratios is affected by the depreciation methods adopted by the companies being compared, absolute conclusions cannot be drawn from these differences. Brar uses the straight-line method of depreciation and Andruski uses the diminishing-balance method which results in higher charges of depreciation in the early years and lower amounts in the later years for Andruski. Assets are acquired throughout the life of a company as well so it is not possible to determine the impact of the different methods without more information. Notwithstanding this limitation, and assuming a normal turnover of assets, one could generally conclude that the amount of profit and total assets of Andruski would be lower than that of Brar, simply because of the accelerated method of depreciation being used, which generated a higher expense for depreciation and a lower carrying amount for the assets.

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PROBLEM 9-1B (a)

Feb.

Land ........................................... 575,000 Cash....................................... Notes Payable ....................... Land ........................................... Cash.......................................

115,000 460,000

7,500 7,500

Land ........................................... 19,000 Cash.......................................

19,000

Cash ........................................... Land .......................................

8,500

Land ........................................... 10,500 Cash.......................................

10,500

Building...................................... 28,000 Cash.......................................

28,000

Building...................................... 18,000 Cash.......................................

18,000

Building...................................... 850,000 Cash....................................... Notes Payable .......................

170,000 680,000

Sept. 3 Land Improvements .................. 40,000 Cash.......................................

40,000

10 Prepaid Insurance ..................... Cash.......................................

3,750

Mar.

Aug. 31

3,750

Oct. 31 Land Improvements .................. 37,750 Cash.......................................

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PROBLEM 9-1B (Continued) (b) Date 2017 Feb. 7 9 15 17 25

Date 2017 Mar. 2 15 Aug. 31

Date 2017 Sept. 3 Oct. 31

Explanation

Land Ref.

Debit

Credit Balance

575,000 7,500 19,000 10,500

575,000 582,500 601,500 593,000 603,500

Debit

Credit Balance

28,000 18,000 850,000

28,000 46,000 896,000

Land Improvements Explanation Ref. Debit

Credit Balance

40,000 37,750

40,000 77,750

8,500

Explanation

Building Ref.

The costs that will appear on Weisman’s December 31, 2017 balance sheet will be: Land $603,500 Building 896,000 Land Improvements 77,750

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PROBLEM 9-1B (Continued) Taking It Further: Companies should start to record depreciation when the asset is ready for use. In the case of Weisman, the building was ready for use on August 31, 2017 and land improvements were completed on October 31, 2017 and so depreciation should be calculated from those dates. Weisman should depreciate only the building and land improvements. Land has an indefinite useful life and therefore is not depreciated.

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PROBLEM 9-2B (a)

Land Building Equipment

Appraised Value $262,500 337,500 150,000 $750,000

% of Total 35% 45% 20%

Cost Allocated $245,000 315,000 140,000 $700,000

(b) Building: Straight-line 1. To the nearest month Depreciable Year Amount* × 2016 2017

$300,000 300,000

Depr. Rate

Depr. Expense

1/60 × 2/12 1/60

$833 5,000

End of Year Accum. Carrying Depr. Amount $315,000 $833 314,167 5,833 309,167

* $315,000 − $15,000 = $300,000 (2) Half a year in the year of acquisition Depreciable Year Amount* × 2016 2017

$300,000 300,000

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Depr. Rate

Depr. Expense

1/60 × 6/12 1/60

$2,500 5,000

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End of Year Accum. Carrying Depr. Amount $315,000 $2,500 312,500 7,500 307,500

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PROBLEM 9-2B (Continued) (b) (Continued) Equipment: Double diminishing-balance 1. To the nearest month Carrying Amount Beginning Depr. Depr. Year of Year × Rate* = Expense 2016 2017

$140,000 134,167

25% × 2/12 25%

$5,833 33,542

End of Year Accum. Carrying Depr. Amount $140,000 $5,833 134,167 39,375 100,625

* 200% ÷ 8 = 25% 2) Half a year in the year of acquisition Carrying Amount Depr. Depr. Beginning Year of Year × Rate = Expense 2016 2017 (c)

$140,000 122,500

25% × 6/12 25%

$17,500 30,625

End of Year Accum. Carrying Depr. Amount $140,000 $17,500 122,500 48,125 91,875

Both options are acceptable. When deciding between the two policies, Solinger should consider, for purpose of consistency, the policy used in the past. Since this is the first year of business, Solinger should consider what other categories or types assets it will be purchasing in the future that will be depreciated using this policy. If for example, the remaining categories of assets will be depreciated using the units-of-production method, the choice will not matter. The impact of the choice will not be significant in the long run, particularly if the assets are bought and sold frequently. Also, the impact is insignificant for assets with very long useful lives, as is demonstrated in part (b) for the building. No matter the choice taken by Solinger, the policy must be followed consistently.

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PROBLEM 9-2B (Continued) Taking It Further: If Solinger had decided to use the units-of-production method instead of the diminishing-balance method for depreciating its equipment, the decision between the adoption of a policy for depreciating to the nearest month or half a year in the year of acquisition would not matter. When using the units-ofproduction method, the calculation of depreciation is not calculated as a function of the time the asset is used but is based on the amount of use that is being made of the asset, which in turn is based on some units of output or production. There is no pro-ration for time used in the units-of-production method.

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PROBLEM 9-3B (a)

Cost: Cash price Delivery costs Installation and testing Total cost

$442,000 4,000 6,000 $452,000

The one-year insurance policy is not included as it is an operating expenditure, benefiting only the current period. (b) 1. STRAIGHT-LINE DEPRECIATION

Depreciable Year Amount ×

Depr. Rate

2016 2017 2018 2019

25% 25% 25% 25%

* **

$432,000* 432,000 432,000 432,000

End of Year Depr. Accum. Carrying = Expense Depr. Amount $452,000 $ 108,000 $ 108,000 344,000 108,000 216,000 236,000 108,000 324,000 128,000 108,000 432,000 20,000

$452,000 − $20,000 = $432,000 100% ÷ 4 years = 25%

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PROBLEM 9-3B (Continued) (b) (Continued) 2. DOUBLE DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2016 2017 2018 2019

50% 50% 50% 50%

$452,000 226,000 113,000 56,500

End of Year Depr. Accum. Carrying = Expense Depr. Amount $452,000 $226,000 $226,000 226,000 113,000 339,000 113,000 56,500 395,500 56,500 36,500** 432,000 20,000

* 200% ÷ 4 = 50% ** Use the amount that brings carrying amount to the residual value of $20,000. 3. UNITS-OF-PRODUCTION DEPRECIATION Units of Depr. Year Production × Amt./Unit* = 2016 2017 2018 2019

22,600 45,600 49,700 32,200

$2.88* 2.88 2.88 2.88

End of Year Depr. Accum. Carrying Expense Depr. Amount $452,000 $65,088 $ 65,088 386,912 131,328 196,416 255,584 143,136 339,552 112,448 92,448** 432,000 20,000

* Depreciation amount per unit: ($452,000 − $20,000) ÷ 150,000 units = $2.88 ** Use the amount that makes carrying amount equal to residual value (actual production exceeded estimated total production).

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PROBLEM 9-3B (Continued) (c)

The straight-line method provides the lowest amount of depreciation expense for 2017, thus resulting in the highest profit that year. Over the life of the asset, all three methods result in the same total depreciation expense (equal to the depreciable amount).

Taking It Further: The cost of recycling the equipment at the end of its useful life is an asset retirement cost which must added to the cost of the equipment — part (a). These costs would consequently be added to the depreciable amount in the calculation of depreciation under all of the methods and would proportionately increase the amount of depreciation expense — part (b).

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PROBLEM 9-4B (a) Transaction

Land

Building

Equip. ment

Accum. Depr.

Total PP&E

Profit

Jan. 22 NE NE NE NE NE −$4,600 Apr. 10 NE NE +$95,000 NE +$95,000 NE May 6 NE NE NE NE NE −$30,500 July 20 NE NE NE NE NE −$10,000 Aug. 7 NE NE +$35,000 NE +$35,000 NE Aug. 15 NE NE NE NE NE −$1,900 Oct. 25 NE NE +$18,200* NE +18,200 NE Nov. 6 NE +$120,000 NE NE +$120,000 NE Dec. 31 NE NE NE +$85,000** −$85,000 −$85,000 Dec. 31 +$75,000*** NE NE NE +$75,000 +$75,000

*$18,200 = $16,700 + $1,500 **$85,000 = [($250,000 − $75,000) − $90,000] ***$75,000 = $575,000 − $500,000 (b) Jan. 22

Apr. 10

May

July 20

Aug.

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Repairs Expense ....................... Accounts Payable .................

4,600 4,600

Equipment.................................. 95,000 Accounts Payable .................

95,000

Repairs Expense ....................... 30,500 Accounts Payable .................

30,500

Repairs Expense ....................... 10,000 Accounts Payable .................

10,000

Equipment.................................. 35,000 Accounts Payable .................

35,000

Training Expense ...................... Accounts Payable .................

1,900

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PROBLEM 9-4B (Continued) (b) (Continued) Oct. 25

Nov.

Equipment.................................. 16,700 Accounts Payable .................

16,700

Equipment.................................. Accounts Payable .................

1,500

Building...................................... 120,000 Accounts Payable .................

120,000

Dec. 31 Impairment Loss ....................... 85,000 Accumulated Depreciation— Equipment .............................

85,000

Dec. 31

Land ........................................... 75,000 Impairment Loss ...................

75,000

Under IFRS, the reversal of the impairment loss is limited to the amount required to increase the asset’s carrying amount to what it would have been if the impairment loss had not been recorded. In this case the original cost of the land was $575,000 and the amount of the impairment recorded to date is $75,000 ($575,000 − $500,000). Since the current recoverable amount of $600,000 is greater than the original cost of the land, before impairment was recorded, the recovery entry is limited to $75,000. Taking It Further: Given that the engine has to be replaced frequently, consideration should be given to depreciating this component of the equipment using a five year useful life and the remainder of the equipment the fifteen year useful life. If the original equipment does not have an amount specified for the engine as a component, it would be reasonable to use the value of a replacement motor to establish the cost of the original motor at the date of the purchase of the equipment.

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PROBLEM 9-5B (a)

Depreciable Year Amount ×

Depr. Rate

2013 2014 2015 2016 2017

10% 10% 10% 10% 10%

$575,000* 575,000 575,000 575,000 575,000

Depr. Expense $57,500 57,500 57,500 57,500 57,500

End of Year Accum. Carrying Depr. Amount $600,000 $ 57,500 542,500 115,000 485,000 172,500 427,500 230,000 370,000 287,500 312,500

* Depreciable amount = $600,000 − $25,000 = $575,000 ** 1 ÷ 10 years = 10% (b)

Dec. 31 Impairment Loss .......................... 52,500 2017 Accumulated Depreciation— Equipment ............................ ($312,500 − $260,000)

52,500

(c)

On Short Track’s income statement will be reported depreciation expense in the amount of $57,500 and the impairment loss of $52,500. On Short Track’s balance sheet the equipment will be reported at its cost of $600,000 and the accumulated depreciation of $340,000 ($287,500 + 52,500) so that the book value will be $260,000 equal to the impaired amount.

(d)

End of Year Depr. Accum. Carrying = Expense Depr. Amount $340,000¹ $260,000 $125,000 465,000 135,000 125,000 590,000 10,000

Depreciable Year Amount × 2018 2019

$250,0002 250,000

Depr. Rate 50%3 50%

¹ Accumulated Depreciation = $287,500 end of year before impairment loss + $52,500 impairment loss 2 Depreciable amount = Recoverable amount at date of impairment less revised residual value of $10,000 3 1 ÷ 2 years (7 – 5 years) remaining = 50% Solutions Manual .

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PROBLEM 9-5B (Continued)

Taking It Further: It is important to record impairment losses when they occur to ensure that the amount of benefit to be derived from long-lived assets is not overstated on the balance sheet. When assets lose their utility, they must be reduced to the recoverable amount expected to be obtained through their use. Postponing a loss until the asset is sold or disposed of would result in mismatching costs and their related revenues and an overstatement of assets.

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PROBLEM 9-6B (a)

2015 Jul.

1 Equipment .................................. 395,000 Cash....................................... Notes Payable .......................

Dec. 31 Depreciation Expense ................. 19,750 Accumulated Depreciation— Equipment ............................ [($395,000 x (200% ÷ 20)) x 6/12] 31 Interest Expense ............................ 7,375 Cash....................................... ($295,000 x 5% x 6/12 = $7,375) 2016 May 21 Software Expense ......................... 2,000 Cash....................................... Dec. 31 Depreciation Expense ................. 37,525 Accumulated Depreciation— Equipment ............................ ($395,000-$19,750) x 10% = $37,525) 31 Interest Expense ....................... 14,750 Cash....................................... ($295,000 × 5% = $14,750)

100,000 295,000

19,750

7,375

2,000

37,525

14,750

31 Impairment Loss ....................... 62,725 Accumulated Depreciation— Equipment ............................ 62,725 [$275,000 – ($395,000 - $19,750 - $37,525)] Carrying value of equipment: $337,725 ($395,000-$19,750$37,525) Impairment loss: $62,725 ($337,725-$275,000)

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PROBLEM 9-6B (Continued) (a) (Continued) 2017 Mar. 31 Depreciation Expense ................... 6,875 Accumulated Depreciation— Equipment ............................ $275,000 x 10% × 3/12 = $6,875 31 Cash ........................................... 240,000 Accumulated Depreciation— Equipment* ............................ 126,875 Loss on Disposal ......................... 28,125 Equipment ............................. * ($19,750+$37,525+$62,725+$6,875) Equipment ................................... Less: Accumulated depreciation Carrying amount ......................... Proceeds ...................................... Loss on disposal ......................... Apr.

1 Interest Expense ................... 3,688 Notes Payable ....................... 295,000 Cash ..................................

6,875

395,000 $395,000 126,875 268,125 240,000 $ 28,125

298,688

(b) The products made using the robot may not be as popular so revenue will be declining in the future. Or there could be new technology that will make the robot obsolete and of lower value to the company. Alternatively, there could have been physical damage to the robot that might be the cause of the impairment in value.

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PROBLEM 9-6B (Continued) (c)

Sept. 30 Depreciation Expense ................. 20,625 Accumulated Depreciation— Equipment ............................ ($275,000 x 10%) x 9/12 = 20,625 30 Cash ........................................... 260,000 Accumulated Depreciation— Equipment** ............................... 140,625 Gain on Disposal .................. Equipment .............................

20,625

5,625 395,000

** ($19,750+$37,525+$62,725+$20,625) Equipment ............................................... Less: Accumulated depreciation ........... Carrying amount ..................................... Proceeds ................................................. Gain on disposal .....................................

$395,000 140,625 254,375 260,000 $ 5,625

Taking It Further: The recoverable amount of an asset is the higher of the fair value of the asset less the cost to sell it or its value in use calculated using discounted cash flows. In this case, the industrial robot will be used in production. Consequently, the value in use to SE Parts Supply would be the amount management expects to recover in operations by using the asset. As for establishing the fair value of the asset, equipment of similar type that has been recently sold can be used to make estimates of what would be obtained on sale. Under ASPE, impairment tests of property, plant and equipment need not be done every year, particularly if the likelihood of impairment is remote. Management should be diligent about looking for possible causes for impairment when changes in circumstances or conditions occur. If the company is using IFRS, annual impairment tests are required regardless of circumstances. Solutions Manual .

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PROBLEM 9-7B (a)

Invoice price Less proceed from sale Cost of ownership

$125,000 21,000 $104,000

1. STRAIGHT-LINE DEPRECIATION Depreciable Year Amount × 2016 2017 2018

$107,000* 107,000 107,000

Depr. Rate

33.333%** 33.333% 33.333%

Depr. Expense $35,667 35,667 35,666

End of Year Accum. Carrying Depr. Amount $125,000 $35,667 89,333 71,334 53,666 107,000 18,000

* $125,000 − $18,000 = $107,000 ** 1 ÷ 3 years = 33.333%

2. DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2016 2017 2018

45% 45% 45%

$125,000 68,750 37,812

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Depr. Expense $56,250 30,938 17,015

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End of Year Accum. Carrying Depr. Amount $125,000 $56,250 68,750 87,188 37,812 104,203 20,797

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PROBLEM 9-7B (Continued) (a) (Continued) 3. UNITS-OF-PRODUCTION Units of Depr. Depr. Year Production × Amt/Unit* = Expense 2016 2017 2018

6,000 2,000 3,800

$8.917* 8.917 8.917

$ 53,502 17,834 33,885

End of Year Accum. Carrying Depr. Amount $125,000 $ 53,502 71,498 71,336 53,664 105,221 19,779

* Depreciable amount per unit is $8.917 per unit [($125,000 – $18,000)  12,000 = $8.917] (b)

(1) (2) Straight- DiminishingLine Balance

Cost ...................................... $125,000 Accumulated depreciation.. 107,000 Carrying amount ..................... 18,000 Cash proceeds...................... 21,000 Gain on sale......................... $ 3,000 (c)

(3) Unit –ofProduction

$125,000 104,203 20,797 21,000 $ 203

$125,000 105,221 19,779 21,000 $ 1,221

(1) (2) Straight- DiminishingLine Balance

(3) Unit –ofProduction

Depreciation expense ......... $107,000 Deduct Gain on sale ............ 3,000 Net expense ......................... $104,000

$104,203 203 $104,000

$105,221 1,221 $104,000

The net expense is the same under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in turn causes a different gain on sale. Consequently, the total depreciation expense recognized over the life of the asset, less the gain on sale, results in the same net expense of $104,000 over the life of the asset.

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PROBLEM 9-7B (Continued) Taking It Further: I disagree. Experiencing a gain or loss on the disposal of a depreciable asset is not the result of an error or mistake. Rather, a gain or loss is an expected outcome due to the limitations of the cost allocation that has occurred for the asset up to the date of its disposal. Since estimates are involved in arriving at the factors used in calculating depreciation, such as the estimated useful life and the estimated residual value, it is natural that some differences between the carrying amount and any proceeds of disposition will occur when the asset is disposed of.

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PROBLEM 9-8B (a)

(b)

2015 Feb.

4 Furniture ...................................... 70,000 Accounts Payable .................

2015 Sept. 30 Depreciation Expense ................... 9,333 Accumulated Depreciation —Furniture ............................ $70,000 × 20% × 8/12 months 2016 Sept. 30 Depreciation Expense ................. 12,133 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333) × 20% 2017 Sept. 30 Depreciation Expense ................... 9,707 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333 − $12,133) × 20%

(c)

2018 Jan. 26 Depreciation Expense ................... 2,588 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333 − $12,133 − $9,707) × 20% × 4/12

70,000

9,333

12,133

9,707

2,588

Accumulated Depreciation at January 26, 2018: $9,333 + $12,133 + $9,707 + $2,588 = $33,761 Carrying Amount at January 26, 2018: Cost – Accumulated Depreciation $70,000 − $33,761 = $36,239

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PROBLEM 9-8B (Continued) (c) (Continued) (1)

(2)

(3)

(4)

Jan. 26 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal* ....................... 36,239 Furniture................................ * $0 – [$70,000 – $33,761] = ($36,239)

Jan. 26 Cash ............................................. 30,000 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal** ........................ 6,239 Furniture................................ ** $30,000 – [$70,000 – $33,761] = ($6,239) Jan. 26 Cash ............................................. 40,000 Accumulated Depreciation— Furniture ...................................... 33,761 Gain on Disposal*** .............. Furniture................................ *** $40,000 – [$70,000 – $33,761] = $3,761

70,000

3,761 70,000

Jan. 26 Furniture ($55,000 + $30,000) ...................... 85,000 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal**** ..................... 6,239 Cash ($100,000 − $45,000).... 55,000 Furniture................................ 70,000 **** $30,000 – [$70,000 – $33,761] = ($6,239)

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PROBLEM 9-8B (Continued) Taking It Further: The following are the arguments in favour of recording gains and losses on disposal of property, plant, and equipment as: 1.

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PROBLEM 9-9B

(a)

April

1 Land............................................1,900,000 Cash....................................... 475,000 Notes Payable ....................... 1,425,000

May

1 Depreciation Expense ................. 25,000 Accumulated Depreciation —Equipment ($750,000 ÷ 10 × 4/12) ..........

25,000

1 Cash ........................................... 350,000 Accumulated Depreciation— Equipment .................................. 550,000 Gain on Disposal .................. Equipment .............................

150,000 750,000

Cost $750,000 Accumulated depreciation—equipment 550,000 [($750,000 ÷ 10) × 7 + $25,000)] Carrying amount 200,000 Cash proceeds 350,000 Gain on disposal $150,000 June

July

1 Cash ........................................... 380,000 Notes Receivable ....................... 820,000 Land ....................................... Gain on Disposal ..................

1 Equipment ..................................1,000,000 Accounts Payable ................. 1,000,000

Dec. 31 Depreciation Expense ............... 47,000 Accumulated Depreciation —Equipment ($470,000 ÷ 10)

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PROBLEM 9-9B (Continued) (a) (Continued) Dec. 31

Accumulated Depreciation— Equipment .................................. 376,000 Loss on disposal ......................... 94,000 Equipment .............................

470,000

Accumulated Depreciation on equipment: $376,000 [($470,000 ÷ 10) x 8 years] (b) Dec. 31 Depreciation Expense ............... 570,000 Accumulated Depreciation— Building ($28,500,000 ÷ 50) ..

570,000

31 Depreciation Expense ...............4,728,000 Accumulated Depreciation— Equipment ............................. 4,728,000 $46,780,000* ÷ 10 $1,000,000 ÷ 10 × 6/12

$4,678,000 50,000 $4,728,000

*$48,000,000 − $750,000 − $470,000 = $46,780,000

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31 Interest Expense .......................... 64,125 Interest Payable .................... ($1,425,000 × 6% × 9/12) = $64,125

64,125

31 Interest Receivable ...................... 28,700 Interest Revenue................... ($820,000 × 6% × 7/12) = $28,700

28,700

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PROBLEM 9-9B (Continued) (c)

JAINA COMPANY Balance Sheet (Partial) December 31, 2017

Property, plant, and equipment* Land ............................................. $ 5,600,000 Building ........................................... $28,500,000 Less: Accumulated depreciation . 12,670,000 15,830,000 Equipment ....................................... $47,780,000 Less: Accumulated depreciation . 18,874,000 28,906,000 Total property, plant, and equipment $50,336,000 *See T accounts that follow for balances Land Jan. 1, 2017 April 1, 2017

4,000,000 1,900,000

June 1, 2017

300,000

Dec. 31, 2017 Bal. 5,600,000 Building Jan. 1, 2017

28,500,000

Dec. 31, 2017 Bal. 28,500,000 Equipment Jan. 1, 2017 July 1, 2017

48,000,000 1,000,000

May 1, 2017 Dec. 31, 2017

750,000 470,000

Dec. 31, 2017 Bal. 47,780,000

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PROBLEM 9-9B (Continued) (c) (Continued) Accumulated Depreciation—Building Jan. 1, 2017 Dec. 31, 2017

12,100,000 570,000

Dec. 31, 2017 Bal. 12,670,000

Accumulated Depreciation—Equipment May 1, 2017 Dec. 31, 2017

550,000 376,000

Jan. 1, 2017 May 1, 2017 Dec. 31, 2017 Dec. 31, 2017

15,000,000 25,000 47,000 4,728,000

Dec. 31, 2017 Bal. 18,874,000 Taking It Further: Although the use of the revaluation model is permitted for those companies adopting the International Financial Reporting Standards (IFRS), its adoption is voluntary, and somewhat rare. Once adopted, the business will need to be consistent with the application of the model in the future. Additional evidence will be required each year to support the values that are being used in the revaluation. This could become expensive and the costs may exceed the benefits of implementing the revaluation model. Comparability with other companies might also be affected. Because the revaluation model is not acceptable under ASPE and most companies are private, this would be the primary reason why most companies use the cost model.

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PROBLEM 9-10B 1.

Research Expense ..................................... 70,000 Patents....................................................

70,000

Patents ........................................................ 21,000 Professional Fees Expense ..................

21,000

Amortization Expense................................ 7,450 Accumulated Amortization—Patents ... {[($45,000 + $21,000) ÷ 5 years] − $5,750}

7,450

Taking It Further: The majority of intangible assets that are developed internally cannot be recognized as intangible assets on the balance sheet because the expenditures on internally developed intangibles cannot be distinguished from the costs of other research and development performed by the business. The costs cannot be separately measured and are expensed as incurred.

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PROBLEM 9-11B (a)

Jan.

July

Aug.

Oct.

Trademark................................ Cash.....................................

7,000

1 Research Expense .................. Cash.....................................

275,000

Patents ..................................... Cash.....................................

50,000

1 Prepaid Advertising ................ Cash.....................................

45,000

7,000

275,000

50,000

Dec. 31 Amortization Expense............. 1,250 Accumulated Amortization— Patents ................................ [($50,000 ÷ 20) × 6/12] = $1,250]

45,000

168,000

1,250

Dec. 31 Amortization Expense ................. 19,000 Accumulated Amortization— Copyrights........................... 19,000 [($36,000 × 1/3) + ($168,000 × 1/6 × 3/12)]

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PROBLEM 9-11B (Continued)

(b) GHANI CORPORATION Balance Sheet (Partial) December 31, 2017

Assets Intangible assets Patents ................................................. $ 50,000 Less: Accumulated amortization ....... 1,250 $ 48,750 1 Copyrights .......................................... $204,000 Less: Accumulated amortization ....... 43,000 161,000 Trademark2 ........................................... 59,000 Total intangible assets ............................................. $268,750 Goodwill ............................................................................. $150,000 1

Copyright: Cost $36,000 + $168,000 = $204,000 Copyright: Amortization $24,000 + $19,000 = $43,000 2 Trademark: $52,000 + $7,000 = $59,000 Taking It Further: Although intangible assets do not have physical substance, they have characteristics common to other assets in that they contribute to the revenue producing ability of a business that owns them. They are owned and controlled by the business and therefore fit the definition of assets.

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PROBLEM 9-12B (a)

2016 June

7 Resource (Timber Land) ..... 50,000,000 Cash................................ 10,000,000 Mortgage Payable .......... 40,000,000 26

Equipment.............................. Cash...................................

196,000 196,000

Dec. 31 Inventory ................................ 5,280,000 Accumulated Depletion— 5,280,000 Resource ........................... ($50,000,000 − $2,000,000) ÷ 1,000,000 t = $48/t $48/t × 110,000 t = $5,280,000 31 Cost of Goods Sold ................ 5,280,000 Inventory ........................... 5,280,000 31 Depreciation Expense ........... Accumulated Depreciation —Equipment ..................... $196,000 ÷ 7 × 6/12 = $14,000

14,000 14,000

31 Interest Expense ($40,000,000 × 7% × 7/12) ....... 1,633,333 Cash................................... 1,633,333

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PROBLEM 9-12B (Continued) (a) (Continued) 2017 Dec. 31 Inventory ($48/t × 240,000 t)................... 11,520,000 Accumulated Depletion .— Resource ........................... 11,520,000 31 Cost of Goods Sold ............... 11,520,000 Inventory ........................... 11,520,000 31 Depreciation Expense ........... Accumulated Depreciation —Equipment ..................... ($196,000 ÷ 7) = $28,000

28,000 28,000

31 Interest Expense ($40,000,000 × 7%)................. 2,800,000 Cash................................... 2,800,000

(b) CYPRESS TIMBER COMPANY Income Statement (partial) Year Ended December 31, 2017 Cost of goods sold .................................

$11,520,000

Operating expenses: Depreciation expense.........................

Other expenses: Interest expense .................................

$ 2,800,000

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PROBLEM 9-12B (Continued) (b) (Continued) CYPRESS TIMBER COMPANY (Partial) Balance Sheet December 31, 2017

Property, plant, and equipment Resource ............................................. $50,000,000 Less: Accumulated depletion1 ........... 16,800,000 $33,200,000 Equipment ........................................... $196,000 2 Less: Accumulated depreciation ...... 42,000 154,000 Total property, plant, and equipment ..................$33,354,000 1 2

$5,280,000 + $11,520,000 = $16,800,000 $14,000 (2016) + $28,000 (2017) = $42,000

Taking It Further: Due to its nature, it is expected that the estimate of the total amount of units to be extracted from a timber tract would need to be adjusted as extraction occurs and better estimates can be made. Management should not be influenced by the need for changes in estimates when choosing the units-of-production method for recording depreciation of the timber tract. It is the depreciation method that best allocates the cost of the tract to the units of timber that are recorded to inventory.

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PROBLEM 9-13B (a) (in thousands) Mock Orange Company

Cotoneaster Company

$9,428.0 [($5,829.1 + $5,771.4) ÷ 2]

$3,839.8 [($2,754.5 + $2,504.1) ÷ 2]

= 1.63 to 1

= 1.46 to 1

$8,894.3 [($5,771.4 + $5,343.9) ÷ 2]

$3,656.9 [($2,504.1 + $2,340.3) ÷ 2]

= 1.60 to 1

= 1.51 to 1

Return on assets 2017

$627.7 [($5,829.1 + $5,771.4) ÷ 2]

$143.4 [($2,754.5 + $2,504.1) ÷ 2]

= 10.82%

= 5.45%

Return on assets 2016

$597.8 [($5,771.4 + $5,343.9) ÷ 2]

$137.9 [($2,504.1 + $2,340.3) ÷ 2]

= 10.76%

= 5.69%

Asset turnover 2017

Asset turnover 2016

(b) Mock Orange Company is more efficient in using its assets to generate sales–its asset turnover of 1.63 times is higher than the turnover of 1.46 for Cotoneaster Company and its ratio is increasing while Cotoneaster’s in decreasing. Mock Orange is also much more efficient in using assets to produce profit–with a return on assets of 10.82% compared to 5.45% for Cotoneaster Company. Moreover, Mock Orange's ratio is increasing while Cotoneaster’s is decreasing.

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PROBLEM 9-13B (Continued) Taking it Further: Although the ability to compare two companies in the same industry using ratios is affected by the depreciation methods adopted by the companies being compared, absolute conclusions cannot be drawn from these differences. In this particular comparison, in the early years of the useful lives of depreciable assets owed by Mock Orange will have lower amounts of depreciation recorded compared to Cotoneaster and will also have higher carrying amounts for the assets. This is the case because Mock Orange uses the straight-line method of depreciation and Cotoneaster uses the diminishing-balance method which results in high charges of depreciation in the early years and lower amounts in the later years. The opposite effect would occur in the amount of depreciation recorded in the later years of the useful lives of the assets being depreciated.

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BYP 9-1 FINANCIAL REPORTING PROBLEM (a)

(in thousands)

Land Broadcasting and computer equipment Buildings and Leasehold improvements Furniture and fixtures Other

Cost $5,539

(2) Accumu lated Deprecia tion

(3) Net Carrying Amount $5,539

146,115

$95,908

50,207

107,430 18,575 4,560 $282,219

30,198 11,193 1,302 $138,601

77,232 7,382 3,258 $143,618

(b) (1)

Broadcast licenses Goodwill (c)

(2)

Cost Impairments $997,435 $17,451 $1,000,408

65,549

(3) Net Carrying Amount $979,984 $934,859

As part of the disclosure provided in note 9 to the financial statements, no disposals or retirements were recorded for Broadcast licenses or Goodwill. On the other hand, impairment losses were recorded in the amount of $65,549,000 for Goodwill and $17,451,000 for Broadcast licenses.

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BYP 9-1 (Continued)

(d) The amount of depreciation and amortization expense for the fiscal year ending August 31, 2014 was $24,068,000. These expenses were outlined in the Consolidated Statement of Income and Comprehensive Income.

(e)

Corus use the cost model

Corus uses the straight-line method of depreciation for property and equipment.

The estimated useful lives for property and equipment and intangibles are: Buildings—Structure 20 to 30 years Buildings—Components 10 to 20 years Fixtures and equipment 7 years Leasehold improvements lease term Computer equipment 3 to 5 years Broadcasting equipment 5 to 10 years Other 4 to 10 years 4)

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Corus derecognized assets upon disposal or when no future economic benefits are expected from their use or disposal. Any gains or losses arising on derecognition of the assets are calculated as the difference between the net disposal proceeds and the carrying amount of the assets.

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BYP 9-2 INTERPRETING FINANCIAL STATEMENTS

(a)

Westjet could use unit-of-production method of depreciation for engine, airframe and landing gear overhaul. For safety reasons, the overhaul costs are done at fixed points following the use of the specific overhauled equipment. These fixed points are likely based on the number of hours this equipment is used in flight. If the use of the assets varied over time, or were seasonal, the unitof-production method would provide a better measure of the charge for depreciation against the revenue produced. It is likely that the amount of use of these assets does not vary a great deal over time, which justifies Westjet’s choice of the straight-line method. If the amount of use varies greatly over time Westjet should use the unit-ofproduction method.

(b) Major overhaul expenditures involve equipment that must be overhauled as a function of amount of use, typically hours in flight. These overhauls must be performed for safety reasons. The expected life between overhauls is very predictable, and likely dictated by safety associations or regulators. Since the timing of the benefit is easily measured, the best match of the major overhaul costs to the revenues is achieved by capitalizing the costs and then depreciating the capitalized overhauls over the benefiting periods. This is an appropriate technique as it is the best and fairest way to deal with major overhaul costs. Other fleet maintenance is minor and less predictable and Westjet’s policy to expense these costs immediately is appropriate.

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BYP 9-2 (Continued) (c)

Leasehold improvements frequently have physical lives that are longer than the terms of the lease. But since the control and enjoyment of leasehold improvements is limited to the term of a lease, it is appropriate to use the term of the lease for purposes of calculating depreciation. Consequently, the maximum length of benefit to the lessee is the term of lease, which is appropriate in the calculation of depreciation. If, on the other hand, the leasehold improvements have a physical life shorter than the term of the lease, the shorter period should be used for purposes of calculating depreciation.

(d) Westjet uses component depreciation for engine, airframe and landing gear overhaul. Engines, in particular are constantly being overhauled, and so spares are needed to ensure that the airplane can be used during the period needed to perform the overhaul. Since the period of benefit of these major overhauls is considerably shorter than the useful life of the aircraft, this technique is a good example of where component depreciation is very appropriate.

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BYP 9-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP 9-4 COMMUNICATION ACTIVITY Memorandum To: From:

Jason Long, Owner Ken Bond, Controller

Re:

Exchange of Long-Lived Assets

I am writing to you about the proposed exchange of one of our semi-trucks for a garage we could use as a branch of our repair operations. The truck we intend to exchange has a carrying value on our books of $100,000 but its fair value in its current condition is $75,000. The garage we would get in exchange has a fair value of $90,000. Consequently we would need to pay, in cash, in the amount of $15,000 ($90,000 less $75,000), the difference in the fair values of the two assets exchanged. (1) Because the fair value of the semi-truck is not the same as the carrying amount on our books, a gain or loss has to be recorded at the date of the exchange. The exchange transaction is a disposal combined with a purchase. In our case, the fair value is lower than the carrying amount and a loss of $25,000 ($100,000 carrying amount less $75,000 fair value) would have to be recorded. This loss will reduce profit for the period. The garage we obtain would be recorded at its fair value of $90,000. Because these are different types of assets with different useful lives, the garage will be depreciated at a different rate than the semi-truck. We will be consistent in our methods of depreciation with other assets in the same group. It is likely the depreciation on the garage will be lower than the depreciation we were recording on the semi-truck. As well, the garage is not likely to need frequent repairs as is the current case for the semi-truck.

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BYP 9-4 (Continued) (2)

The exchange of assets would be recorded as follows: Building .......................................... 90,000 Accumulated Depreciation— Vehicles.......................................... 65,000 Loss on Disposal .......................... 25,000 Vehicles .................................... 165,000 Cash .......................................... 15,000

(3) As I mentioned earlier, we will be consistent and use the same depreciation method for the garage as already use for buildings. Once we have established what our intentions are concerning how long we want to use the garage for operations and what the physical life of the garage, we will be able to calculate and record depreciation as soon as the garage is available for use.

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BYP 9-5 “ALL ABOUT YOU” ACTIVITY (a)

Generally, copyright means the sole right to produce or reproduce a work or a substantial part of it in any form. It also includes the right to perform a work, or in the case of a lecture to deliver it, and the right to publish an unpublished work. Copyright applies to all original literary, dramatic, musical, and artistic works. These include books, other writings, music, sculptures, paintings, maps, photographs, films, plays, television and radio programs, and computer programs. Copyright also applies to other subject matter including recordings (such as records, cassettes, DVDs, videos and tapes), performer's performances, and communication signals.

(b) A person acquires a copyright automatically when he or she creates an original work or other subject matter, provided the conditions set out in the Copyright Act have been met. Since you automatically obtain copyright, the law automatically protects you. You do not have to register your copyright in order to be protected. (c)

The Copyright Act provides that a certificate of registration is evidence that the copyright exists and that the person registered is the owner of the copyright. Being on the Register of Copyrights may also assist those wishing to seek permission to use the work.

(d) Registration of a copyright is done by completing an application and sending it to the Copyright Office, along with the appropriate fee.

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BYP 9-5 (Continued) (e)

The fee for filing on-line is $50 and is so small that it is not material. Consequently, most businesses decide to expense the fee immediately. It is possible that with several copyrights, a meaningful amount can be recorded as an asset as the fees have been incurred to protect the right to the works and will bring benefit to the business in the future.

(f)

Copyright infringement refers to unlawful use of copyright material. Plagiarism—passing off someone else's work as your own—is a form of infringement.

(g) A copyright generally lasts for the life of the author, plus 50 year following the calendar year the author dies.

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BYP 9-6 Santé Smoothie Saga

(a)

Purchase price ........................................................ Painting .................................................................... Shelving ................................................................... Cost of van...............................................................

(b)

1. STRAIGHT-LINE METHOD

Depreciable Year Amount × 2018 2019 2020 2021 2022 2023 Total

$28,000* 28,000 28,000 28,000 28,000 28,000

Depr. Rate

20% × 5/12 20% 20% 20% 20% 20% × 7/12

Depr. Expense $ 2,333 5,600 5,600 5,600 5,600 3,267 $28,000

$28,400 3,000 1,600 $33,000

End of Year Accum. Carrying Depr. Amount $33,000 $ 2,333 30,667 7,933 25,067 13,533 19,467 19,133 13,867 24,733 8,267 28,000 5,000

* ($33,000 − $5,000 = $28,000) 2. DIMINISHING-BALANCE AT DOUBLE THE STRAIGHTLINE RATE METHOD Carrying End of Year Depr. Depr. Amount (Beg. Accum. Carrying Year of Year × Rate = Expense Depr. Amount $33,000 2018 $33,000 40%* × 5/12 $ 5,500 $ 5,500 27,500 2019 27,500 40% 11,000 16,500 16,500 2020 16,500 40% 6,600 23,100 9,900 2021 9,900 40% 3,960 27,060 5,940 2022 5,940 40% 940** 28,000 5,000 $28,000 * 40% = 20% × 2 [double the straight-line rate] **amount required for carrying amount to equal residual value

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BYP 9-6 (Continued) (b) (Continued) 3. UNITS-OF-PRODUCTION METHOD Units of Depreciable Year Production × Cost/Unit =

Depr. Expense

2018 2019 2020 2021 2022 2023

$ 4,200 5,250 5,600 6,650 4,900 1,400 $28,000

30,000 37,500 40,000 47,500 35,000 10,000

$0.14* 0.14 0.14 0.14 0.14 0.14

End of Year Accum. Carrying Depr. Amount $33,000 $ 4,200 28,800 9,450 23,550 15,050 17,950 21,700 11,300 26,600 6,400 28,000 5,000

* ($33,000 − $5,000) ÷ 200,000 km = $0.14 per km (c)

The units-of-production method of depreciation will result in the greatest amount of profit reported for the year ended May 31, 2019 because it has the lowest depreciation expense for the year. There will be no difference in the total profit over the life of the asset.

(d) As indicated in the three different schedules prepared in part (b), the carrying amount on the balance sheet at May 31, 2019 would be the highest if the straight-line method were used. By the end of the useful life the carrying amount will be the same under all depreciation methods. (e)

I recommend the unit-of-production method of depreciation because this method will provide Natalie with the best pattern to match the economic benefits of the van. It will provide the fairest charge for each year.

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CHAPTER 10 Current Liabilities and Payroll ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Exercises

Problems Set A

Problems Set B

1, 2, 3, 4, 5, 6, 7, 12

1, 2, 3, 4, 5, 6, 7, 16, 17

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 14

1, 2, 3, 4, 5

8, 9, 10, 11, 12, 13, 14, 15, 16 17, 18, 19, 20

8, 9, 10, 11, 12, 13, 16 14, 15, 16

11, 12, 13, 14, 15

1, 2, 5, 6, 7, 8,

1, 16, 17, *20

5, 9, 10,

21, 22, 23

16, 17, 18

10, 18, 19

3, 4, 5, 8, 11, 12,

*24, *25

*19, *20

*20, *21

*13

Learning Objectives

Questions

1. Account for determinable or certain current liabilities. 2. Account for uncertain liabilities. 3. Determine payroll costs and record payroll transactions. 4. Prepare the current liabilities section of the balance sheet. *5. Calculate mandatory payroll deductions (Appendix 10A).

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A

Description Prepare current liability entries and adjusting entries.

Difficulty Level Moderate

Time Allotted (min.) 15-25

Prepare current liability entries, adjusting entries and current liability section.

Moderate

25-35

Calculate current and non-current portion of notes payable, and interest payable.

Moderate

15-25

Record note transactions; show financial statement presentation.

Moderate

30-40

Record current liability transactions; prepare current liabilities section.

Moderate

30-40

Record warranty transactions.

Moderate

15-25

Record customer loyalty program and gift card transactions; determine impact on financial statements.

Moderate

15-25

Discuss reporting of contingencies and record provisions.

Moderate

15-25

Prepare payroll register and record payroll.

Moderate

25-35

10A

Record payroll transactions and calculate balances in payroll liability accounts.

Moderate

25-35

11A

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

12A

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

*13A

Calculate payroll deductions; prepare payroll register.

Moderate

25-35

Prepare current liability entries and adjusting entries.

Moderate

15-25

Prepare current liability entries, adjusting entries and current liability section.

Moderate

25-35

Calculate current and non-current portion of notes payable, and interest payable.

Moderate

15-25

Record note transactions; show financial statement presentation.

Moderate

30-40

Record current liability transactions; prepare current liabilities section.

Moderate

30-40

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 6B

Description Record warranty transactions.

Difficulty Level Moderate

Time Allotted (min.) 15-25

Record customer loyalty program and gift card transactions; determine impact on financial statements.

Moderate

15-25

Discuss reporting of contingencies and record provisions.

Moderate

15-25

Prepare payroll register and record payroll.

Moderate

25-35

10B

Record payroll transactions and calculate balances in payroll liability accounts.

Moderate

25-35

11B

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

12B

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

*13B

Calculate payroll deductions; prepare payroll register.

Moderate

25-35

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Learning Objectives

Knowledge Comprehension

1. Account for determinable or certain current liabilities.

Q10-1 Q10-2 Q10-4 Q10-5 Q10-12 BE10-16

Q10-6 Q10-7 E10-14

2. Account for uncertain liabilities.

Q10-12 BE10-16

Q10-8 Q10-9 Q10-10 Q10-11 Q10-13 Q10-14 Q10-15 Q10-16 BE10-12 E10-14

3. Determine payroll costs and record payroll transactions.

Q10-19 BE10-13

Q10-17 Q10-18 Q10-20

4. Prepare the current liabilities section of the balance sheet.

Q10-21 Q10-22 Q10-23 BE10-16

*5. Calculate mandatory payroll deductions (Appendix 10A).

*Q10-24 *Q10-25

Q10-3 BE10-1 BE10-2 BE10-3 BE10-4 BE10-5 BE10-6 BE10-7 BE10-17 E10-1 E10-2 E10-3 E10-4 E10-5 E10-6 BE10-8 BE10-9 BE10-10 BE10-11 BE10-13 E10-11 E10-12 E10-13 E10-15 P10-1A P10-2A

E10-7 E10-8 E10-9 E10-10 P10-1A P10-2A P10-3A P10-4A P10-5A P10-1B P10-2B P10-3B P10-4B P10-5B

BE10-14 BE10-15 BE10-16 E10-1 E10-16 E10-17 *E10-20

P10-5A P10-9A P10-10A P10-5B P10-9B P10-10B

BE10-17 BE10-18 E10-10 E10-18 E10-19 P10-3A P10-4A P10-5A P10-8A *BE10-19 *BE10-20 *E10-20 *E10-21

P10-10A P10-11A P10-12A P10-3B P10-4B P10-5B P10-8B P10-11B P10-12B *P10-13A *P10-13B

10-4

Analysis

Synthesi s

BYP10-1

BYP10-2 BYP10-5

P10-5A P10-6A P10-7A P10-8A P10-1B P10-2B P10-5B P10-6B P10-7B P10-8B

Santé Smoothie Saga Cumulative Coverage Chapters 3 – 10 BYP10-3 BYP10-4

Broadening Your Perspective

Solutions Manual .

Application

Chapter 10

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

A determinable liability is also referred to as a certain liability or a known liability. Examples include accounts payable, salaries payable, HST payable, and CPP and EI payable.

The transaction does not meet the definition of a liability. A liability is defined as a present obligation, arising from past events, to make future payments of assets or services. A commitment to purchase is usually not an obligation and no past event (a purchase) has occurred since goods have not been delivered or services received.

(a)

(b)

Cash .......................................................... Unearned Revenue .............................. (5,000 × $80)

400,000

Unearned Revenue ................................... Service Revenue .................................. ($400,000 ÷ 6)

66,667

400,000

66,667

Interest payable is calculated as the product of the principal, the interest rate, and the fraction of the year in the accrual. The amount of interest payable at the fiscal year end is calculated with reference to the amount of time since the last interest payment if regular interest payments are required.

An operating line of credit is a pre-authorized bank loan that allows a company to borrow up to a pre-set limit, and repay the loan, as needed. When the company borrows against its line of credit, the cash account balance is increased and notes payable are increased. A bank overdraft occurs when a bank account is overdrawn due to withdrawals and cheques in excess of deposit amounts. In this case, the cash account will show a credit balance. There is no separate liability shown, as the overdraft is itself a liability.

The roommate is confusing different taxes. Incorporated businesses pay income tax on profits. Those taxes do appear as expenses on the income statement. Sales taxes, on the other hand, do not appear on the income statement. Merchants are directed by law to charge sales taxes on the selling price of most goods and services. In doing so, the merchant is acting as an agent of the federal and provincial governments when the business is charging, collecting, and remitting the sales taxes when due. Until the sales taxes are remitted, they appear as current liabilities on the balance sheet.

Laurel is not correct. Some long-term debts have portions that will be due in the coming year. This portion is classified as a current liability since it will be paid within one year of the balance sheet date.

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 8.

I don’t agree. Although you don’t know which specific appliances will be returned for repair, you can estimate the cost of repairs that will be required under warranty based on past experience or industry information. If repair costs are not recorded until units are brought in, liabilities on the balance sheet will be understated and the expenses will not be properly matched with revenue on the income statement. If sales are increasing, this will probably result in an overstatement of income.

Future savings provided to customers through customer loyalty programs produces a future performance obligation. This future performance obligation results in unearned revenue, in that the entity has promised to deliver goods or services in the future. When the promised goods or services are delivered, the performance obligation is met, and this results in the recognition of the related revenue.

10.

The company should estimate the number of vouchers that will likely be used and the stand-alone value of these vouchers. The total of the standalone value of the vouchers and the stand-alone value of the restaurant meals sold should be used to allocate the revenue to current sales and unearned revenue. When the vouchers are redeemed, the restaurant has satisfied its future performance obligation and it can then recognize this unearned revenue as earned.

11.

Gift cards are similar to unearned revenues in that they represent cash received from customers for future products or services. They are classified as a liability because they are an obligation for the issuing company to provide assets or services in the future. Unearned passenger revenue usually has a determinable time at which the flight will be taken and the unearned revenue becomes earned. Gift cards however do not have a fixed date at which the obligation will be satisfied, and frequently are not used at all. In some cases, a portion or the entire amount of the gift card is not used at all. Over time, companies need to determine if a portion of this unearned revenue can be considered earned since the likelihood of redemption becomes more remote.

12. A determinable liability has a known amount, payee, and due date. An estimated liability is an obligation that exists but whose amount and timing are uncertain. There is no uncertainty about the existence of a determinable liability and an estimated liability. Under ASPE, a contingent liability is an obligation that is uncertain with respect to existence, timing, and amount. The existence of a contingent liability depends on the resolution of a future event outside of the company’s control. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. Contingent liabilities are possible obligations that the company probably will not have to settle, or obligations for which the amount cannot be reliably measured.

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Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 13. Under ASPE, a contingent liability is defined as a possible obligation that will be confirmed by the occurrence or non-occurrence of an uncertain future event. An estimated liability is an obligation that exists but whose amount and timing are uncertain. A contingent liability may be recognized as an estimated liability if it is likely that a present obligation exists and the amount can be reliably estimated. Under IFRS, a contingent liability is a possible obligation that does not meet the criteria for recognition and does not meet the definition of a liability. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. 14.

Under ASPE, if a contingent liability is both likely to occur and reasonably estimable, it is recorded in the accounts. If its likelihood is not determinable, or if it is not reasonably estimable, it is not recorded in the accounts but disclosed in a note. If it is unlikely to occur, but could have a substantial negative effect on the company’s financial position, it should be disclosed. Otherwise, contingent liabilities are neither recorded nor disclosed.

15.

Under IFRS, a contingent liability is never recorded because it is a possible liability that does not meet the criteria for recognition, either because it is not probable or the amount cannot be reliably measured. The criteria for recognition of an estimated liability are that it is probable a present obligation exists and that the amount can be reliably estimated. Under IFRS, the threshold for recognizing liabilities is “probable” rather than “likely” as used under ASPE. This threshold is generally considered lower.

16.

If the chance of a contingency occurring is considered small, it should still be disclosed if the occurrence could have a substantial effect on the company’s financial position.

17.

Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as income tax, union dues, etc. Gross pay should be recorded as wages or salaries expense.

18.

Employee payroll deductions are the amounts subtracted from an employee’s gross pay in determining net pay. Mandatory employee payroll deductions include federal and provincial income taxes, Canada Pension Plan, and Employment Insurance. When an employer withholds these amounts from an employee pay cheque, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees' funds, these withholdings are a liability for the employer until they are remitted to the government. Employee payroll deductions also include voluntary deductions for things such as insurance, pensions, union dues, and donations to charities.

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10-7

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 18. (Continued) Employer payroll deductions are amounts the employer is expected to pay. These include CPP where the employer is expected to pay the same amount as the employee and EI where the employer is expected to pay 1.4 times the amount the employee has paid. These are expenses for the employer over and above gross pay. 19.

The employee earnings record is used in (1) determining when an employee has earned the maximum earnings subject to CPP and EI deductions, (2) filing information returns with the CRA, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year on the T4 form. The payroll register accumulates gross earnings, deductions, and net pay for all employees for each pay period. It provides the documentation to support the preparation of the paycheque for each employee.

20.

Income tax, CPP, and EI deductions are remitted to the Receiver General, usually on a monthly basis. Workplace, Health, Safety, and Compensation is remitted quarterly (or monthly depending on the province) to the Workplace, Health, Safety and Compensation Commission (or similar body depending on the province). Other deductions are paid to different organizations, such as the United Way, and would normally be made on a monthly basis.

21.

Current liabilities are usually listed in order of their liquidity, by maturity date. It may not be possible to list current liabilities in order of liquidity because of the varying maturity dates that may exist for certain specific obligations. They are also often listed in order of magnitude with the largest items listed first.

22.

If companies have used their line of credit and are overdrawn or show a negative cash balance, the amount is included in current liabilities and called bank indebtedness, bank overdraft, or bank advances. Note disclosure will include security or collateral that was required by the bank, the maximum amount that can be withdrawn, as well as the interest rate charged on the bank overdraft. Terms associated with notes payable are also disclosed.

23.

A company can determine if its current liabilities are too high by monitoring the relationship of current assets to current liabilities and calculating the current ratio (current assets ÷ current liabilities). This relationship is critical in evaluating a company’s short-term ability to repay debt.

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Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) *24. Contribution rates for CPP are set by the federal government (Quebec government for QPP) and are adjusted every January if applicable. Employee contributions under the Canada Pension Plan Act are set at a percentage of pensionable earnings (currently 4.95%). Pensionable earnings are gross earnings less a basic yearly exemption (currently $3,500). A maximum ceiling or limit is imposed on pensionable earnings ($53,600 for 2015). The exemption and ceiling are prorated to the relevant pay period (e.g., weekly, biweekly, semimonthly, monthly). Contribution rates for EI are based upon a percentage (currently 1.88%) of insurable earnings, to a maximum earnings ceiling ($49,500 for 2015). In most cases, insured earnings are gross earnings plus any taxable benefits. *25. The amount deducted from an employee’s salary for income tax is determined by using payroll accounting software programs, CRA payroll deduction tables easily accessible online, or using the payroll deductions online calculator. The income tax that should be withheld from gross salary is based on the number of personal tax credits claimed by an employee as shown on their TD1 form.

Solutions Manual .

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Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) (b) (c) (d) (e) (f)

No Yes Yes for $30,000 Yes Yes Yes

BRIEF EXERCISE 10-2 (a)

(b)

Cash ............................................... Unearned Revenue.................... (2,000 × $120)

240,000

Unearned Revenue ........................ Service Revenue ....................... ($240,000 ÷ 6)

40,000

240,000

40,000

BRIEF EXERCISE 10-3 (a)

(b)

Solutions Manual .

Cash ............................................... Unearned Revenue.................... (15,000 × $18)

270,000

Unearned Revenue ........................ Revenue ..................................... ($270,000 ÷ 12)

22,500

10-10

270,000

22,500

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-4 (a) 2017 July 1 Cash ............................................... Notes Payable ........................... (b) 2017 Dec. 31 Interest Expense ($60,000 × 4% × 6/12) ..................... Interest Payable ........................ (c) 2018 July 1 Interest Expense ($60,000 × 4% × 6/12) ..................... Interest Payable ............................. Notes Payable ................................ Cash ...........................................

60,000 60,000

1,200 1,200

1,200 1,200 60,000 62,400

BRIEF EXERCISE 10-5 (a) Calculation of sales tax payable – Ottawa store: HST payable = $7,200 × 13% = $936 Calculation of sales tax payable – Regina store: GST payable = $8,400 × 5% = $420 PST payable = $8,400 × 5% = $420

Solutions Manual .

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Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-5 (Continued) (b) Ottawa store: Mar. 12 Cash ................................................... Sales .............................................. HST Payable .................................. Regina store: Mar. 12 Cash ................................................... Sales .............................................. GST Payable .................................. PST Payable ..................................

8,136 7,200 936 9,240 8,400 420 420

BRIEF EXERCISE 10-6 (a) May 10, 2017: Calculation of sales tax collected: HST: $1,800 × 13% × 40 =

$9,360

May 17, 2017: Calculation of sales tax collected: HST: $1,800 x 13% x 95 =

$22,230

(b) May. 10 Cash ................................................... Sales ($1,800 × 40) ........................ HST Payable .................................. May 17

Solutions Manual .

81,360 72,000 9,360

Cash ................................................... 193,230 Sales ($1,800 x 95) ....................... HST Payable ..................................

171,000 22,230

10-12

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-7 Mar. 31

Property Tax Expense ($9,600 × 3/12) Property Tax Payable....................

2,400

June 30 Property Tax Payable ........................ Property Tax Expense ($9,600 × 3/12) Prepaid Property Tax ($9,600 × 6/12) Cash ...............................................

2,400 2,400 4,800

Dec. 31

4,800

Property Tax Expense ....................... Prepaid Property Tax ....................

2,400

9,600 4,800

BRIEF EXERCISE 10-8 Dec. 31 Warranty Expense ................................ 18,700 Warranty Liability .......................... [(4,400 units × 5%) × $85/unit]

18,700

BRIEF EXERCISE 10-9 July 3

Unearned Revenue–Loyalty Program Sales ............................................. To recognize the loyalty program redemption.

50 50

Note: Each time One-Stop has a point redemption it satisfies the related performance obligation and therefore the unearned revenue becomes earned.

Solutions Manual .

10-13

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-10 (a) Stand-alone book sales (50,000 novels × $8) Stand-alone value of coupons = 50,000*10%*$2 Total Value .................................................. Allocate as follows: Earned revenue= ($400,000/$410,000)*$400,000 Unearned revenue= ($10,000/$410,000)*$400,000 (b) July Cash .................................................. 400,000 Sales............................................ Unearned Revenue–Loyalty Program

= $400,000 = 10,000 $ 410,000 =

390,244 = 9,756

390,244 9,756

BRIEF EXERCISE 10-11 Dec. 2017 Cash ................................................. Unearned Revenue.....................

4,750

Jan. 2018 Unearned Revenue .......................... Sales............................................

2,425

Cost of Goods Sold ......................... Merchandise Inventory ..............

1,070

4,750

2,425 1,070

BRIEF EXERCISE 10-12 (a)

(2) Disclosed: This liability should be disclosed. The outcome is neither likely nor unlikely (not determinable). The treatment would be the same under both IFRS and ASPE.

(b)

(1) Recorded: This liability is likely and can be reasonably estimated. The treatment would be the same under both IFRS and ASPE.

Solutions Manual .

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-12 (Continued) (c)

(1) Recorded under IFRS: This liability is “probable” and can be reasonably estimated. (2) Disclosed under ASPE: The outcome is not “likely”; the chance of occurrence is not considered sufficiently high.

BRIEF EXERCISE 10-13 The arguments for recording this liability are that the outcome is probable and the amount can be estimated. Since the company is public, IFRS applies. In this case, the lawsuit is considered an estimated liability and is recorded since the loss is considered probable. Management may be reluctant to disclose this information separately on the financial statements for fear it will be taken as an admission of guilt.

BRIEF EXERCISE 10-14 (a) Gross pay: Regular pay (40 × $12.50).................................. $500.00 Overtime pay (6 × $18.75) ................................. 112.50

$612.50

Less: CPP contributions .................................. $26.99 EI premiums ........................................... 11.21 Income tax withheld ............................... 94.56 132.76 Net pay ................................................................................. $479.74

(b) Employer costs: CPP contributions................................................. $26.99 EI premiums ($11.21 × 1.4) .................................... 15.69 $42.68 The employer does not bear any costs for employee income taxes.

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-15 Aug. 22 Employee Benefits Expense ............. CPP Payable .................................. EI Payable ($1,281 × 1.4) ...............

5,123 3,330 1,793

BRIEF EXERCISE 10-16 (a) (b) (c) (d) (e) (f) (g)

Current liability Current liability Current liability Current liability Current liability Current asset Disclosed in the notes to the financial statements as a contingent liability (h) Current liability (i) Current asset (j) Current liability ($5,000) and long-term liability ($70,000)

BRIEF EXERCISE 10-17 (a)

Current liability: $12,000 Non-current liability: $48,000 Only the portion of principal to be repaid in 2018 would be shown as a current liability.

(b) Current liability: $24,000 ($2,000 per month × 12 months) Non-current liability: $66,000 ($96,000 – [$2,000 × 3] – $24,000) The principal repayments of $2,000 per month to be repaid in 2018 would be shown as a current liability.

Solutions Manual .

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-18 (a) SUNCOR ENERGY INC. (Partial) Balance Sheet December 31, 2014 (in millions)

Liabilities Current liabilities Accounts payable and accrued liabilities ................. Income taxes payable ................................................. Current portion of provisions .................................... Short-term debt ........................................................... Current portion of long-term debt.............................. Total current liabilities ...........................................

$5,704 1,058 752 806 34 $8,354

Note: This presentation lists the accounts in order of size, with the largest one (accounts payable and accrued liabilities) listed first. Other alternatives are also possible, such as listing the accounts in order of liquidity, by estimated maturity date. (b) Current Ratio = Current Assets ÷ Current Liabilities $13,916* ÷ $8,354 = 1.67 to 1 * $4,275 + $5,495 + $680 + $3,466 = $13,916 Acid-Test Ratio = (Cash + AR + Income Tax Recoverable) ÷ Current Liabilities ($4,275 + $5,495 + $680) ÷ $8,354 = 1.25 to 1

Solutions Manual .

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

*BRIEF EXERCISE 10-19 Monthly Pay = ($60,100/year ÷ 12 months) = $5,008.33 (a)

January 2015: CPP deduction = ($5,008.33 – [$3,500 ÷ 12]) × 4.95% = $233.47 EI deduction = $5,008.33 × 1.88% = $94.16

(b) December 2015: No deductions for CPP or EI. The cumulative salary up to November 30, 2015 is $55,091.63 ($5,008.33 × 11). The cumulative salary exceeds the annual maximum pensionable earnings of $53,600 and maximum insurable earnings of $49,500.

*BRIEF EXERCISE 10-20 Gross salary for the week = $1,075 (a) CPP [($1,075.00 − $67.31) × 4.95%] EI ($1,075 × 1.88%) (b) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions

Solutions Manual .

10-18

$49.88 20.21 130.95 65.20 $266.24

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 10-1 March 1

Supplies .................................... Accounts Payable ................

350

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

200

Unearned Revenue ................... Service Revenue ..................

200

Salaries Expense ...................... CPP Payable ......................... EI Payable ............................. Income Tax Payable............. Cash ......................................

5,000

30 Accounts Payable..................... Cash ......................................

350

Solutions Manual .

10-19

350

200

200 230 94 1,400 3,276 350

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-2 2017 July 1

Cash .................................................... 50,000 Notes Payable ...............................

50,000

Nov. 1 Cash .................................................... 60,000 Notes Payable ...............................

60,000

Dec. 31 Interest Expense ................................ Interest Payable ............................ ($50,000 × 8% × 6/12) = $2,000 + ($60,000 × 6% × 2/12) = $600

2,600 2,600

2018 Feb. 1 Notes Payable..................................... 60,000 Interest Payable.................................. 600 300 Interest Expense ................................ Cash .............................................. ($60,000 × 6% × 1/12) = $300

60,900

Apr. 1 Notes Payable..................................... 50,000 Interest Payable.................................. Interest Expense ................................ Cash .............................................. ($50,000 × 8% × 3/12) = $1,000

Solutions Manual .

10-20

2,000 1,000 53,000

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-3 (a) June 1 Cash .................................................... 90,000 Notes Payable ............................... (b) June 30 Interest Expense ................................ Interest Payable ............................ ($90,000 × 6% × 1/12) = $450

90,000

450

(c) Dec. 1 Notes Payable..................................... 90,000 Interest Payable.................................. 2,700 Cash ..............................................

450

92,700

(d) Total financing cost was $2,700 ($90,000 × 6% × 6/12)

Solutions Manual .

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-4 Novack Company 2017 June

July

Aug.

Equipment................................. Accounts Payable ................

50,000

Accounts Payable..................... Notes Payable ......................

50,000

1 Interest Expense....................... Cash ...................................... ($50,000 × 7% × 1/12)

292

Aug. 31

Sep. Oct.

Solutions Manual .

50,000

292

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

292

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

292

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

10-22

292

292 292 50,000 50,292

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-5 (a)

Tundra Trees Mar. 1 Equipment................................. Notes Payable ......................

30,000 30,000

July 31 Interest Expense....................... Interest Payable ................... ($30,000 × 8% × 5/12)

1,000

Oct.

400 1,000 30,000

Interest Expense* ..................... Interest Payable ........................ Notes Payable ........................... Cash ...................................... * ($30,000 × 8% × 2/12)

(b) Edworthy Equipment Mar. 1 Notes Receivable...................... Sales .....................................

1,000

31,400

30,000 30,000

1 Cost of Goods Sold .................. Merchandise Inventory ........

18,000

May 31 Interest Receivable ................... Interest Revenue .................. ($30,000 × 8% × 3/12)

600

Oct.

Solutions Manual .

Cash .......................................... Interest Receivable .............. Interest Revenue*................. Notes Receivable ................. * ($30,000 × 8% × 4/12)

10-23

18,000

600

31,400 600 800 30,000

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-6 1.

Sainsbury

April 10

13,200 1,716

Montgomery

April 21

Cash .......................................... 14,916 Sales ..................................... HST Payable ($13,200 × 13%)

Cash .......................................... 31,500 Sales ..................................... GST Payable ($30,000 × 5%)

30,000 1,500

Cash .......................................... 28,112 Sales ..................................... GST Payable ($25,100 × 5%) PST Payable ($25,100 × 7%)

25,100 1,255 1,757

Winslow

April 27

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-7 (a)

Quebec

April 10

Cash ................................................. Sales ($80,000) ........................... GST Payable ($80,000 x 5%) ...... QST Payable ($80,000 x 9.975%)

91,980 80,000 4,000 7,980

(b) Nova Scotia April 10

(c)

Cash ................................................. Sales............................................ HST Payable ($80,000x 15%) .....

92,000

Cash ................................................. Sales ........................................... GST Payable ($80,000 x 5%) ......

84,000

80,000 12,000

Alberta

April 10

Solutions Manual .

10-25

80,000 4,000

Chapter 10

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-8 2017 (a) Oct. 31 Cash .................................................... 21,000 Unearned Revenue ....................... (100 × $210) (b) 1. Nov. 30 Unearned Revenue............................. Admission Revenue ..................... ($21,000 × 1/6)

3,500

2018 2. Mar. 31 Unearned Revenue ................................ 3,500 Admission Revenue ..................... ($21,000 × 1/6)* 3. Apr. 30 Unearned Revenue ................................ 3,500 Admission Revenue ..................... ($21,000 × 1/6)* *

21,000

3,500

Charleswood adjusts its accounts on a monthly basis. There would be a similar entry at December 31, 2017, January 31, 2018, and February 28, 2018.

Date 2017 Oct. 31 Nov. 30 Dec. 31 2018 Jan. 31 Feb. 28 Mar. 31 Apr. 30

Solutions Manual .

Unearned Revenue Explanation Ref. Debit

Credit Balance 21,000

Adjusting entry Adjusting entry

3,500 3,500

21,000 17,500 14,000

Adjusting entry Adjusting entry Adjusting entry Adjusting entry

3,500 3,500 3,500 3,500

10,500 7,000 3,500 0

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-9 2017 (a) Nov.

Cash .................................................... 270,000 270,000 Unearned Revenue ....................... (15,000 × $18)

(b) Dec. 31 Unearned Revenue............................. 22,500 Revenue ........................................ ($270,000 × 1/12) 2018 (c) Mar. 31 Unearned Revenue............................. 67,500 Revenue ........................................ ($270,000 × 3/12)

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22,500

67,500

Chapter 10

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-10 (a)

May 31 Property Tax Expense ($24,000 × 1/12) ......................... Property Tax Payable...........

2,000 2,000

The company would have accrued property tax expense on a monthly basis using the 2016 monthly expense of $2,200 per month. An adjustment would be required when the property tax bill is received for the over accrual: May 31 Property Tax Payable .............. 800 Property Tax Expense ......... [($24,000 × 1/12) – $2,200] × 4 months

800

The company accrues property tax expense on June 30, 2017 for one month. July 31 Property Tax Payable ($24,000 × 6/12) ......................... Property Tax Expense ($24,000 × 1/12) ........................ Prepaid Property Tax ($24,000 × 5/12) ......................... Cash ......................................

12,000 2,000 10,000 24,000

The company makes monthly adjusting entries for property tax expense on from August to December, as follows: Property Tax Expense .............. 2,000 Prepaid Property Tax ........... 2,000 (b) Since the company’s fiscal year matches the annual property tax bill, there are no prepaid property taxes or property taxes payable. Income Statement, Year Ended December 31, 2017 (Partial) Operating expenses Property tax expense................................................... $24,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-10 (Continued) (b) (Continued)

Date Jul. 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31

Date Jan. 31 Feb. 28 Mar. 31 Apr. 30 May 31 May 31 June 30 July 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31

Solutions Manual .

Prepaid Property Tax Explanation Ref. Debit 10,000

Property Tax Expense Explanation Ref. Debit 2,200 2,200 2,200 2,200 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

10-29

Credit

Balance 10,000 2,000 8,000 2,000 6,000 2,000 4,000 2,000 2,000 2,000 0

Credit

Balance 2,200 4,400 6,600 8,800 10,800 800 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-11 (a)

Estimated warranty costs for November and December sales: Number of units sold (30,000 + 32,000) Estimated rate of defective units Total estimated defective units Average warranty repair cost Estimated warranty costs for Nov. and Dec.

62,000 × 2.5% 1,550 × $20 $31,000

Dec. 31 Warranty Expense............................ 31,000 Warranty Liability ....................

31,000

(b) Dec. 31 Warranty Liability ............................. 21,600 Repair Parts Inventory, Salaries Payable, Cash, etc. ... (450 + 630) x $20 = $21,600 .........

21,600

(c) Income Statement, Year Ended December 31, 2017 (Partial) Operating expenses Warranty expense ........................................................ $31,000 Balance Sheet, at December 31, 2017 (Partial) Current Liabilities Warranty liability ($31,000 – $21,600).....................

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$9,400

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-12 (a)

Warranty expense: 2015: ($2,000 × 500 units sold × 5%) = 2016: ($2,000 × 600 units sold × 5%) = 2017: ($2,000 × 525 units sold × 5%) =

$50,000 $60,000 $52,500

(b) Warranty liability at the end of the year: Estimated warranty expense for 2015: Less: Cost incurred in 2015 Warranty liability at end of 2015:

$50,000 (30,000) 20,000

Add: Estimated warranty expense for 2016: Less: Cost incurred 2016 Warranty liability at end of 2016:

60,000 (46,000) 34,000

Add: Estimated warranty expense for 2017: Less: Cost incurred 2017 Warranty liability at end of 2017:

52,500 (53,500) $33,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-13 (a)

2016: 900,000 × 35% × $0.01 = $3,150 2017:1,200,000 × 35% × $0.01 = $4,200

(b)

2016- Stand-alone sales= $300,000 Total value of goods =$300,000 + $3,150= $303,150

Amount to allocate to revenue = $300,000*($300,000/$303,150) = $296,883 Amount to allocate to unearned revenue–rewards program = = $300,000* ($3,150/$303,150) = $3,117 2016

Cash .................................................. 300,000 Sales............................................ Unearned Revenue–Loyalty Program

296,883 3,117

2017- Stand-alone sales= $400,000 Total value of goods = $400,000 + $4,200 = $404,200 Amount to allocate to revenue= $400,000 X ($400,000/$404,200) = $395,844 Amount to allocate to unearned revenue–rewards program = $400,000 X ($4,200/$404,200) = $4,156 2017

Solutions Manual .

Cash .................................................. 400,000 Sales............................................ Unearned Revenue–Loyalty Program

395,844 4,156

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-13 (Continued) (c) When the points are redeemed, the following entry would be done:

Unearned Revenue–Loyalty Program Cash ................................................. Sales............................................

XXX XXX

Cost of Goods Sold ......................... Inventory .....................................

XXX

XXX XXX

The redemption of the points increases net income as the unearned revenue is now recognized as earned. There is no impact on cash when the points are redeemed as the entry is to debit Unearned Revenue–Loyalty Program and credit Sales.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-14 (1)

(a) Estimable. The amount and timing with respect to brake replacement is uncertain. The existence of the liability to replace the brakes is certain and the amount can be reasonably estimated. The liability should be recorded in the financial statements. (b)

(2)

Not required.

(a) Estimable. The amount and timing with respect to “money back, no questions asked” guarantee is uncertain. The existence of the money back guarantee is certain. (b)

Not required.

(3)

Same as (2) above.

(4)

(a) Determinable. The timing with respect to the prizes to be distributed is uncertain. The existence of the liability and the cost of the trip are certain. The liability should be recorded in the financial statements. (b)

(5)

Not required.

(a) Contingent Liability under both IFRS and ASPE. The contingent liability is neither likely nor unlikely and the amount cannot be reasonably estimated. (b)

Solutions Manual .

Under both IFRS and ASPE, the contingent liability would be disclosed in the notes to the financial statements because the outcome and the amount are both unknown.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-15 (a)

The company should record an estimate of the cost of replacing the cribs in its financial statements. This liability is probable and can be reasonably estimated. The company also has a contingent liability with respect to the lawsuit. If the probability of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either possible (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is probable the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be accrued as an estimated liability.

(b)

If Sleep-a-Bye Baby Company’s lawyers advise that it is likely that the company will have to pay damages of $100,000, then a journal entry should be recorded. The liability is likely and the amount can be reasonably estimated. The journal entry would be as follows: Loss due to Damages .................................... 100,000 Liability for Damages Due to Unsafe Cribs

(c)

100,000

If Sleep-a-Bye Baby Company is a private company, the answer to part (a) will be changed to assess the likelihood of loss from the lawsuit as “likely” rather than “probable”. If the likelihood of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either “likely” (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is “likely” the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be recorded. Part (b) stays the same, since the higher threshold of “likely” was applied.

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EXERCISE 10-16 (a) Apr. 30 Salaries Expense .................................. 46,600 CPP Payable .................................. EI Payable ...................................... Income Tax Payable ...................... Cash ............................................... (b) Apr. 30 Employee Benefits Expense ............. 5,686 CPP Payable .................................. EI Payable ($853 × 1.4).................. Workers’ Compensation Payable ($46,600 × 1%) ......................... Vacation Pay Payable ($46,600 × 4%) (c) May 15 CPP Payable ($2,162 + $2,162).......... EI Payable ($853 + $1,194) ................ Income Tax Payable .......................... Cash ..............................................

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2,162 853 9,011 34,574

2,162 1,194 466 1,864

4,324 2,047 9,011 15,382

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-17 (a)

AHMAD COMPANY Payroll Register Week Ended May 31 Gross Earnings

Total Employee Hours Regular Overtime A. Kassam H. Faas G. Labute Totals

47 45 46

$ 520.00 560.00 600.00 $1,680.00

(b) May 31

Gross Pay

$136.50 $ 656.50 105.00 665.00 135.00 735.00 $376.50 $2,056.50

Deductions CPP

Income Health Tax Insurance

$29.17 $12.34 $ 85.55 29.59 12.50 87.10 33.05 13.82 102.55 $91.81 $38.66 $275.20

$10.00 $137.06 15.00 144.19 15.00 164.42 $40.00 $445.67

Salaries Expense......................................................... 2,056.50 CPP Payable............................................................ EI Payable................................................................ Income Tax Payable ............................................... Health Insurance Payable ...................................... Salaries Payable ..................................................... Employee Benefits Expense....................................... CPP Payable ($91.81 × 1) ....................................... EI Payable ($38.66 × 1.4) ........................................ Workers’ Compensation Payable ($2,056.50 × 2%) Vacation Pay Payable ($2,056.50 × 4%)................. Health Insurance Payable ......................................

10-37

Total

91.81 38.66 275.20 40.00 1,610.83

309.32 91.81 54.12 41.13 82.26 40.00

Net Pay $ 519.44 520.81 570.58 $1,610.83

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 10-18 Date Issued

Rate

Term

Current Portion

$60,000 3/31/16 $30,000 7/1/16 $120,000 9/1/16

6% 4% 5%

6 yrs. 7 mo. 30 mo.

$10,000 $30,000 $48,000

Principal 1. 2. 3.

NonCurrent Portion $50,000 $0 $60,000

Interest Payable $2,700 $600 $450

Current Portion: Note 1: One payment of $10,000 will be made in the coming year. Note 3: $48,000 = 12 monthly payments × $4,000 Non-Current Portion: Note 1: $50,000 = $60,000 – $10,000 Note 3: $60,000 = $120,000 – (3 payments in 2016 × $4,000) – $48,000 Interest Payable: Note 1: $2,700 = $60,000 × 6% × 9/12 Note 2: $600 = $30,000 × 4% × 6/12 Note 3: $450 = [$120,000 – (3 payments in 2016 × $4,000)] × 5% × 1/12

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EXERCISE 10-19 MEDLEN MODELS (Partial) Balance Sheet December 31, 2017

Current liabilities Accounts payable ....................................................... Salaries payable.......................................................... Unearned revenue ...................................................... Notes Payable ............................................................ Litigation liability ........................................................ Mortgage payable—current portion .......................... Total current liabilities ...........................................

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10-39

$ 63,000 32,000 70,000 40,000 25,000 90,000 $320,000

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

*EXERCISE 10-20 (a)

Gross Pay = (40 hours × $22.60) + (4 hours × [$22.60 × 1.5]) = $904.00 + $135.60 = $1,039.60 Deductions (using Illustration 10A-3): CPP [($1,039.60 – ($3,500 ÷ 52)) × 4.95%] EI ($1,039.60 × 1.88%) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions

$48.13 19.54 123.05 61.70 $252.42

(b) June 15 Salaries Expense .......................1,039.60 CPP Payable.......................... 48.13 EI Payable.............................. 19.54 Income Tax Payable ($123.05 + $61.70) 184.75 Cash....................................... 787.18 (c)

June 15 Employee Benefits Expense ......... 75.49 CPP Payable.......................... EI Payable ($19.54 × 1.4) ......

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*EXERCISE 10-21

Month

Gross Salary

Jan. – Oct. November December Totals

$47,500.00 4,750.00 4,750.00 $57,000.00

Cumulative Salary

CPP 4.95%

$47,500.00 $ 2,206.90 2 52,250.00 220.69 1 57,000.00 52.36 3 $2,479.95

EI 1.88% $893.00 4 37.60 5 0 $930.60

1. CPP = ($4,750 – [$3,500 ÷ 12]) × 4.95% = $220.69 2. CPP = $220.69/month × 10 months = $2,206.90 3. CPP = $52.36 (annual CPP maximum – CPP to end of November = maximum to be deducted in November [$2,479.95 – ($220.69 × 11) 4. EI = $4,750 × 1.88% = $89.30 EI = $86.93/month × 10 months = $893.00 5. EI = ($49,500 maximum insurable earnings – $47,500) × 1.88% = $37.60

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SOLUTIONS TO PROBLEMS PROBLEM 10-1A

2 Supplies.............................................. Accounts Payable ........................

Feb.

2,500 2,500

10 Cash .................................................... 48,816 Sales.............................................. GST Payable ................................. PST Payable..................................

43,200 2,160 3,456

15 Cash .................................................... 35,000 Notes Payable...............................

35,000

21 Salaries Expense ............................... 50,000 CPP Payable ................................. EI Payable ..................................... Income Tax Payable ..................... Salaries Payable ...........................

2,308 940 8,900 37,852

21 Employee Benefits Expense ............. CPP Payable ................................. EI Payable ($940 x 1.4) .................

3,624 2,308 1,316

28 Interest Expense ................................ Interest Payable............................ ($35,000 x 6% x 1/12 X .5)

87.50

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87.50

28 Warranty Expense.............................. 14,000 Warranty Liability .........................

14,000

28 Salaries Payable................................. 37,852 Cash ..............................................

37,852

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PROBLEM 10-1A (Continued) Mar.

1 GST Payable ....................................... PST Payable ....................................... Cash ..............................................

2,160 3,456

2 Accounts Payable .............................. Cash ..............................................

2,500

15 CPP Payable ($2,308 x 2) ................... EI Payable ($940 + $1,316)................. Income Tax Payable........................... Cash ..............................................

4,616 2,256 8,900

5,616

2,500

15,772

Taking It Further: Some additional mandatory employee benefits paid entirely by the employer include payments to fund the workplace health, safety, and compensation plan. Vacations are also mandatory and the amounts and limits vary among provinces. The remaining benefits are not mandatory and have more to do with the negotiated employment package with employees. The latter could include full or partial payments into pension plans, savings plans, and medical or life insurance related coverage. Finally, again based on a business’ practice, paid absences for sick leave, for example, are additional employee benefits paid by the employer. Mandatory and negotiated employee benefit accounted for as expenses when incurred.

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costs

are

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PROBLEM 10-2A

(a) Jan.

2 Cash .................................................... 27,000 Notes Payable...............................

27,000

5 Cash .................................................... 23,165 Sales.............................................. HST Payable ($20,500 x 13%) ......

20,500 2,665

12 Unearned Revenue ............................ 10,000 Service Revenue .......................... HST Payable .................................

8,849 1,151

14 HST Payable ....................................... Cash ..............................................

7,700

20 Accounts Receivable ......................... 50,850 Sales (900 X $50) .......................... HST Payable ($45,000 x 13%) ......

45,000 5,850

25 Cash .................................................... 14,125 Sales.............................................. HST Payable ($12,500 x 13%) ......

12,500 1,625

(b) 31 Interest Expense ................................ Interest Payable............................ ($27,000 x 6% x 1/12)

135

31 Warranty Expense.............................. Warranty Liability ......................... ($45,000 x 7%)

3,150

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3,150

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PROBLEM 10-2A (Continued)

(c) ACCARDO COMPANY (Partial) Balance Sheet January 31, 2017 Current liabilities Accounts payable ....................................................... HST payable ($2,665 + $1,151+ $5,850 + $1,625) ...... Interest payable .......................................................... Warranty liability ......................................................... Unearned revenue ($16,000 - $10,000) ...................... Notes payable ............................................................. Total current liabilities ...........................................

$52,000 11,291 135 3,150 6,000 27,000 $99,576

Taking It Further: Warranty liabilities and the related expenses are accrued at the time of the sale of the product on which the warranty applies. Merchants accrue the expenses before a customer has any issues with the product in order to recognize the expense in the same accounting period as the sale. This fulfills the matching principle in the conceptual framework of accounting. Doing so also honours the accrual basis of accounting. Failing to do so could result in the benefit of the sale occurring in one accounting period and the related expenses being incurred in a subsequent accounting period. This latter treatment would provide financial information that would be misleading to the financial statement users.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-3A

1 2 3 4 5 6 1 2 3 4 5 6

Original Principal $ 35,000 $ 15,000 $ 26,000 $ 60,000 $ 100,000 $ 40,000

Date issued Aug. 1/17 Sept. 1/17 Nov. 1/17 Mar. 31/17 Oct. 1/17 Jan. 31/16

Rate 5.0% 4.0% 4.5% 3.5% 5.0% 5.0%

Term 10 months 4 months 6 months 5 years 6 years 4 years

$145.83 = $35,000 × 5.0% × 1/12 $200.00 = $15,000 × 4.0% × 4/12 $195.00 = $26,000 × 4.5% × 2/12 $1,575.00 = $60,000 × 3.5% × 9/12 $400.00 = $96,000 × 5.0% × 1/12 Interest was paid on December 31, 2017

(a)

(b)

(c)

Current Portion $ 35,000 $ 15,000 $ 26,000 $ 12,000 $ 24,000 $ 10,000

Noncurrent Portion $ $ $ $ 48,000 $ 72,000 $ 20,000

Interest Payable $ 145.83 $ 200.00 $ 195.00 $1,575.00 $ 400.00 $ -

8 9

1 2 3 4 5 6

current: $24,000 = $2,000 × 12 months non-current: $72,000 = $100,000 – $24,000 – $4,000

non-current: $20,000 = $40,000 – ($10,000 × 2)

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PROBLEM 10-3A (Continued) Taking It Further: For the maker, a note payable bears interest which is an additional cost. Some liabilities, such as accounts payable to suppliers are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal. For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.

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PROBLEM 10-4A (a)

Jan. 12

Merchandise Inventory ............. 25,000 Accounts Payable .................

25,000

Accounts Payable ..................... 25,000 Notes Payable .......................

25,000

Feb. 28 Interest Expense ....................... ($25,000 × 7% × 1/12) Cash....................................... Mar. 31

146 146

Notes Payable............................ 14,000 490 Interest Payable......................... Interest Expense 245 ($14,000 × 7% × 3/12)................. Cash.......................................

Mar. 31 Interest Expense ....................... ($25,000 × 7% × 1/12) Cash.......................................

146 146

Apr. 30 Notes Payable............................ 25,000 Interest Expense 146 ($25,000 × 7% × 1/12)................. Cash....................................... Aug.

14,735

25,146

Equipment.................................. 41,000 Cash....................................... Notes Payable .......................

11,000 30,000

Sept. 30 Cash ........................................... 100,000 Notes Payable .......................

100,000

Dec. 31

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Interest Expense ....................... ($100,000 × 5% × 3/12) Cash.......................................

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1,250 1,250

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-4A (Continued) (a) (Continued) Dec. 31

Interest Expense ....................... ($30,000 × 6% × 5/12) Interest Payable ....................

750 750

(b) LEARNSTREAM COMPANY (Partial) Balance Sheet December 31, 2017

Current liabilities Notes payable ............................................................. Current portion of long-term notes payable ............. Interest payable .......................................................... Long-term liabilities Notes payable ............................................. $100,000 Less current portion .................................. (10,000)

$30,000 10,000 750 40,750

90,000

(c) LEARNSTREAM COMPANY (Partial) Income Statement Year Ended December 31, 2017 Other expense Interest expense ......................................................... ($146 X 3) + $245 +$1,250 +$ 750) = $2,683

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$2,683

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PROBLEM 10-4A (Continued) Taking It Further: Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the portion of long-term debt that is repayable in the current term. This classification is important because it represents amounts that must be settled within the next year and is an important factor in assessing the company’s liquidity.

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PROBLEM 10-5A (a) Jan. 2 Cash................................................ Notes Payable .......................... 5

14 15

46,000 46,000

Cash................................................ Sales ......................................... HST Payable ($8,600 × 13%) ....

9,718

Cost of Goods Sold ....................... Merchandise Inventory ............

4,100

Unearned Revenue ........................ Service Revenue ..................... HST Payable .............................

8,000

HST Payable ................................... Cash ..........................................

8,630

CPP Payable................................... EI Payable....................................... Income Tax Payable....................... Cash ..........................................

1,320 680 3,340

8,600 1,118

4,100 7,080 920

8,630

5,340

17 Accounts Payable .......................... 14,800 Cash ..........................................

14,800

20 Accounts Receivable ..................... 118,085 Sales (1,900 × $55) ................... HST Payable ($104,500 × 13%)

104,500 13,585

Cost of Goods Sold (1,900 × $25) . 47,500 Merchandise Inventory ............

47,500

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PROBLEM 10-5A (Continued) (a) (Continued) Jan. 29 Unearned Revenue–Loyalty Program ......................................... 2,300 HST Payable ............................. Revenue from Rewards Program ($2,300 − $265) 31 Cash ................................................ 250,000 Sales ......................................... Unearned Revenue–Loyalty Program Stand-alone sales ............................. Stand-alone value of loyalty points (30,000 × $1 × 20%)........................... Total Value

265 2,035

244,141 5,859 $250,000 6,000 $256,000

Allocate as follows: Earned revenue= ($250,000/$256,000) X $250,000 = $244,141 Unearned revenue= ($6,000/$256,000) X $250,000 = $5,859 31

Salaries Expense ........................... 18,750 CPP Payable ............................. EI Payable ................................. Income Tax Payable ................. Salaries Payable.......................

764 343 3,481 14,162

31 Salaries Payable ............................ 14,162 Cash ..........................................

14,162

(b) (1) Jan. 31 Interest Expense ............................ Interest Payable ....................... ($46,000 × 7% × 1/12)

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PROBLEM 10-5A (Continued) (b) (Continued) (2) Jan. 31 Warranty Expense (1,900 × 9% × $10) .......................... Warranty Liability ..................... (3) Jan. 31 Employee Benefits Expense ......... CPP Payable ............................. EI Payable ($343 × 1.4) ............. Vacation Pay Payable .............. ($18,750 x 4%) = $750

1,710 1,710 1,994

(4) Jan. 31 Property Tax Expense 735 ($8,820 ÷ 12) ................................... Property Tax Payable............... (c) SHUMWAY SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2017

764 480 750

735

Current liabilities Notes payable ............................................................. $ 46,000 Accounts payable ($40,000 – $14,800) ...................... 25,200 Unearned revenue ($15,300 – $8,000......................... 7,300 Unearned revenue–loyalty program ($3,700 - $2,300 + $5,859) ........................................... 7,259 HST payable ($8,630 + $1,118 + $920 – $8,630 + $13,585 + $265) .. 15,888 Income tax payable ($3,340 – $3,340 + $3,481) ......... 3,481 CPP payable ($1,320 – $1,320 + $764 + $764) ........... 1,528 EI payable ($680 – $680 + $343 + $480) ..................... 823 Vacation pay payable ($8,660 + $750) ....................... 9,410 Property tax payable .................................................. 735 Warranty liability ......................................................... 1,710 Interest payable............................................................. 268 Total current liabilities ........................................... $ 119,602

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PROBLEM 10-5A (Continued) Taking It Further: Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries payable are credited.

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PROBLEM 10-6A (a)

Warranty expense 2015 – (1,500 × 5% × $30) = $2,250 2016 – (1,700 × 5% × $30) = $2,550 2017 – (1,800 × 5% × $30) = $2,700 Warranty liability at year end 2015 – ($0 – $2,250 + $2,250) = $0 2016 – ($0 – $2,400 + $2,550) = $150 2017 – ($150 – $2,640 + $2,700) = $210

Note: See analysis of Warranty Liability account in (b) below. (b) 2015

2016

2017

Warranty Liability ................................. Repair Parts Inventory .....................

2,250

Warranty Expense (1,500 × 5% × $30) . Warranty Liability .............................

2,250

Warranty Liability ................................. Repair Parts Inventory .....................

2,400

Warranty Expense (1,700 × 5% × $30) . Warranty Liability .............................

2,550

Warranty Liability ................................. Repair Parts Inventory .....................

2,640

Warranty Expense (1,800 × 5% × $30) . Warranty Liability .............................

2,700

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2,250

2,400

2,550

2,640 2,700

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PROBLEM 10-6A (Continued) (b) (Continued)

Date 2015 During Dec. 31 2016 During Dec. 31 2017 During Dec. 31 (c)

Warranty Liability Explanation Ref. Debit

Credit Balance

2,250

2,250 Dr 2,250 0

2,400

2,400 Dr 2,550 150

2,640

2,490 Dr 2,700 210

Percentage of units returned for repair = Number of units returned ÷ Number of units sold Returned 2015 75 2016 90 2017 105 270

Sold 1,500 1,700 1,800 5,000

Percentage returned = 270 ÷ 5,000 = 5.4% Average actual warranty cost per unit = Total actual warranty costs ÷ Total units returned Actual costs 2015 $2,250 2016 2,400 2017 2,640 $7,290 Average warranty cost per unit over the three-year period: $7,290 ÷ 270 = $27

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PROBLEM 10-6A (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $150. The revised warranty expense for 2017 is calculated as follows: Warranty expense 2017: 1,800 × 7% × $27 = $3,402 Warranty liability at December 31, 2017: $150 – $2,640 + $3,402 = $912

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PROBLEM 10-7A (a)

1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues. 2. Increases revenues and profit (form of unearned revenue) 3. No effect on revenues, expenses, and profit 4. Increases revenues, expenses (cost of goods sold), and profit

(b) 2016: 1.

Cash ............................................... 4,560,000 Sales ................................... 4,447,334 Unearned Revenue–Loyalty Program 112,666

Stand-alone gas sales........................................ Stand-alone value of loyalty coupons ((3,800,000 x $0.038 x 80%) ................................ Total Value ...................................................

$4,560,000 115,520 $4,675,520

Allocate as follows: Earned revenue= ($4,560,000/$4,675,520) X $4,560,000 = $4,447,334 Unearned revenue = ($115,520/$4,675,520) X $4,560,000 = $112,666 2.

Unearned Revenue-Loyalty Program . Revenue from Rewards Program

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PROBLEM 10-7A (Continued) (b) (Continued) 2017: 3.

Cash ...............................................6,045,000 Sales ................................... 5,906,870 Unearned Revenue–Loyalty Program 138,130

Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (4,650,000 x $0.038 x 80%) ................................. Total Value ...................................................

$6,045,000 141,360 $6,186,360

Allocate as follows: Earned revenue= ($6,045,000/$6,186,360) x $6,045,000 =$5,906,870 Unearned revenue= ($141,360 /$6,186,360) x $6,045,000 = $138,130

Unearned Revenue–Loyalty Program Revenue from Rewards Program

53,500

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

82,000

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

45,000

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53,500

82,000 45,000

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PROBLEM 10-7A (Continued) (c) Date 2016 During Dec. 31

Unearned Revenue–Loyalty Program Explanation Ref. Debit Credit Balance 112,666 66,666

138,130

204,796 151,296

Credit

Balance

82,000

82,000 37,000

46,000

2017 During Dec. 31

Date 2017 During Dec. 31

112,666

53,500

Unearned Revenue Explanation Ref. Debit

45,000

Taking It Further: Management should consider the following factors:  The historical rate of redemption on the grocery coupons. Some coupons will never be redeemed and management needs to determine over time, if the estimated redemption rate should be revised.  Factors to consider for the gift cards include long periods of inactivity by customers, or low residual balances. These factors increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where there is a remote chance they will be used can be transferred to a revenue account.

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PROBLEM 10-8A 1.

Note disclosure: It does not appear that it is probable that the company will lose the lawsuit. If the possibility of loss is considered remote, Mega Company would not need to disclose the lawsuit.

Note disclosure: Since it is likely that the company will lose the lawsuit, but the amount of the liability cannot be reliably measured, the lawsuit should be disclosed.

Accrue in the financial statements: Because Mega has negotiated a settlement, it now has a liability and the amount is measurable.

Taking It Further: Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Thus a benefit of recording the accrual is that it allows users of financial statements to make better informed decisions. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios. The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are probable and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-9A (a) SURE VALUE HARDWARE Payroll Register Week Ended March 14, 2017 Gross Earnings Employee Hours Regular I. Dahl F. Gualtieri G. Ho A. Israeli Totals

37.5 42.5 43.5 45

Overtime

Gross Pay

$637.50 0 $637.50 660.00 $61.88 721.88 620.00 81.38 701.38 600.00 112.50 712.50 $2,517.50 $255.76 $2,773.26

Deductions CPP

Income United Tax Way

$27.80 $11.83 $82.25 $ 7.50 32.40 13.57 91.20 8.00 31.39 13.19 97.50 5.00 31.94 13.40 107.75 10.00 $123.53 $51.99 $378.70 $30.50

10-62

Total

Net Pay

$129.38 $508.12 145.17 576.71 147.08 554.30 163.09 549.41 $584.72 $2,188.54

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-9A (Continued) (b) Mar.14

Salaries Expense ......................... 2,773.26 CPP Payable ......................... 123.53 EI Payable ............................. 51.99 Income Tax Payable............. 378.70 United Way Contributions Payable 30.50 Salaries Payable................... 2,188.54

14 Employee Benefits Expense ..... 307.25 CPP Payable ($123.53 × 1) ... EI Payable ($51.99 × 1.4)...... Vacation Pay Liability .......... Vacation pay liability = $2,773.26 × 4% (c) Mar.14 Salaries Payable ........................ Cash ...................................... (d) Apr. 15 CPP Payable ($123.53 + $123.53) .................... EI Payable ($51.99 + $72.79) ..... Income Tax Payable .................. Cash ......................................

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123.53 72.79 110.93

2,188.54 2,188.54 247.06 124.78 378.70 750.54

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PROBLEM 10-9A (Continued) Taking It Further: The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll. A proprietor is not required, nor able, to pay EI on business profit for purposes of collecting employment insurance if he or she is not working. However, a proprietor can choose to pay EI for special benefits such as sickness or maternity benefits. Business profit is considered pensionable earnings for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.

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PROBLEM 10-10A (a) Feb.

4 Union Dues Payable ........................... Cash................................................

1,450

1,280 855

Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................

2,135

CPP Payable ....................................... 7,887 EI Payable ........................................... 3,755 Income Tax Payable ........................... 16,252 Cash................................................

20 Workers’ Compensation Payable ...... Cash................................................ 28

1,450

4,275 4,275

Salaries Expense................................ 92,600 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable ........ Salaries Payable ............................

28 Salaries Payable ................................. Cash................................................

10-65

4,281 1,695 17,595 1,574 1,380 66,075

66,075

28 Employee Benefits Expense.............. 15,914 CPP Payable................................... EI Payable ($1,695 × 1.4) ............... Workers’ Compensation Payable ($92,600 × 5%) ................................ Vacation Pay Payable ($92,600 × 4%) Life Insurance Payable ($92,600 × 1%)

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66,075 4,281 2,373 4,630 3,704 926

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PROBLEM 10-10A (Continued) (b) Canada Pension Plan Payable Explanation Ref. Debit Credit

Date Feb. 1 13 28 28

Date Feb.

1 13 28 28

Date Feb. 1 13 28

Date Feb. 1 20 28

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Balance



Balance

4,281 4,281

7,887 0 4,281 8,562

Employment Insurance Payable Explanation Ref. Debit Credit

Balance

7,887

Balance

 1,695 2,373

3,755 0 1,695 4,068

Credit

Balance

17,595

16,252 0 17,595

Workers’ Compensation Payable Explanation Ref. Debit Credit

Balance

3,755

Income Tax Payable Explanation Ref. Debit Balance

 16,252

Balance

 4,275 4,630

10-66

4,275 0 4,630

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PROBLEM 10-10A (Continued) (b) (Continued)

Date Feb. 1 4 28

Date Feb. 1 7 28

Date Feb. 1 28

Date Feb. 1 7 28

Date Feb. 28 28

Solutions Manual .

Union Dues Payable Explanation Ref. Debit

Credit

Balance

1,574

1,450 0 1,574

Credit

Balance

926

855 0 926

Credit

Balance

3,704

20,520 24,224

Disability Insurance Payable Explanation Ref. Debit Credit

Balance

 1,450

Life Insurance Payable Explanation Ref. Debit Balance

 855

Vacation Pay Payable Explanation Ref. Debit Balance

Balance



 1,280 1,380

Salaries Payable Explanation Ref. Debit 

10-67

Credit Balance 66,075

66,075

1,280 0 1,380

66,075 0

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-10A (Continued) Taking It Further: The employee earning record is required to determine the employee’s total earnings for the year and total deductions. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits. The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.

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PROBLEM 10-11A (a)

LIGHTHOUSE DISTRIBUTORS (Partial) Balance Sheet September 30, 2017

Current liabilities Bank indebtedness ............................................... Accounts payable ................................................. Warranty liability .................................................... Property taxes payable.......................................... CPP payable ........................................................... EI payable............................................................... Workers’ compensation payable .......................... Vacation pay payable ............................................ Income tax payable................................................ HST payable ........................................................... Interest payable ..................................................... Unearned revenue–loyalty program ..................... Unearned card revenue ......................................... Current portion of notes payable ......................... Current portion of mortgage payable ................... Total current liabilities ...................................... (b)

$ 62,500 90,000 22,500 10,000 7,500 3,750 1,250 13,500 35,000 15,000 10,000 5,000 30,000 12,000 10,000 $328,000

Current assets: $182,000 + $275,000 + $12,500 = $469,500 Current ratio: $469,500 ÷ $328,000 = 1.43:1 Acid-test ratio: $182,000 ÷ $328,000 = 0.55:1

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PROBLEM 10-11A (Continued) (c)

LightHouse Distributors did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to LightHouse from the bank. LightHouse is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but LightHouse still has $75,000 available in its line of credit for immediate cash needs.

Taking It Further: The accountant is not correct. Recording a full year of property tax expense when the payment is made, on the basis that the payment is unavoidable is not proper accounting. The property taxes are paid for a full calendar year of services to be delivered by the municipality or city. These services are not obtained at the time of the tax payment. The payment should be allocated to property tax expense in all accounting periods that benefit from the services provided during the year. The expense for property taxes is recognized through the passage of time, evenly over the fiscal year.

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PROBLEM 10-12A (a)

MAPLE LEAF FOODS INC. (Partial) Balance Sheet December 31, 2014 (in thousands)

Current liabilities Accounts payable and accruals .............................. Income taxes payable............................................... Current portion of long-term debt ........................... Other current liabilities............................................. Provisions ................................................................. Total current liabilities ......................................... (b)

$275,249 26,614 472 24,383 60,443 $387,161

Current assets = $496,328 + $60,396 + $105,743 + $270,401 + $110,209 + $20,157 = $1,063,234 Current ratio: $1,063,234 ÷ $387,161 = 2.75:1 Acid-test ratio: ($496,328 + $60,396 + $110,209) ÷ $387,161 = 1.72:1

(c)

Current ratio Dec. 31, 2013: $1,183,171 ÷ $966,522 = 1.22:1 Acid-test ratio Dec. 31, 2013: ($506,670 + $111,034+ 115,514) ÷ $966,522 = 0.76:1 Both the current ratio and the asset test ratio improved considerably in 2014.

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PROBLEM 10-12A (Continued) Taking It Further: In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory. We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those that can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of Maple Leaf Foods Inc. the acid-test ratio is less than the current ratio indicating that the company has a high proportion of less liquid current assets. Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.

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Accounting Principles, Seventh Canadian

*PROBLEM 10-13A (a) WESTERN ELECTRIC COMPANY Payroll Register Week Ended June 9, 2015

Employee C. Tanm T. Ng O. Stavtech A. Mandell Totals

Gross Pay $945.00 1,130.00 1,130.00 1,067.00 $4,272.00

CPP $43.45 52.60 52.60 49.48 $198.13

1 2 2 3

Deductions Federal EI Income Tax 4 $99.85 $17.77 5 125.90 21.24 5 141.50 21.24 6 128.30 20.06 $495.55 $80.31

1. CPP = ($945.00 – [$3,500 ÷ 52]) × 4.95% = $43.45 2. CPP = ($1,130.00 – [$3,500 ÷ 52]) × 4.95% = $52.60 3. CPP = ($1,067.00 – [$3,500 ÷ 52]) × 4.95% = $49.48 4. EI = $945.00 × 1.88% = $17.77 5. EI = $1,130.00 × 1.88% = $21.24 6. EI = $1,067.00 × 1.88% = $20.06

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Ontario Total Income Tax Deductions Net Pay $52.10 $213.17 $731.83 64.45 264.19 865.81 69.60 284.94 845.06 64.10 261.94 805.06 $250.25 $1,024.24 $3,247.76

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

*PROBLEM 10-13A (Continued) (b) Semi-monthly Payroll Ended June 15, 2015:

Employee

Annual Salary

Gross Pay

CPP 4.95%

EI 1.88%

S. Goodspeed M. Giancarlo H. Ridley

$43,440 64,770 76,880

$1,810.00 2,698.75 3,203.33

$ 82.38 1 126.37 2 151.35 3

$34.03 4 50.74 5 60.22 6

1. CPP = ($1,810.00 – [$3,500 ÷ 24]) × 4.95% = $82.38 2. CPP = ($2,698.75 – [$3,500 ÷ 24]) × 4.95% = $126.37 3. CPP = ($3,203.33 – [$3,500 ÷ 24]) × 4.95% = $151.35 4. EI = $1,810.00 × 1.88% = $34.03 5. EI = $2,698.75 × 1.88% = $50.74 6. EI = $3,203.33 × 1.88% = $60.22 (c) Pay period in which CPP maximum is reached = Maximum

annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period). S. Goodspeed: His annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. He will not reach the maximum CPP and EI payments for 2015. M. Giancarlo: Pay period in which CPP maximum is reached = $2,479.95 ÷ $126.37 = 19.6; rounded up to pay period 20 (October 31).

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*PROBLEM 10-13A (Continued) (c) (Continued) Pay period in which EI maximum is reached = $930.60 ÷ $50.74 = 18.34; rounded up to pay period 19 (October 15). H. Ridley: Pay period in which CPP maximum is reached = $2,479.95 ÷ $151.35 = 16.39; rounded up to pay period 17 (September 15). Pay period in which EI maximum is reached = $930.60 ÷ $60.22 = 15.45; rounded up to pay period 16 (August 31). Taking It Further: The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company. The amounts of CPP, EI, and income tax to be deducted are all dependent upon the length of the pay period, thus different tables are required.

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PROBLEM 10-1B

Feb. 1 Cash .................................................... 30,000 Notes Payable...............................

30,000

8 Accounts Receivable ......................... 16,385 Sales.............................................. HST Payable .................................

14,500 1,885

14 Salaries Expense ............................... 15,000 CPP Payable ................................. EI Payable ..................................... Income Tax Payable ..................... Salaries Payable ...........................

692 282 2,700 11,326

14 Employee Benefits Expense ............. CPP Payable ................................. EI Payable ($282 x 1.4) .................

1,087

15 Furniture ............................................. Accounts Payable ........................

1,975

692 395

1,975

21 Salaries Payable................................. 11,326 Cash .............................................. 28 Interest Expense ................................ Interest Payable............................ ($30,000 x 5% x 1/12)

125

28 Warranty Expense.............................. Warranty Liability .........................

500

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11,326

125

500

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PROBLEM 10-1B (Continued) Taking It Further: The accountant is mostly correct. Accounts payable are an example of a current liability that can be expected to be paid within the next year. However, unearned revenue is a current liability that will not be paid within the year, but can be expected to be extinguished by goods or services being provided.

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PROBLEM 10-2B (a)Jan. 1

Cash ......................................................30,000 Notes Payable...............................

30,000

5 Cash .................................................... 11,648 Sales.............................................. GST Payable ($10,400 x 5%) ........ PST Payable ($10,400 x 7%) ........

10,400 520 728

12 Unearned Revenue ............................ Service Revenue ................................ GST Payable ................................. PST Payable..................................

9,000

14 GST Payable ....................................... Cash ..............................................

5,800

8,036 402 562

5,800

20 Accounts Receivable ......................... 52,416 Sales (900 X $52) .......................... GST Payable ($46,800 x 5%) ........ PST Payable ($46,800 x 7%) ........

46,800 2,340 3,276

25 Cash .................................................... 20,966 Sales.............................................. GST Payable ($18,720 x 5%) ........ PST Payable ($18,720 x 7%) ........

18,720 936 1,310

(b) 31 Interest Expense ................................ Interest Payable............................ ($30,000 x 8% x 1/12)

200

31 Warranty Expense.............................. Warranty Liability ......................... ($46,800 x 5%)

2,340

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2,340

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PROBLEM 10-2B (Continued) (c) EDMISTON SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2017 Current liabilities Accounts payable ....................................................... GST payable ($520 + $402 + $2,340 + $936) .............. PST payable ($728 + $562 + $3,276 + $1,310) ........... Interest payable .......................................................... Warranty liability ......................................................... Unearned revenue ($15,000 - $9,000) ........................ Notes payable ............................................................. Total current liabilities ...........................................

$42,500 4,198 5,876 200 2,340 6,000 30,000 $91,114

Taking It Further: James is incorrect. The payroll taxes withheld are amounts that belong to the employee. The employer is instructed by law to take from the gross pay of employees and remit these amounts for income taxes, CPP, and EI to the Receiver General. By doing so, these amounts reach the CPP and EI funds to finance the benefits to which employees are entitled. As well, the remittances represent instalments on individual employees’ tax liability accounts for federal and provincial income taxes withheld. The employer has already recognized the expense as part of the gross salaries paid to the employees. The gross amount of the salaries is debited to Salaries Expense. The employee benefits are paid by the employer to the Receiver General along with the employer’s portion of CPP and EI payments, which are over and above what has been deducted from the employee’s pay.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-3B

1 2 3 4 5 6 1 2 3 4 5 6

Principal $ 25,000 $ 10,000 $ 40,000 $ 80,000 $ 126,000 $ 50,000

Date issued July 1/17 Sept. 1/17 Nov. 1/17 May 31/17 Oct. 1/17 Mar. 31/16

Rate 5.00% 4.00% 4.50% 3.75% 4.25% 5.00%

Term 9 months 6 months 7 months 5 years 3 years 4 years

(a)

(b)

(c)

Current Portion $ 25,000 $ 10,000 $ 40,000 $ 16,000 $ 42,000 $ 12,500

Noncurrent Portion $ $ $ $ 64,000 $ 77,000 $ 25,000

Interest Payable $ 104.17 $ 133.33 $ 300.00 $1,750.00 $ 421.46 $ -

7 9

8 9

1 2 3 4 5 6

7 $104.17 = $25,000 × 5.0% × 1/12 current: $42,000 = $3,500 × 12 months 8 $133.33 = $10,000 × 4.0% × 4/12 non-current: $77,000 = $126,000 – ($3,500 × 2) $300.00 = $40,000 × 4.5% × 2/12 – $42,000 9 $1,750.00 = $80,000 × 3.75% × 7/12 non-current: $25,000 = $50,000 – ($12,500 × 2) $421.46 = ($126,000 – [2 × $3,500]) × 4.25% × 1/12 Interest was paid on December 31, 2017

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PROBLEM 10-3B (Continued) Taking It Further: For the maker, a note payable bears interest, which is an additional cost. Some liabilities, such as accounts payable to suppliers, are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal. For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.

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PROBLEM 10-4B (a)

2016: Dec. 1 Interest Expense ($15,000 × 6% × 1/12)................. 75 Interest Payable......................... 375 Notes Payable............................ 15,000 Cash....................................... 2017: Apr. 1 Land ........................................... 75,000 Notes Payable ....................... Apr. 30 Equipment.................................. Accounts Payable .................

8,000

May 31 Accounts Payable ..................... Notes Payable .......................

8,000

July

1,313

1 Interest Expense ....................... ($75,000 × 7% × 3/12) Cash.......................................

Aug. 31 Interest Expense ($8,000 × 8% × 3/12)................... Note Payable.............................. Cash....................................... Oct.

Oct.

1 Interest Expense ($75,000 × 7% × 3/12)................ Cash....................................... 1 31

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15,450

75,000 8,000 8,000

1,313 160 8,000 8,160

1,313 1,313

Cash ........................................... 90,000 Notes Payable .......................

90,000

Interest Expense ....................... 888 [($90,000 × 6% × 1/12) + ($1,313 × ⅓)] Interest Payable ....................

888

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PROBLEM 10-4B (Continued) (b) MILEHI MOUNTAIN BIKES (Partial) Balance Sheet October 31, 2017 Current liabilities Notes payable ............................................................. Current portion of long-term notes payable ............. Interest payable .......................................................... Total current liabilities ...........................................

$75,000 18,000 888 93,888

Long-term liabilities Notes payable .......................................... Less current portion ................................

72,000

$90,000 (18,000 )

(c) MILEHI MOUNTAIN BIKES (Partial) Income Statement Year ended October 31, 2017 Other expenses Interest expense ......................................................... *($75 + $1,313 + $160 + $1,313 + $888)

$3,749*

Taking It Further: Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the current maturity of the portion of long-term debt that is repayable in the current term. This classification is important because it shows the amount that must be settled within one year, which is an important factor in evaluating the company’s liquidity.

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PROBLEM 10-5B (a) Jan. 5

Cash............................................... 17,854 Sales ....................................... HST Payable ($15,800 × 13%) .

15,800 2,054

Unearned Revenue ....................... HST Payable ............................ Service Revenue .....................

805 6,195

7,000

HST Payable.................................. 11,390 Cash .........................................

15 CPP Payable.................................. EI Payable ..................................... Income Tax Payable ..................... Cash .........................................

2,152 1,019 4,563

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

18,000

17 Accounts Payable......................... Cash .........................................

35,000

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11,390

7,734 18,000

35,000

Accounts Receivable.................... 33,900 Sales (500 × $60) ..................... HST Payable ($30,000 × 13%) .

30,000 3,900

Unearned Revenue- Loyalty 1,750 Program...................................... HST Payable ($1,549 × 13%) ... Service Revenue ($1,750 ÷ 1.13)

201 1,549

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PROBLEM 10-5B (Continued) (a) (Continued) Jan.

31 Cash ............................................500,000 Sales ........................................ Unearned Revenue–Loyalty Program

495,050 4,950

Stand-alone sales ................................... $500,000 Stand-alone value of loyalty points 5,000 (50,000 × 10% × $1) ................................. Total Value .............................................. $505,000 Allocate as follows: Earned revenue = ($500,000/$505,000) x $500,000 = $495,050 Unearned revenue = ($5,000/$505,000) x $500,000 = $4,950 31 Warranty Liability ...................... Repair Parts Inventory ......... 31

(b)

875 875

Salaries Expense....................... 25,350 CPP Payable.......................... EI Payable ............................. Income Tax Payable ............. Salaries Payable ...................

1,183 464 4,563 19,140

31 Salaries Payable ........................ 19,140 Cash.......................................

19,140

Jan. 31 Interest Expense ....................... Interest Payable .................... [($18,000 × 6% × 1/12) × 1/2]

31 Warranty Expense ..................... Warranty Liability ................. (500 × 6% × $10)

300

Solutions Manual .

Employee Benefits Expense..... 2,847 CPP Payable.......................... EI Payable ($464 × 1.4) ......... Vacation Pay Payable ($25,350 × 4%)

10-85

300

1,183 650 1,014

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PROBLEM 10-5B (Continued) (c) ZAUR COMPANY (Partial) Balance Sheet January 31, 2017 Liabilities Current liabilities Accounts payable ($63,700 – $35,000) ...................... Notes payable ............................................................. Vacation pay liability ($9,120 + $1,014) ..................... Unearned revenue ($16,000 – $7,000)........................ Unearned revenue–loyalty program ($2,150 – $1,750 + $4,950).................................................................. HST payable ($11,390 + $2,054 + $805 – $11,390 + $3,900 + $201)...................................................... Warranty liability ($5,750 – $875 + $300) ................... Income tax payable ($4,563 – $4,563 + $4,563) ......... CPP payable ($2,152 – $2,152 + $1,183 + $1,183) ..... EI payable ($1,019 – $1,019 + $464 + $650) ............... Interest payable .......................................................... Total current liabilities ...........................................

$28,700 18,000 10,134 9,000 5,350 6,960 5,175 4,563 2,366 1,114 45 $91,407

Taking It Further: Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries Payable are credited.

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PROBLEM 10-6B (a)

Warranty expense 2015 – (1,200 × 5% × $25) = $1,500 2016 – (1,320 × 5% × $25) = $1,650 2017 – (1,420 × 5% × $25) = $1,775 Warranty liability at year end 2015 – ($0 – $1,275 + $1,500) = $225 2016 – ($225 – $1,600 + $1,650) = $275 2017 – ($275 – $1,960 + $1,775) = $90

Note: See analysis of Warranty Liability account in (b) below. (b) 2015 Warranty Liability ................................ Repair Parts Inventory...................

1,275

Dec. 31 Warranty Expense (1,200 × 5% × $25) Warranty Liability...........................

1,500

1,275

1,500

2016 Warranty Liability ................................ Repair Parts Inventory...................

1,600

Dec. 31 Warranty Expense (1,320 × 5% × $25) Warranty Liability...........................

1,650

1,600

1,650

2017 Warranty Liability ................................ Repair Parts Inventory...................

1,960

Dec. 31 Warranty Expense (1,420 × 5% × $25) Warranty Liability...........................

1,775

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PROBLEM 10-6B (Continued) (b) (Continued)

Date 2015 During Dec. 31 2016 During Dec. 31 2017 During Dec. 31 (c)

Warranty Liability Explanation Ref. Debit

Credit

Balance

1,500

1,275 Dr 225

1,650

1,375 Dr 275

1,775

1,685 Dr 90

1,275

1,600

1,960

Percentage of units returned for repair = Number of units returned ÷ Number of units sold Returned 2015 60 2016 70 2017 80 210

Sold 1,200 1,320 1,420 3,940

Percentage returned = 210 ÷ 3,940 = 5.3% Average actual warranty cost per unit = Total actual warranty costs ÷ Total units returned 2015 2016 2017

Actual costs $1,275 1,600 1,960 $4,835

Average warranty cost over the three-year period: $4,835 ÷ 210 = $23

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PROBLEM 10-6B (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $275. The revised warranty expense for 2017 is calculated as follows: Warranty expense 2017: 1,420 × 7% × $25 = $2,485 Warranty liability at December 31, 2017: $275 – $1,960 + $2,485 = $800

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PROBLEM 10-7B (a) 1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues 2. Increases revenues and profit 3. No effect on revenues, expenses, and profit 4. Increases revenues, expenses (cost of goods sold), and profit 2016: 1.

Cash ............................................... 1,050,000 Sales .................................. 1,037,037 Unearned Revenue–Loyalty Program 12,963

Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (750,000 × $0.025 x 70%) .................................... Total Value ...................................................

$1,050,000 13,125 $1,063,125

Allocate as follows: Earned revenue= ($1,050,000/$1,063,125) x $1,050,000 = $1,037,037 Unearned revenue= ($13,125/$1,063,125) x $1,050,000 = $12,963

2. Unearned Revenue–Loyalty Program Revenue from Rewards Program

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PROBLEM 10-7B (Continued) (b) (Continued) 2017: 3. Cash ............................................... 1,255,000 Sales .................................. 1,240,983 Unearned Revenue–Loyalty Program 14,017 Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (810,000 × $0.025 x 70%) .................................... Total Value ...................................................

$1,255,000 14,175 $1,269,175

Allocate as follows: Earned revenue= ($1,255,000/$1,269,175) x $1,255,000 = $1,240,983 Unearned revenue= ($14,175 /$1,269,175) x $1,255,000 = $14,017

4. Unearned Revenue–Loyalty Program Revenue from Rewards Program

9,500

5. Cash ...................................................... Unearned Revenue .......................

3,950

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

1,500

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3,950 1,500

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PROBLEM 10-7B (Continued) (c) Date 2016 During Dec. 31 2017 During Dec. 31

Date 2017 During Dec. 31

Unearned Revenue–Loyalty Program Explanation Ref. Debit Credit Balance 12,963

12,963 7,013

14,017

21,030 11,530

Credit

Balance

3,950

3,950 2,450

5,950

9,500 Unearned Revenue Explanation Ref. Debit

1,500

Taking It Further: Management should consider the following factors:  The historical rate of redemption on the service coupons should be reviewed and revised as needed to ensure an appropriate amount of revenue is being recorded and an appropriate amount of revenue is being deferred.  The likelihood of redemption of the gift cards. Factors such as long periods of inactivity by customers, or low residual balances increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where the likelihood of use is remote should be transferred to a revenue account.

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PROBLEM 10-8B 1.

Note disclosure: Since the amount of the liability cannot be reliably measured, the lawsuit cannot be recorded, but it should be disclosed.

It appears that it is unlikely that Big Fork will lose the lawsuit; therefore the company does not need to record or report it in the notes to the financial statements. If the loss from the lawsuit could have a substantial negative effect on the company’s financial position, then note disclosure is still desirable.

Accrue in the financial statements: It appears likely that the company will lose this claim as it was at fault and the claim of $250,000 appears to be a reasonable estimate.

Taking It Further: Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. This allows users of financial statements to make better informed decisions. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios. The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are likely and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-9B (a)

SCOOT SCOOTERS Payroll Register Week Ended February 17, 2015

Earnings Gross Employee Hours Regular Overtime Pay CPP P. Kilchyk 40 $610.00 0 $610.00 $26.86 B. Quon 42 600.00 $45.00 645.00 28.60 C. Pospisil 40 650.00 0 650.00 28.84 B. Verwey 44 580.00 87.00 667.00 29.68 Totals $2,440.00 $132.00 $2,572.00 $113.98

10-94

Deductions Income United EI Tax Way Total Net Pay $11.16 $76.60 $5.00 $119.62 $490.38 11.80 83.70 7.25 131.35 513.65 11.90 84.10 5.50 130.34 519.66 12.21 87.10 8.25 137.24 529.76 $47.07 $331.50 $26.00 $518.55 $2,053.45

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-9B (Continued) (b) Feb.15

Salaries Expense ..........................2,572.00 CPP Payable.......................... 113.98 EI Payable.............................. 47.07 Income Tax Payable ............. 331.50 United Way Contributions Payable 26.00 Salaries Payable ................... 2,053.45

15 Employee Benefits Expense ........ 282.76 CPP Payable.......................... EI Payable ($47.07 × 1.4) ...... Vacation Pay Payable ........... ($2,572.00 × 4%)

113.98 65.90 102.88

Salaries Payable............................2,053.45 Cash....................................... 2,053.45

(d) Mar.15

CPP Payable ($113.98 + $113.98). 227.96 EI Payable ($47.07 + $65.90) ............112.97 Income Tax Payable .........................331.50 Cash.......................................

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PROBLEM 10-9B (Continued) Taking It Further: The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll. Business profit is not considered insurable profit for EI purposes, so no EI is deducted from business profit or drawings. Business profit is considered pensionable profit for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.

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PROBLEM 10-10B (a) Apr.

4 Union Dues Payable ........................... Cash................................................

1,285

1,134 756

Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................

1,890

CPP Payable ....................................... 6,907 EI Payable ........................................... 3,320 Income Tax Payable ........................... 14,364 Cash................................................

20 Workers’ Compensation Payable ...... Cash................................................ 28

1,285

3,780 3,780

Salaries Expense................................ 83,160 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable ........ Salaries Payable ............................

28 Salaries Payable ................................. Cash................................................

10-97

3,799 1,522 15,800 1,414 1,247 59,378

59,378

28 Employee Benefits Expense.............. 14,246 CPP Payable................................... EI Payable ($1,522 × 1.4) ............... Workers’ Compensation Payable ($83,160 × 5%) ................................ Vacation Pay Payable ($83,160 × 4%) Life Insurance Payable ($83,160 × 1%)

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59,378 3,799 2,131 4,158 3,326 832

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PROBLEM 10-10B (Continued) (b) Canada Pension Plan Payable Explanation Ref. Debit Credit

Date Apr.

1 13 28 28

1 13 28

Date Apr.

1 13 28 28

Date Apr.

 3,799 3,799

6,907 0 3,799 7,598

Credit

Balance

15,800

14,364 0 15,800

Employment Insurance Payable Explanation Ref. Debit Credit

Balance

6,907

Income Tax Payable Explanation Ref. Debit

Date Apr.

Balance

1 20 28

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Balance

 14,364

Balance

 1,522 2,131

3,320 0 1,522 3,653

Workers’ Compensation Payable Explanation Ref. Debit Credit

Balance

3,320

Balance

 3,780 4,158

10-98

3,780 0 4,158

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PROBLEM 10-10B (Continued) (b) (Continued) Union Dues Payable Explanation Ref. Debit

Date Apr.

1 4 28

Date Apr.

1 7 28

1 28

1 7 28

Disability Insurance Payable Explanation Ref. Debit Credit

Balance

 1,285

Balance



1 28 28

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1,247

1,134 0 1,247

Credit

Balance

3,326

3,024 6,350

Credit

Balance

832

756 0 832

Credit

Balance

59,378

0 59,378 0

1,134

Balance



Balance

 756

Salaries Payable Explanation Ref. Debit

Date Apr.

1,414

1,285 0 1,414

Balance

Life Insurance Payable Explanation Ref. Debit

Date Apr.

Balance

Vacation Pay Payable Explanation Ref. Debit

Date Apr.

Credit

Balance

 59,378

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PROBLEM 10-10B (Continued) Taking It Further: The employee earning record is required to determine the employee’s total earnings and total deductions for the year. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits purposes. The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.

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PROBLEM 10-11B (a)

CREATIVE CARPENTRY (Partial) Balance Sheet March 31, 2017

Current liabilities Bank indebtedness ............................................... Accounts payable ................................................. Warranty liability .................................................... CPP payable ........................................................... EI payable............................................................... Vacation pay payable ............................................ Income tax payable................................................ HST payable ........................................................... Interest payable ..................................................... Unearned revenue ................................................. Notes payable ........................................................ Current portion of mortgage payable ................... Total current liabilities ...................................... (b)

$ 55,200 60,000 12,500 2,300 1,750 1,200 25,000 12,250 8,000 9,385 30,000 50,000 $267,585

Current assets: $184,000 + $120,600 + $500 = $305,100 Current ratio: $305,100 ÷ $267,585 = 1.14:1 Acid-test ratio: $184,000 ÷ $267,585 = 0.69:1

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PROBLEM 10-11B (Continued) (c)

Creative Carpentry did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to Creative from the bank. Creative is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but Creative still has $25,000 available in its line of credit for immediate cash needs.

Taking It Further: When customers purchase gift cards from Creative Carpentry, no goods or services have yet been delivered by the business to earn the cash obtained. Consequently, the amount received for the gift cards is initially recorded to the Unearned Revenue account. Later on, when the card is redeemed, the Unearned Revenue account is reduced for the value redeemed and revenue is recorded, along with sales taxes if applicable. This fulfills the revenue recognition principle of accounting and provides a fair reporting of when revenue is being earned.

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PROBLEM 10-12B

(a) BCE INC. (Partial) Balance Sheet December 31, 2014 (in millions of dollars)

Current liabilities Trade payables and other liabilities ..................... Current tax liabilities ............................................. Dividends payable ................................................. Interest payable ..................................................... Debt due within one year ...................................... Total current liabilities ...................................... (b)

$4,398 269 534 145 3,743 $9,089

Current assets: $142 + $424 + $333 + $198 + $379 + $3,069 = $4,545 Current ratio: $4,545 ÷ $9,089 = 0.50:1 Acid-test ratio: ($142 + $424 + $3,069) ÷ $9,089 = 0.40:1

(c)

Current ratio Dec. 31, 2013: $5,070 ÷ $7,890 = 0.64:1 Acid-test ratio Dec. 31, 2013: ($335 + $3,043) ÷ $7,890 = 0.43:1 Both the current and acid-test ratios weakened in 2014.

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PROBLEM 10-12B (Continued) Taking It Further: In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory. We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those than can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of BCE Inc. the acid-test and current ratios are relatively close, indicating that the company has a high proportion of liquid current assets. Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.

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Accounting Principles, Seventh Canadian

*PROBLEM 10-13B (a)

SLOVAK PLUMBING COMPANY Payroll Register Week Ended May 12, 2015

Employee D. Quinn K. Holub A. Lowhorn I. Kostra Totals

Gross Pay $985.00 1,037.00 1,080.00 950.00 $4,052.00

CPP $45.43 1 48.00 2 50.13 3 43.69 4 $187.25

Deductions Federal EI Income Tax 5 $111.45 $18.52 6 113.65 19.50 7 130.95 20.30 8 87.40 17.86 $76.18 $443.45

1. CPP = ($985.00 – [$3,500 ÷ 52]) × 4.95% = $45.43 2. CPP = ($1,037.00 – [$3,500 ÷ 52]) × 4.95% = $48.00 3. CPP = ($1,080.00 – [$3,500 ÷ 52]) × 4.95% = $50.13 4. CPP = ($950.00 – [$3,500 ÷ 52]) × 4.95% = $43.69 5. EI = $985.00 × 1.88% = $18.52 6. EI = $1,037.00 × 1.88% = $19.50 7. EI = $1,080.00 × 1.88% = $20.30 8. EI = $950.00 × 1.88% = $17.86

10-105

Ontario Total Income Tax Deductions Net Pay $56.70 $232.10 $752.90 57.90 239.05 797.95 65.20 266.58 813.42 48.70 197.65 752.35 $228.50 $935.38 $3,116.62

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

*PROBLEM 10-13B (Continued) (b) Semi-monthly Payroll Ended May 15, 2015:

Employee B. Dolina H. Koleno A. Krneta

Annual Salary

Gross Pay

CPP 4.95%

$80,700 62,500 44,120

$3,362.50 $159.23 1 2,604.17 121.69 2 1,838.33 83.78 3

EI 1.88% $63.22 4 48.96 5 34.56 6

1. CPP = ($3,362.50 – [$3,500 ÷ 24]) × 4.95% = $159.23 2. CPP = ($2,604.17 – [$3,500 ÷ 24]) × 4.95% = $121.69 3. CPP = ($1,838.33 – [$3,500 ÷ 24]) × 4.95% = $83.78 4. EI = $3,362.50 × 1.88% = $63.22 5. EI = $2,604.17 × 1.88% = $48.96 6. EI = $1,838.33 × 1.88% = $34.56 (c) Pay period in which CPP maximum is reached = Maximum

annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period). B. Dolina: Pay period in which CPP maximum is reached = $2,479.95 ÷ $159.23 = 15.57; rounded up to pay period 16 (August 31). Pay period in which EI maximum is reached = $930.60 ÷ $63.22 = 14.72; rounded up to pay period 15 (August 15).

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*PROBLEM 10-13B (Continued) (c) (Continued) H. Koleno: Pay period in which CPP maximum is reached = $2,479.95 ÷ $121.69 = 20.38; rounded up to pay period 21 (November 15). Pay period in which EI maximum is reached = $930.60 ÷ $48.96 = 19.01; rounded up to pay period 20 (October 31). A. Krneta: Her annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. She will not reach the maximum CPP and EI payments for 2015. Taking It Further: The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company. The amounts deducted for CPP, EI, and income taxes depends on the length of the pay period, thus different tables are necessary.

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CUMULATIVE COVERAGE: CHAPTERS 3 TO 10 (a) 1.

July 31

Operating Expenses.................. Accounts Receivable ................ Cash.......................................

50 650 700

Bad Debt Expense..................... 1,850 Allowance for Doubtful Accounts ($3,850 − $2,000) ...................

31 Interest Receivable.................... Interest Revenue ($10,000 × 8% × 1/12 months)

1,850

67 67

31 Cost of Goods Sold ....................... 6,700 Merchandise Inventory ($45,900 − $39,200) ...............

6,700

31 Operating Expenses ...................... 5,500 Prepaid Expenses .................

5,500

31 Depreciation Expense ($5,600 + $5,120) .......................... 10,720 Amortization Expense ................. 15,000 Accumulated Depreciation —Building.............................. Accumulated Depreciation —Equipment ......................... Accumulated Amortization —Patent ................................. Calculations Building ($155,000 − $15,000) ÷ 25 years = $5,600 Equipment ($25,000 − $12,200) × 40%* = $5,120 *(2 × 1 ÷ 5 years) Patent $75,000 ÷ 5 years = $15,000

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5,600 5,120 15,000

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CUMULATIVE COVERAGE (Continued) (a) (Continued) 7.

July 31 Interest Expense ....................... Interest Payable ($124,200 × 6% × 1/12) ..........

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Operating Expenses.................. Warranty Liability..................

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621 621 1,975 1,975

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CUMULATIVE COVERAGE (Continued) (b) LEBRUN COMPANY Adjusted Trial Balance July 31, 2017 Debit $ 15,850 200 39,150

Credit

Cash .......................................................... Petty cash ................................................. Accounts receivable ................................ Allowance for doubtful accounts ............ $ 3,850 Note receivable ........................................ 10,000 Interest receivable.................................... 67 Merchandise inventory ............................ 39,200 Prepaid expenses..................................... 10,500 Land .......................................................... 50,000 Building..................................................... 155,000 Accumulated depreciation—building ..... 16,400 Equipment................................................. 25,000 Accumulated depreciation—equipment . 17,320 Patent ........................................................ 75,000 Accumulated amortization—patent ........ 30,000 Accounts payable..................................... 78,900 Interest payable ........................................ 621 Warranty liability ...................................... 7,975 Note payable ............................................. 124,200 S. LeBrun, capital ..................................... 124,700 S. LeBrun, drawings................................. 54,000 Sales.......................................................... 750,000 Cost of goods sold ................................... 456,700 Bad debt expense..................................... 1,850 Operating expenses ................................. 188,745 Amortization expense .............................. 15,000 Depreciation expense .............................. 10,720 Interest revenue ....................................... 467 Interest expense .......................................... 7,451 Total ............................................................. $1,154,433 $1,154,433 See the following page for calculations.

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CUMULATIVE COVERAGE (Continued) (b) This format not required but is presented to show calculations. Account

Cash Petty cash Accounts receivable Allowance for doubtful accounts Note receivable Interest receivable Merchandise inventory Prepaid expenses Land Building Accumulated depreciation —building Equipment Accumulated depreciation —equipment Patent Accumulated amortization —patent Accounts payable

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Adjustments

Unadjusted Trial Balance Dr. Cr. 16,550 200

38,500

Cr. (1) 700

(1) 650

2,000

Adjusted Trial Balance Dr. Cr. 15,850 200 39,150

(2) 1,850

10,000

3,850 10,000

(3) 67

45,900

(4) 6,700

39,200

16,000 50,000 155,000

(5) 5,500

10,500 50,000 155,000

10,800

(6) 5,600

25,000

16,400 25,000

12,200

(6) 5,120

75,000

17,320 75,000

15,000

(6)15,000

30,000

78,900

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CUMULATIVE COVERAGE (Continued) (b) (Continued) Account Interest payable Warranty liability Note payable S. LeBrun, capital S. LeBrun, drawings Sales Cost of goods sold Bad debt expense Operating expenses Amortization expense Depreciation expense Interest revenue Interest expense Total

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Unadjusted Trial Balance Dr. Cr.

Adjusted Trial Balance Dr. Cr.

Adjustments Dr. Cr.

6,000 124,200

(7) 621

621

(8) 1,975

7,975 124,200

124,700

54,000

54,000 750,000

750,000

450,000

(4) 6,700

456,700 1,850

181,220

(2) 1,850 (5) 5,500 (8) 1,975 (1) 50

188,745

(6)15,000

15,000

(6)10,720

10,720

400

(3)

467

6,830 1,124,200

(7) 621 1,124,200 43,133

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7,451 43,133 1,154,433 1,154,433

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CUMULATIVE COVERAGE (Continued) (c) LEBRUN COMPANY Income Statement Year Ended July 31, 2017 Sales revenues Sales .............................................................................. $750,000 Cost of goods sold........................................................ 456,700 Gross profit ..................................................................... 293,300 Operating and other expenses Operating expenses ..................................... $188,745 Amortization expense................................. 15,000 Depreciation expense................................. 10,720 Bad debt expense ......................................... 1,850 Total expenses .......................................................... 216,315 Profit from operations..................................................... 76,985 Other revenues Interest revenue .......................................... 467 Other expenses Interest expense ......................................... 7,451 6,984 Profit ..................................................................................... $70,001

LEBRUN COMPANY Statement of Owner’s Equity Year Ended July 31, 2017 S. LeBrun, capital, August 1, 2016 ................................. Add: Profit........................................................................ Less: Drawings................................................................ S. LeBrun, capital, July 31, 2017 ....................................

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$124,700 70,001 194,701 54,000 $140,701

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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet July 31, 2017 Assets Current assets Cash ($15,850 + $200)................................................. $ 16,050 Accounts receivable ...................................... $39,150 Less: Allowance for doubtful accounts ........ 3,850 35,300 Note receivable ........................................................... 10,000 Interest receivable ...................................................... 67 Merchandise inventory............................................... 39,200 Prepaid expenses ....................................................... 10,500 Total current assets ............................................... 111,117 Property, plant, and equipment Land ............................................................. 50,000 Building .........................................$155,000 Less: Accumulated depreciation 16,400 138,600 Equipment ................................. 25,000 Less: Accumulated depreciation 17,320 7,680

196,280

Intangible assets Patent .......................................................... Less: Accumulated amortization ...............

45,000

75,000 30,000

Total assets........................................................................ $352,397

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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet (Continued) July 31, 2017 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... Interest payable .......................................................... Warranty liability......................................................... Current portion of note payable ................................ Total current liabilities ...........................................

$ 78,900 621 7,975 1,680 89,176

Long-term liabilities Note payable ($124,200 − $1,680) .................................. 122,520 Total liabilities ............................................................ 211,696 Owner’s equity S. LeBrun, capital .......................................................... 140,701 Total liabilities and owner’s equity ............................. $352,397

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BYP10-1 FINANCIAL REPORTING PROBLEM (a)

Total current liabilities at August 31, 2014, were $175,725,000. There was a $7,341,000 increase from the previous year ($175,725,000 – $168,384,000), which was equivalent to a 4.4% increase ($7,341,000 ÷ $168,384,000).

(b) The first of two components of total current liabilities on August 31, 2014 was accounts payable and accrued liabilities for the lion’s share of the total followed by a modest amount for provisions. Since provisions usually involve estimates, the order used by Corus was liquidity order. (c)

Current ratio: 2014 $217,394,000 ÷ $175,725,000 = 1.24:1 Current ratio: 2013 $310,070,000 ÷ $168,384,000 = 1.84:1 Receivables turnover: 2014 $833,016,000 ÷ [($183,009,000 + $164,302,000) ÷ 2] = 4.8 times Receivables turnover: 2013 $751,536,000 ÷ [($164,302,000 + $163,345,000) ÷2] = 4.6 times While the current ratio has deteriorated substantially, showing poor liquidity, the receivables turnover is very similar and slightly better than 2013.

(d)

As footnoted at the bottom of the Consolidated Statement of Financial Position, Corus directs us to the discussion of contingencies in note 27 to its financial statements. A very short paragraph describes litigation matters arising out of the ordinary course and conduct of the business. In management’s opinion, the exposure from these matters is considered not material to the financial statements.

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BYP10-2 INTERPRETING FINANCIAL STATEMENTS Loblaw does not accrue legal proceedings, as they are not expected to have a material impact on the reported results. It also does not accrue the class action proceedings as the company cannot predict the outcome with certainty. These class action proceedings however, if successful, would result in material losses for the company and it is desirable to disclose these items because they would have a substantial negative effect on the company’s financial position.

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BYP10-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

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BYP10-4 COMMUNICATION ACTIVITY

RE: TO: FROM: DATE:

Accounting for Gift Certificates Show_Time_Movie_Theatre@gmail.com Student@gmail.com

In response to your request, I wish to answer your questions regarding the accounting for gift certificates in your theatre. (a)

A liability is recorded when these certificates are sold because there is still a service to be provided by the theatre. The certificates sold are considered unearned revenue until they are redeemed and the service provided. At this point, the theatre's obligation is fulfilled and the amounts can be transferred from a liability account to a revenue account. The foregoing applies even though the gift certificates may, as you suggest, also generate additional revenues for the theatre.

(b) Since the gift certificates have no expiry date, the theatre will always have a liability for any gift certificates produced and redeemed. However, based upon the experience of your theatre and the theatre industry in general, estimates could be developed for the proportion of gift certificates that will never be redeemed. An entry would be made to reduce the liability related to unearned revenue, and to record the estimated amount that will never be redeemed as earned (or perhaps as a gain), rather than carrying an unlikely liability on your books in perpetuity.

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BYP10-5 “ALL ABOUT YOU” ACTIVITY (a)

Some of the factors to consider in determining if a worker is an employee or self-employed include:  the level of control the payer has over the worker;  whether or not the worker provides the tools and equipment;  whether the worker can subcontract the work or hire assistants;  the degree of financial risk taken by the worker;  the degree of responsibility for investment and management held by the worker;  the worker’s opportunity for profit; and  any other relevant factors, such as written contracts.

(b) The amount of cash received each month is the gross pay less the payroll deductions: Gross pay: Less: CPP Contribution EI Contribution Income taxes Cash received (net pay)

$3,000.00 $134.06 54.90 409.35

598.31 $2,401.69

The total amount of cash received in a year: Annual salary ($3,000 × 12) Less deductions: CPP Contribution ($134.06 × 12) EI Contribution ($54.90 × 12) Income tax ($409.35 × 12) Cash received (net pay)

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$36,000.00 1,608.72 658.80 4,912.20 $28,820.28

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BYP 10-5 (Continued) (c)

The total CPP paid in the year will be $134.06 × 12 = $1,608.72. Since the employee’s annual salary of $36,000 is less than the 2015 maximum pensionable earnings of $53,600, the employee will not reach the maximum annual contribution. The total EI paid in the year will be $54.90 × 12 = $658.80. The employee’s annual salary is less than the 2015 maximum insurable earnings of $49,500, so the maximum annual employee EI premium will not be reached.

(d) If you are self-employed, you will receive the full $3,000 each month. As a self-employed individual, you will be responsible for making periodic instalmentt payments to CRA for personal income tax. The amount paid in income taxes may differ depending on the expenses that you may be able to claim as a self-employed individual. If no expenses are claimed, the amount of CPP paid in a year will include the employee and the employer portion as follows: $1,608.72 × 2 = $3,217.44 If no expenses are claimed, and the individual has chosen to pay EI, the amount of EI paid in a year will include only the employee’s contribution of $658.80.

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BYP 10-5 (Continued) (e)

(f)

Consulting revenue ($3,000 × 12) Less deductions: Income tax ($409.35 × 12) CPP Contribution ($134.06 × 12 × 2) Net pay

$36,000.00 4,912.20 3,217.44 $27,870.36

Based on the calculations in (c) and (e), it is preferable to be an employee because the net pay is higher.

(g) The answer to (f) may change if there is more than one client. It would be likely that additional expenses, such as travelling to the client’s location would be incurred. As a self-employed consultant, these costs could be deductible for income tax purposes and could decrease the amount of taxes paid.

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BYP10-6 Santé Smoothie Saga

The cash from the sale of gift certificates must be recorded as unearned revenue. Unearned revenue represents cash payments received in advance of earning the revenue because the service or goods has not been provided to the customer. With a gift certificate, Natalie’s business owes a recipe book and all of the supplies needed to create two cups of smoothies. This is the same rationale as deposits received for pre-made smoothies.

If the sale of gift certificates is recorded as revenue, revenues on the income statement will be overstated and profit will also be overstated. The revenue is not earned until the recipe book and supplies are provided to customers. The gift certificate does not represent a good or service but rather an entitlement to receive goods in the future when they are redeemed. If the gift certificates are never used, Natalie will need to use her past experience to determine what her liability is and the likelihood of the older gift certificates being redeemed. She can then recognize revenue on gift certificates unlikely to be redeemed.

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CHAPTER 11 Financial Reporting Concepts ASSIGNMENT CLASSIFICATION TABLE Brief Problems Questions Exercises Exercises Set A

Problems Set B

1. Explain the importance of having a conceptual framework of accounting, and list the key components.

2. Explain the objective of financial reporting, and define the elements of the financial statements.

2, 3, 4, 20

1, 10

1, 2, 4, 7

3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting.

5, 6, 7, 8, 9, 10, 11, 21

2, 3,

1, 2, 7

4. Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

11, 12, 13, 14, 15, 16, 17, 18, 19,

4, 5, 6, 7, 4, 5, 6, 7, 8, 9, 10, 8, 10, 11, 11 12

1, 2, 3, 4, 1, 2, 3, 4, 5, 6, 7 5, 6, 7

5. Apply the foundational concepts, assumptions and constraints of the conceptual framework to financial reporting situations.

20, 21, 22, 23, 24

11, 12, 13, 14

1, 7, 8

Learning Objectives

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6, 9, 10, 11, 12

1, 7, 8

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A

4A 5A 6A

7A 8A 1B 2B 3B

4B 5B 6B

7B 8B

Identify violations of the components of the conceptual framework. Identify objective of financial reporting, identifying elements, and revenue and expense recognition – earnings approach. Identify contract components and prepare journal entries– revenue recognition contract based approach, multiple performance obligations. Identify elements of the financial statements – contract-based approach revenue transactions. Identify revenue recognition criteria and prepare journal entries–earnings approach. Identify contract components and prepare journal entries – revenue recognition contract-based approach, right of return. Identify concept or assumption violated and prepare entries. Explain assumptions and concepts – going concern, full disclosure. Identify violations of the components of the conceptual framework. Identify objective of financial reporting, identifying elements, and revenue and expense recognition. Identify contract components and prepare journal entries– revenue recognition contract based approach, multiple performance obligations. Identify elements of the financial statements – contract-based approach revenue transactions. Identify revenue recognition criteria and prepare journal entries–earnings approach. Identify contract components and prepare journal entries – revenue recognition contract-based approach, right of return. Identify elements, assumptions, constraints and measurement criteria. Comment on application of accounting assumptions and concepts.

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Complex

Time Allotted (min.) 45-50

Moderate

35-40

Moderate

20-25

Moderate

15-20

Moderate

20-25

Moderate

25-30

Moderate

30-35

Moderate

15-20

Complex

45-50

Moderate

35-40

Moderate

20-25

Moderate

15-20

Moderate

20-25

Moderate

25-30

Moderate

30-35

Moderate

15-20

Difficulty Level

Description

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Objectives 1. Explain the importance of having a conceptual framework of accounting, and list the key components.

Knowledge

Comprehension

Application

Analysis

BE11-1

Q11-1 E11-9

P11-1A P11-1B

2. Explain the objective of financial reporting, and define the elements of the financial statements.

Q11-2 Q11-4 BE11-2

Q11-3 Q11-11 Q11-20 E11-1 E11-2 E11-4

E11-5 E11-10 P11-1A P11-2A P11-4A P11-1B P11-2B P11-4B

P11-7A P11-7B

3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting.

Q11-5 Q11-7 Q11-10 BE11-3

Q11-6 Q11-8 Q11-9 Q11-11 Q11-21 E11-2 E11-4

E11-3 P11-1A P11-2A P11-1B P11-2B

P11-7A P11-7B

4. Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.

Q11-13 Q11-14 Q11-17 E11-5

Q11-11 Q11-12 Q11-18 BE11-11 E11-7 E11-11

BE11-4 BE11-5 BE11-6 BE11-7 BE11-8 BE11-9 BE11-10 E11-4 E11-8 E11-10 E11-12

5. Apply the foundational concepts, assumptions and constraints of the conceptual framework to financial reporting situations. Broadening Your Perspective

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Q11-20 Q11-21 Q11-22 Q11-23 Q11-24 BE11-11 BE11-12

BE11-13 BE11-14 E11-9 E11-11

BYP11-3

11-3

P11-1A P11-2A P11-3A P11-4A P11-5A P11-6A P11-1B P11-2B P11-3B P11-4B P11-5B P11-6B

Synthesis

Q11-15 Q11-16 Q11-19 BE11-15 BE11-16 E11-6 P11-7A P11-7B

E11-10 E11-12 P11-1A P11-8A P11-1B P11-8B

E11-6 P11-7A P11-7B

BYP11-4 BYP11-5

BYP11-1 BYP11-2

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Evaluation

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Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

The conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function, and limits of financial accounting statements. It guides choices about what to present in financial statements, how to report economic events, and how to communicate such information.

(a) The main objective of financial reporting is to provide information that is useful for decision-making. More specifically, the conceptual framework states that the objective of general purpose financial reporting is to provide financial information that is useful to present and potential investors, lenders, and other creditors in making decisions about a business. (b)

The objective identifies the specific users to ensure that a range of possible points of view are included in fulfilling the needs of users but cannot be all things to all users.

(a) Stewardship refers to the responsibility of management to acquire and use company resources in the best way possible. (b)

The objective of financial reporting is to provide users with useful financial information. Users look for information in the financial statements about a company’s ability to earn a profit and generate future cash flows. Using the financial statements helps users assess stewardship.

Under IFRS the elements of assets, liabilities, equity, revenue, and expenses are included, as they are in ASPE. Under revenues, IFRS includes gains and under expenses, IFRS includes losses. Under ASPE, gains and losses are defined in separate categories from revenues and expenses, but have similar basic definitions to those under IFRS.

The two fundamental qualitative characteristics of financial information are: relevance and faithful representation. Accounting information has relevance if it makes a difference in a decision. Relevant information has predictive value or confirmatory value. Faithful representation shows the economic reality of events rather than just their legal form. Faithful representation is achieved if the information is complete, neutral, and free from material error. Complete information includes all information necessary to show the economic reality of the transaction.

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Questions (Continued) 5. (Continued) Accounting information is neutral if it is free from bias intended to attain a predetermined result or encourage a particular behaviour. Accounting estimates must also be based on the best available information and be reasonably accurate to be considered free from material error. 6.

(a) The concept of materiality means that an item may be so small that failure to follow generally accepted accounting principles will not influence the decision of a reasonably careful investor or creditor. For example, the expensing of a $20 calculator would not technically be in accordance with GAAP since the calculator will probably have a useful life beyond one year. However, the cost is so insignificant that it will have no impact on users’ decisions and therefore, this GAAP deviation is not considered to be material. In addition, the cost constraint supports the expensing of the calculator. Materiality is also the criterion used in deciding whether or not an element deserves to be disclosed separately within the body of the financial statements or in the notes to the financial statements. (b) In order to be relevant to a financial statement user, a transaction or amount must make a difference to the user when making a decision. If an omission or misstatement does not influence a user, it is said to be immaterial or not material. Materiality is not only a matter of size, but also has to do with the nature of the omission or misstatement (for instance, illegal acts or contingent liabilities).

The four enhancing qualitative characteristics of financial information are: comparability, verifiability, timeliness and understandability. Accounting information about a company is most useful when it can be compared with accounting information about other companies. Comparability results when different companies use the same accounting principles. Comparability is also easier when accounting policies are used consistently by a business from one accounting period to the next. Information is verifiable if two knowledgeable and independent people would agree that it faithfully represents the economic reality. The usefulness of accounting information is enhanced when it is provided on a timely basis, when it is still highly useful for decision-making. Information in financial statements must be capable of being understood by users. Understandability is enhanced by classified, clear, and concise presentation. It is assumed that the average user has a reasonable understanding of accounting concepts and procedures, and general business and economic conditions.

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Questions (Continued) 8.

Although the transactions amount might be considered immaterial to the rest of the financial statements of a business, it does not mean that the transaction should be omitted. In order for financial statements to be relevant the financial information presented should be complete. The concept of materiality means that an item may be so small that failure to follow GAAP will not influence the decision of a reasonably careful investor or creditor. When dealing with the omission of a transaction, the framework discusses the decision to omit the transaction’s detail in the disclosure of separate elements in the body of the financial statement or in their notes.

The qualitative characteristics differences of IFRS and ASPE can be highlighted in the following table: IFRS ASPE Qualitative Characteristics: Qualitative Characteristics: Fundamental Relevance Faithful representation Enhancing Comparability Verifiability Timeliness Understandability

Understandability Relevance Reliability Comparability

In ASPE, the reliability characteristic is similar in many ways to faithful representation in IFRS. ASPE includes conservatism as a component of reliability. Conservatism is similar to the prudence concept for IFRS. 10. The qualitative characteristic of relevance should be applied first because it will identify the specific information that would affect the decisions of investors and creditors and that should be included in the financial report. Once relevance is applied, faithful representation should be applied to ensure that the economic information faithfully represents the economic events being described. Taken together, relevance and faithful representation make financial reporting information decision useful. Then the enhancing qualitative characteristics—comparability, verifiability, timeliness, and understandability—are applied. They add to the decision usefulness of financial reporting information that is relevant and representationally faithful. They must be applied after the first two characteristics because they cannot, either individually or together, make information useful if it is irrelevant or not faithfully represented.

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Accounting Principles, Seventh Canadian Edition

Questions (Continued) 11. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.” For some elements of the financial statements, reporting balances at their fair values is judged by management to be the more appropriate choice as doing so better reflects their intentions and plans for the future. Fair values are thought to be more relevant in some financial reporting situations and will provide users with more relevant information to assess the impact of changes in value on the company’s liquidity and solvency. 12. The conceptual framework specifically addresses revenue recognition because of its importance in the measurement of the performance of any enterprise. There are a variety of methods that can be used to recognize revenue and judgement needs to be applied in the selection of a method that is most appropriate for the circumstances and transactions of the business. The activities that generate revenue have become more complex and innovative over the years, making the point where revenues meet the guidelines for recognition much harder to determine. The complex transactions include “swap” transactions, “bill and hold” sales arrangements, risk-sharing agreements, complex rights of return, price-protection guarantees, and post-sale maintenance contracts to name a few. From the perspective of a financial statement user, the revenue being recognized should be the best fit for the situation and must provide a relevant measure of financial performance. 13. The revenue recognition steps used in the contract-based approach include: a) Identify the contract with a customer b) Identify the performance obligations in the contract c) Determine the transaction price (overall contract price) d) Allocate the transaction price to the performance obligations in the contract e) Recognize revenue when the performance obligations are complete.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

Questions (Continued) 14. The revenue recognition criteria state that revenue is recognized when there is an increase in an asset or a decrease in a liability due to profitgenerating activities. Under the earnings approach the following criteria must be met for revenue to be recognized: a) Performance is complete and the seller has transferred to the buyer the significant risks and rewards of ownership; b) The seller does not have control over the goods or continuing managerial involvement; c) The amount of revenue can be reliably measured; d) It is probable there will be an increase in economic resources (that is, cash will be collected); and e) Costs relating to the sale of the goods can be reliably measured. 15. Under the contract-based approach, the revenue from the sale should be recognized when the performance obligation has been satisfied. Since the sale is for a single product, with no apparent return privileges or collection risk, the performance obligation will be satisfied when the customer, Beowulf Industries takes possession of the furniture on June 10, 2017. 16. Under the earnings approach of revenue recognition, the $10,000 cash received on March 24, 2017 should be recorded as unearned revenue since no landscaping services have yet been performed. The unearned revenue should appear as a current liability on Greenthumb’s balance sheet at April 30, 2017. The revenue from providing landscaping services should be allocated to the month in which the services are performed. In this case, the amount of $10,000 will be allocated to the five-month period from May through September 2017 at the rate of $2,000 per month. 17. Under the contract-based approach to recognize revenue, the indications that control of the services has transferred to the customer over a period of time are: a) Customer receives and consumes the benefits provided by the business at the same time b) Business creates or enhances an asset that the customer controls c) Business is not creating or enhancing an asset that it could have an alternative use for d) Business has a right to payment for performance completed to date.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

Questions (Continued) 18. (a) Under the contract-based approach to revenue recognition, returns which can be measured reasonably will be treated as a separate performance obligation under the contract. Once that performance obligation has been completed at the end of 30 days that portion of revenue can be recognized. (b) If the potential returns cannot be estimated, the gross profit on the sale will be deferred and the sale recognized when all performance obligations have been completed. 19. I disagree. The payments for assets consumed in the same month as the month of payment and recorded as expenses do not violate the concept of a financial statement element. Those payments that benefit the organization for the current and future periods such as the annual insurance premium and the cost of the industrial oven should be broken down into the portion of the payment that is an expense for the month and the asset portion which will bring benefit to the business in future accounting periods. 20. Xiaoping has presented financial statements that are not useful because they include several business entities, some involved in the sale of goods and some involved in providing services. By violating the reporting entity principle, the information has become much less relevant in assessing the performance of each of the three businesses or her personal wealth. Comparisons of performance cannot be made with other businesses in the same industry, nor can trends be established and assessed by taking information from financial statements covering several fiscal years for each business. 21. Cost constraints are typically involved in the level of precision or detail of the financial information being provided. The value obtained for the level of precision on estimates for example or the finer detail of tracking all types of expenses might, due to materiality, exceed any benefit obtained from the additional effort that would be required. The concept of completeness is often tied to the disclosure principle. Completeness relates to the cost constraint in that disclosure may be limited due to the costs involved in getting the information ready for disclosure.

Solutions Manual .

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Chapter 11

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Accounting Principles, Seventh Canadian Edition

Questions (Continued) 22. (a) It is assumed under the going concern assumption that the business will continue in its operations for the foreseeable future; that is, long enough to carry out its existing objectives and commitments. (b) As a consequence of the going concern assumption, the classification of assets and liabilities between current and non-current becomes relevant in the eyes of the financial statement user who may be assessing the business’ liquidity. The user may also be looking for some predictive value in the financial information that will determine expected future cash flows needed for replacing long-lived assets for example. In addition, the use of the historical cost basis of reporting some long-lived assets is justified by the expectation that the business will not need to liquidate these assets in the near future and management’s estimates and expectations for the use of the assets for the long-term can be achieved. 23. The cost constraint is a pervasive constraint that ensures the value of the information provided is greater than the cost of providing it. Cost constraints are typically involved in the level of precision, detail of the financial information being provided, or the details involved in the disclosure process. 24. The periodicity concept ties in with the timeliness concept which in turn enhances the main qualitative characteristic of relevance. The periodicity concept (also sometimes referred to as the time period concept) guides businesses in dividing up their economic activities into distinct time periods. The accrual basis of accounting is also closely tied to the periodicity concept. Together these concepts provide timely information to financial statement users who can make comparisons, and assess trends quickly in order to react appropriately to the financial information.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 (a) (b) (c) (d) (e) (f)

F T F T T T

BRIEF EXERCISE 11-2 (a) (b) (c) (d) (e) (f)

4. 2. 1. 5. 3. 1.

Revenues Liabilities Assets Expenses Equity Assets

BRIEF EXERCISE 11-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)

4 6 3 5 7 10 1 9 8 2 11

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 11-4 Revenue of $250,000; the value of the work completed in March. Salaries expense of $75,000.

BRIEF EXERCISE 11-5 Using the contract–based approach, the company should recognize sales in the amount of 98% of the invoice amount of $450,000 or $441,000 in the month of September and the $9,000 should be recorded to Unearned Revenue.

BRIEF EXERCISE 11-6 The critical event in the sales transaction is the legal possession of the merchandise, which occurs based on the shipping terms. In this case since the shipping terms are FOB shipping point, the sale occurs on November 29, 2017. Accounts Receivable ............................ Sales ............................................... Cost of Goods Sold ............................... Merchandise Inventory ..................

350,000 350,000 200,000 200,000

The amount of gross profit recognized in November is $150,000 ($350,000 - $200,000)

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 11-7 Although the customer, Ragnar Company has taken possession of the goods, Willow Appliance Company has not fulfilled all of the revenue recognition criteria. Willow is not able to reasonably estimate the probability of collection. Consequently, under the earnings approach, the gross profit on the sale is deferred until the collection is received. Accounts Receivable ............................ Deferred Gross Profit..................... Merchandise Inventory ..................

25,000 6,000 19,000

BRIEF EXERCISE 11-8 Step Description 1 Is there a contract? 2

What is the performance obligation(s)?

What is the transaction price?

Is there a need to allocate the transaction price?

Has the performance obligation(s) been satisfied?

Solutions Manual .

Criteria to be met and discussion Yes, a contract was signed April 3, 2017. There are two performance obligations: 1) the delivery of the microprocessors to Thompson Industries and 2) the obligation to accept returns. The transaction price is $35,000 (5,000 x $7) less the estimated refund liability of 5% ($1,750) for a net amount of $33,250. Sales will be in the amount of $33,250 and the refund liability will be $1,750 for expected returns. Yes, on June 3, 2017 Flin Flon will recognize sales of $33,250 when it delivers the goods to Thompson who takes control (possession and legal title has transferred) of the goods.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 11-9 Operating expenses from adjusted trial balance Add: Loss on damaged inventory Accrual of sales commissions expense Total operating expenses

$55,000 4,000 2,500 $61,500

BRIEF EXERCISE 11-10 1.

The measurement criterion for historical cost has been violated. The accountant should not have recorded the increase in the value from the original cost to the fair value as this is not allowed under ASPE.

2. There is a violation of revenue recognition criteria. Since the musical production for which the ticket sales were made has not yet taken place by the end of January, none of the revenue had been earned. Instead, Unearned Revenue should have been credited in the entry made by the accountant.

BRIEF EXERCISE 11-11 (a) (b) (c) (d) (e) (f) (g)

3. 5. 1. 1. 4. 6. 2.

Full disclosure Expense recognition Revenue recognition Revenue recognition Historical cost Realizable value Matching

BRIEF EXERCISE 11-12 (a) (b) (c)

Yes Yes No

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 11-13 (a) (b) (c)

Yes Yes Yes

BRIEF EXERCISE 11-14 (a) (b) (c) (d) (e)

1. 2. 3. 4. 6.

Going concern assumption Reporting entity concept Full disclosure Monetary unit Periodicity

Solutions Manual .

11-15

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 11-1 1. Asset 2. No element exists as the benefit to the business is not measurable and is not the result of an exchange. 3. Liability 4. No element exists as the benefit to the business is not measurable and is not the result of an exchange. 5. Liability EXERCISE 11-2 (a) (b) (c) (d) (e) (f) (g) (h)

3 4 6 6 2 7 1 5

EXERCISE 11-3 1. 2. 3. 4.

Feedback value Free from material error Complete Predictive value

Solutions Manual .

11-16

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 11-4 Step Question 1. What kind of contract does Leo Legal Services have with the customer? 2. What is Leo’s performance obligation? 3. 4.

What is the transaction price? Should the transaction price be allocated? If so, how? When should Leo recognize revenue from this contract?

Answer One month of legal services by Leo Legal Services to J & J Home Inspections The performance obligation for Leo is to provide one month of legal services. The transaction price is $5,000. Since there is only one performance obligation, there is no allocation needed. The performance obligation will be satisfied by the end of the month at which time the revenue will have been earned from the contract.

EXERCISE 11-5 1. 2. 3. 4. 5. 6. 7. 8.

Contract-based approach Earnings approach Contract-based approach Contract-based approach Contract-based approach Earnings approach Earnings approach Contract-based approach

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 11-6 1.

This is a violation of the cost measurement concept, because the inventory was recorded at its estimated fair value and not its cost. The correct journal entry is: Merchandise inventory.......................... Cash ................................................

42,000 42,000

This is a violation of the reporting entity concept. The treatment of the transaction treats Evan Ellis and Ellis Company as one entity when they are two separate entities. No journal entry should have been made since Evan Ellis should have used personal assets to purchase the computer. If cash assets of the company were used, the debit entry could be to Accounts Receivable—E. Ellis, or to E. Ellis, Drawings and the credit entry to Cash.

There is no violation of generally accepted accounting principles. The merchandise inventory is properly reported at the lower of cost and net realizable value.

This is a question of matching, materiality, and cost constraint. In theory, the coffee machine should be depreciated to match the expense with revenue, since the coffee machine has an estimated useful life of 5 years. However, because the cost of the coffee machine is not material, the cost of accounting for it as a long-lived asset will exceed any benefits from doing so. Office Expense ....................................... Cash ...............................................

50 50

This is a violation of the revenue recognition criteria. The revenue should be recognized when the service is provided in April. When the cash is received, it should be credited to an unearned revenue account until the revenue is earned. Cash ....................................................... Unearned Revenue........................

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650 650 Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 11-7 March sales = 350 × $760 = $266,000 for services performed from May-September (5 months) June sales = 300 × $800 = 240,000 for services performed from June-September (4 months) July sales = 100 × $800 = 80,000 for services performed from July-September (3 months) Total sales $586,000 No revenue would be recorded in March or April because no services were provided. Assuming the same amount of work is provided to the customers each month from May to September, revenue would be recognized as follows: March April $266,000 $240,000 $ 80,000 Total

May $53,200

June $53,200 60,000

July August Sept. $53,200 $53,200 $53,200 60,000 60,000 60,000 26,667 26,667 26,666 $53,200 $113,200 $139,867 $139,867 $139,866

EXERCISE 11-8 1.

Byer’s Innovations Co. should record rent expense in 2017 in the amount of $6,000 for the months of November and December at the rate of $3,000 per month.

The full amount of $35,000 for research must be expensed immediately as there is no assurance of any future benefit to be derived from the research activity.

An estimate can be made of the amount of monthly power and water expenses that should be accrued for the month of December 2017 in the amount of $5,000 ($55,000 ÷ 11). Consequently the cost of power and water for the fiscal year will be in the amount of $60,000 ($55,000 + $5,000).

No depreciation expense should be recognized in the 2017 fiscal year as the packaging equipment was not yet available for use.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 11-9 (a) It is advisable for Susan to prepare monthly financial statements, particularly because the business is new. It is not unusual for new business owners to experience difficulty when starting a new business, for example in areas such as product pricing and expense management. Monthly financial statements will provide Susan the necessary frequent feedback she needs concerning the results of operations. Timely information will allow Susan to react quickly and make any necessary business decisions to ensure her business’ success. (b) Since Susan’s business is quite small it is not cost effective for her to adopt IFRS. Only very large operations can justify the time, effort, and cost of implementing IFRS. Consequently, Susan should follow ASPE.

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 11-10 (a) Financial statements help the bank assess the financial position, profitability, and liquidity of their customers. With accurate and complete financial information, the bank can determine the impact the expansion plans might have on Marc’s profitability and ability to repay any current and additional loans obtained. Financial statements will allow the bank to conduct some analysis and make comparisons of Marc’s business with other similar retail operations. (b) The bank manager wants reliable, comparable, and relevant information to determine the amount of risk the bank is taking if it is to extend a loan to Marc for his inventory expansion. GAAP requires qualitative characteristics to be embedded in accounting information. (c) Unless there is contractual relationship between the two companies, such as a guarantee for an existing loan, the two companies do not have a business relationship. The two companies should not be combined for purposes of preparing financial statements. Doing so would violate the reporting entity concept of GAAP. (d) Although the rented store space is shared space with another business, there is likely other property, plant, and equipment owned by the business that is necessary to operate the store. These assets would be depreciated and would be reported on the balance sheet at their carrying amount (i.e., cost less accumulated depreciation). As for the inventory, the measurement of this current asset should be at the lower of cost and net realizable value.

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 11-11 (a) (b) (c) (d) (e) (f)

2. 5. 3. 1. 6. 4.

Reporting entity concept Cost constraint Completeness Going concern assumption Materiality Cost constraint

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

Revenue recognition criteria Completeness Expense recognition criteria Going concern assumption; Completeness No violation (lower of cost and net realizable value) Timeliness characteristic Historical cost Reporting entity concept Cost constraint

Solutions Manual .

11-22

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 11-1A (a) The financial statements that have been provided are not useful to the bank manager as they have not been prepared in accordance with GAAP. The banker will also want to see a Statement of Owner’s Equity and a Statement of Cash Flows. Along with properly prepared financial statements, the bank manager will also want to see the notes to the financial statements which will assist him in gathering the necessary information, required under the disclosure principle, needed to interpret the elements reported on the financial statements. (b) The reporting of assets, liabilities, revenue, and expenses is not appropriate as several GAAP have been violated in their preparation. Assets are misstated because: 1. Cash should be reported at $5,000 and the remaining amount should be reported as a long-term investment of $495,000 (or a short-term investment if the intention is to resell the shares in the near future). 2. A vehicle should be reported as property, plant, and equipment, on the balance sheet and should have depreciation expense recorded in the period. It should not have been expensed completely on the statement of income. 3. The different categories of property, plant, and equipment should be disclosed, as well as the accounting policy used for depreciation. 4. The property, plant, and equipment is misstated as the estimate of the useful life far exceeds the number of years used in the calculation of the depreciation expense.

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-1A (Continued) (b) (Continued) 5. Depreciation expense in the amount of $75,000 has been listed as an asset on the balance sheet instead of as an expense on the income statement. 6. Inventory includes cost of goods sold which should be reported on the income statement as an expense 7. Inventory has been reported at an amount that has not been adjusted to its net realizable value and is therefore overstated. Liabilities are misstated because: 1. The liabilities on the balance sheet should be classified between current and non-current liabilities. 2. The bank loan reported on the balance sheet should be relabelled as a mortgage payable and the current and non-current portions should be split on the balance sheet. 3. The security for the mortgage payable, along with its rate of interest and terms of repayment need to be disclosed in the notes to the financial statements. 4. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. Revenues are misstated because: 1. Some of the revenues from a separate entity and business, Sumsong Appliance Store, have been incorrectly included in the sales reported on the income statement. 2. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. 3. The amount of $18,000 reported as sales for orders to be filled is not a transaction and should not be included in revenue or elsewhere on the financial statements.

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-1A (Continued) (b) (Continued) 4. There are likely performance obligations outstanding relating to the return policy. Expenses are misstated because: 1. The income statement is missing cost of goods sold expense which has been shown as inventory on the balance sheet. 2. G. Sumsong’s personal transactions are incorrectly included as expenses of the business. 3. G. Sumsong’s drawings should not appear on the income statement as an expense but should instead be reported in the statement of owner’s equity. 4. The vehicle expense is a capital asset and should appear on the balance sheet. Depreciation expense should be recorded on the vehicle for the current year. 5. There is no interest expense reported on the mortgage payable. 6. Depreciation expense in the amount of $75,000 has been listed as an asset on the balance sheet instead of an expense on the income statement. (c) Sumsong has not followed the guidance for relevance and faithful representation. As mentioned in the details of part (b) the violations include: 1. Reporting entity 2. Revenue recognition 3. Periodicity 4. Full disclosure 5. Measurement (lower of cost and NRV for inventory and depreciation expense omission for the vehicle) 6. Historical cost (for the omission of the vehicle that was expensed)

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-1A (Continued) (d) As mentioned in the details of part (b) there have been revenues included in the income statement that have not been realized or not based on transactions. As well there may be performance obligations outstanding on the returns of merchandise which will reduce total sales reported. The measurement problems exist for the reporting of inventory at the lower of cost and net realizable value. A write down of the inventory by $4,000 should be recorded. There was also an issue of the measurement of depreciation expense caused by not applying the appropriate useful life of some capital assets. (e) Because transactions of another business have been included in the records of the business, the reporting entity principle has been violated. Not all financial statements have been prepared. No notes to the financial statements have been provided. These are violations of the full disclosure principle.

Taking It Further: When looking at the financial statements provided, it would be very difficult to interpret the performance and financial position of Sumsong. It would also be difficult to have confidence in Gillian’s ability to determine the success or failure of the business due to the extremely poor treatment of the financial records. Consequently, I would doubt Gillian’s abilities as an owner manager.

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-2A (a)

Financial statements help the bank assess the financial position, profitability, and liquidity of their customers. With accurate and complete financial information, the bank can determine the impact the expansion plans might have on Kamloops’s profitability and ability to repay any current and additional loans obtained.

(b)

In order to ensure that the financial information provided by Kamloops is reliable, the bank has requested that the financial statements be reviewed by an independent accountant.

(c) Current assets Add: Cost of goods in transit (1) Less: Sale has not occurred (2) Accrued sales returns (3) Eliminate prepaid advertising (4) Revised current assets *($26,000 × 5%) Current liabilities Add: Invoice for goods in transit (1) Revised current liabilities

$120,000 15,000 (8,400) (1,300)* (3,500) $121,800

Sales Less: Accrued sales returns (3) Sale has not occurred, no transfer of ownership (2) Revised sales

560,000 (1,300) (8,400) $550,300

Total operating expenses Add: Advertising expense (4) Revised total operating expenses

$106,000 3,500 $109,500

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$ 80,000 15,000 $ 95,000

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-2A (Continued) (c) (Continued) 1. Goods in transit must be included in inventory and accounts payable as the terms of shipment indicate that Kamloops owned the inventory as of December 31, 2017. 2. No sale has occurred. The sales amount must be removed from the accounts receivable and sales accounts. The cost of goods sold is not affected because the amount ($4,300) was still included in merchandise inventory. 3. Sales returns for the last 15 days of the fiscal year need to be accrued as a reduction of sales and a reduction of accounts receivable. The amount accrued is 5% of $26,000 or $1,300. 4. The promotional expense recorded as a prepaid expense must be expensed as there is no measurable future benefit realized as of December 31, 2017. Taking It Further: (a)

Current ratio

(b)

Current ratio

$ 120,000 $ 80,000

1.50:1

$ 121,800 $ 95,000

1.28:1

As a result of the required adjustments, Kamloops’s current ratio is considerably worse as it has reduced by from the initial 1.5 to 1.28. Since the adjustments that were required are in the same direction (reducing profit, decreasing current assets, and increasing current liabilities), there appears to be bias in the errors made by Kamloops. On the other hand, without knowing the level of training and expertise of Alphonzo, the company’s manager, who is the preparer of the financial statements, it is inappropriate to conclude if the errors were intentional.

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-3A (a) Step Question 1. Is there a contract? If so, describe the contract. 2. What is Santa Holiday Farm’s performance obligation(s)? 3. What is the transaction price?

Is there a need to allocate the transaction price? Has the performance obligation(s) been satisfied? If so, when?

Answer Delivery of one fir tree and the removal of one fir tree. 1) Deliver one fir tree. 2) Remove one fir tree. The transaction price for both performance obligations is a combined price of $60 allocated on a basis of their pre-holiday package individual selling prices. Yes. For the fir tree $42.86 ($50 ÷ $70 x $60) and the disposal service $17.14 ($20 ÷ $70 x $60) The performance obligation to deliver fir trees has been satisfied by December 31, 2017 and the removal of the fir trees will be satisfied on January 3, 2018.

(b) Cash (200 x $60) ......................................... Sales (200 x $42.86) ............................ Unearned Revenue (200 x $17.14) ..... (upon delivery of the fir trees)

12,000

Unearned Revenue ..................................... Revenue............................................... (upon removal of fir trees)

3,428

8,572 3,428

3,428

Taking It Further: Accounting standards need to change to address the needs of the financial statement users. As new types of transactions occur, for example from technological advances, standards need to be developed and applied to these new transactions or situations to maintain representational faithfulness. Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

PROBLEM 11-4A Dec. 4

Asset (Cash and Building) Liability (Bank Loan)

Dec. 10

No elements as there has been no exchange and there is no transaction.

Dec. 15

Asset (Cash and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)

Dec. 18

No elements as there has been no exchange and there is no transaction.

Dec. 20

Asset (Accounts Receivable and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)

Dec. 24

Asset (Cash) Expenses (Salaries Expense)

Dec. 31

Liability (Accounts Payable) Expenses (Utilities Expense)

Dec. 31

Asset (Accumulated Depreciation – Equipment) Expenses (Depreciation Expense)

Taking It Further: Precisely defined elements for the financial statements enhance the representational faithfulness of what is being reported. It avoids confusion on the part of the financial statement reader, particularly when making comparisons with other businesses.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-5A (a) 1.

Port’s performance will be complete when the tires reach the destination of Kelsee Electrocar Company. This is the point where the risks and rewards of ownership will pass to Kelsee and when Kelsee has legal title of the goods.

Port has no control over the goods or continuing involvement as there are no returns expected and the warranty on the goods is provided by the manufacturer of the tires.

The transaction can be measured reliably at the selling price of the tires since no sales discount is offered for early payment.

There is a risk that collection will not be achieved. Port cannot determine that it is probable that collection will be received. Consequently, the probability that there will be an increase in the economic resources to Port cannot be established.

The cost of the goods sold of $6,000 is known but the bad debt expense is not known.

The critical event in this case that will trigger the revenue will be the collection of the account from Kelsee.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-5A (Continued) (b) Sept. 18, 2017 Accounts Receivable (300 x $40) .............. Deferred Gross Profit.......................... Merchandise Inventory (300 x $20) .... Nov. 4, 2017 Cash ............................................................ Accounts Receivable ......................... Cost of Goods Sold .................................... Deferred Gross Profit ................................. Sales ....................................................

12,000 6,000 6,000 12,000 12,000 6,000 6,000 12,000

Taking It Further: Additional costs that could be incurred after the sale include the cost of sales returns and allowances, sales discounts, freight on sales returns, and bad debt expenses.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-6A (a) The contract is to deliver to the customer 300 accounting textbooks at a price of $110 per book, to be paid September 25, 2017. (b) Nicolet’s performance obligation is to ship 300 accounting textbooks to Hinton University. (c) The transaction price is $33,000 (300 x $110). (d) The revenue from the sale of the books should be recognized on August 25, 2017. (e) August 25, 2017 Accounts Receivable ....................................... Refund Liability ($33,000 X 10%)............ Sales ........................................................ Inventory Returns (300 X 10% x $80) .............. Cost of Goods Sold.......................................... Merchandise Inventory (300 X $80)........ Sept. 15, 2017 Refund Liability (10 x $110) ............................. Accounts Receivable (10 X $110) ............ Merchandise Inventory (10 x $ 80) .................. Inventory Returns ...................................

33,000 3,300 29,700 2,400 21,600 24,000 1,100 1,100 800 800

Sept. 25, 2017 Cash ($33,000 - $1,100) .................................... Accounts Receivable ...............................

31,900

Sept. 30, 2017 Refund Liability (20 x $ 110) ............................ Cash (20 X $110) .......................................

2,200

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31,900

2,200

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-6A (Continued) (e) (Continued) Merchandise Inventory (20 x $ 80) .................. Inventory Returns ...................................

1,600 1,600

Taking It Further: Because Nicolet would have offered Hinton a cash discount for early payment, the transaction price is subject to a variable consideration and so the amount of the accounts receivable recorded on August 25, 2017 should be reduced by the sales discount if it is probable that Hinton will take advantage of the discount offered by Nicolet.

Solutions Manual .

11-34

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-7A (a) and (b) 1.

Expense recognition criteria (matching concept). The cost of equipment should not be expensed immediately. Only costs that have no probable future benefits are recognized immediately as expenses. Therefore, the following entries are necessary: Equipment................................................... Cash .....................................................

80,000 80,000

Depreciation Expense [$80,000 × (100%  5 × 2)]........................... 32,000 Accumulated Depreciation—Equipment 32,000 2.

Expense recognition criteria (matching concept). The cost of property, plant, and equipment should be allocated over its useful life in a rational and systematic manner. Deferring depreciation is not rational and systematic. Therefore, the following entry is necessary: Depreciation Expense ................................ Accumulated Depreciation .................

43,000 43,000

Measurement criteria (historical cost basis). Recording the transaction at its estimated fair value would not be proper because estimated fair value in this case does not represent an exchange price (the company has not adopted the revaluation model for accounting for its property, plant, and equipment). The purchase should be recorded at cost, not at a fair value that someone believes the equipment is worth. The correct entry is: Equipment................................................... Cash .....................................................

Solutions Manual .

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36,000 36,000

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-7A (Continued) (a) and (b) (Continued) 4.

Going concern assumption. Liquidation value is not appropriate because it assumes that the enterprise will not continue. No entry is necessary. Only when liquidation appears imminent is the going concern assumption inapplicable. Otherwise, the cost measurement basis applies.

Expense recognition criteria (matching concept). Expensing the cost of the rent immediately does not allow a proper matching of the expense with the revenue that will be earned over the next 6 months. The correct entry is: Prepaid Rent ............................................... Cash .....................................................

18,000 18,000

An adjusting entry is made at December 31 to record the proper rent expense. Rent Expense.............................................. Prepaid Rent........................................

12,000 12,000

Alternatively, the entry debiting Rent Expense can be recorded, but the adjusting entry at December 31 would then be as follows: Prepaid Rent ............................................... Rent Expense ......................................

6,000 6,000

If financial statements are prepared only once at the end of the fiscal year, it really doesn’t matter what entry is made originally (although debiting an asset account such as Prepaid Rent tends to result in better internal control), as long as the correct allocation is made at year end between the asset and the expense account.

Solutions Manual .

11-36

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-7A (Continued) (a) and (b) (Continued) 6.

Measurement criteria (historical cost basis). Appreciation in value does not justify recognizing a gain on the land, until the land is sold (since Kwick Kopy has not adopted the revaluation model for accounting for its property, plant, and equipment). Appreciation does not involve an exchange transaction. No entry is necessary.

Taking It Further: A liquidation basis may be appropriate for property, plant, and equipment if the company can no longer apply the going concern assumption. In such a case, the company’s demise would be imminent and liquidation is likely.

Solutions Manual .

11-37

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-8A (a) If a company files for bankruptcy, it may not satisfy the going concern assumption. The going concern assumption is a basic assumption underlying the preparation and presentation of financial statements. When this assumption is not satisfied, the balance sheet would not be classified, since all assets and liabilities would be current. The basis of measurement of assets would be liquidation or net realizable value, rather than their carrying amounts. (b) Companies that are under bankruptcy protection would disclose in the notes to their financial statements, their plan for restructuring their operations. Since many factors may remain outside of their control, depending on the circumstances, it is possible that some of the companies will not be able to continue and cannot be viewed as a going concern. Individual companies can be expected to survive bankruptcy protection and can continue to apply the going concern assumption, but the remarks in the notes to the financial statements will be strongly worded and send a clear message of warning to users. Usually, a company has to be virtually certain that it will not continue operations in the near future in order to not apply the going concern assumption.

Taking It Further: In disclosing that a company may not be able to continue as a going concern, a company’s management faces the dilemma of a “self-fulfilling” prophecy. If a company prepares financial statements without applying the going concern assumption, this is a clear signal to users that the company’s management does not believe the company will survive beyond the coming year. This sends a clear signal to users to think in terms of liquidation; it encourages creditors to demand repayment of outstanding debt and discourages potential investors from investing in the company.

Solutions Manual .

11-38

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-1B (a) The financial statements that have been provided are not useful to the investor as they have not been prepared in accordance with GAAP. The investor will also want to see a Statement of Owner’s Equity and a Statement of Cash Flows. Along with properly prepared financial statements, the investor will also want to see the notes to the financial statements which will assist him in gathering the necessary information, required under the disclosure principle, needed to interpret the elements reported on the financial statements. (b) The reporting of assets, liabilities, revenue, and expenses is not appropriate as several GAAP have been violated in their preparation. Assets are misstated because: 1. Accounts receivable are overstated. Accounts receivable should be reported at the gross amount of $35,000 and the remaining amount of $315,000 should be reported as a long-term investment (or a short-term investment if the intention is to resell the shares in the near future). In addition, an allowance for doubtful accounts should be set up to reduce the accounts receivable to their net realizable value. 2. A building addition should be reported as property, plant, and equipment, on the balance sheet and should have depreciation expense recorded in the period. It should not have been expensed completely on the statement of income. 3. The different categories of property, plant, and equipment should be disclosed, as well as the accounting policy used for depreciation. 4. The property, plant, and equipment is misstated as the estimate of the useful life far exceeds the number of years used in the calculation of the depreciation expense.

Solutions Manual .

11-39

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-1B (Continued) (b) (Continued) Assets are misstated because: (Continued) 5. Depreciation expense in the amount of $85,000 has been listed as an asset on the balance sheet instead of an expense on the income statement. 6. Inventory includes cost of goods sold which should be reported on the income statement as an expense. Liabilities are misstated because: 1. The liabilities on the balance sheet should be classified between current and non-current liabilities. 2. The accounts payable reported on the balance sheet should be reduced by an amount reported separately as a bank loan and the current and non-current portions should be split on the balance sheet. 3. The security for the bank loan (if any), the rate of interest, and the terms of repayment need to be disclosed in the notes to the financial statements. 4. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. Revenues are misstated because: 1. Some of the revenues from a separate entity and business, a music store, have been incorrectly included in the sales reported on the income statement. 2. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. 3. The amount of $35,000 reported as sales for orders to be filled is not a transaction and should not be included in revenue or elsewhere on the financial statements.

Solutions Manual .

11-40

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-1B (Continued) (b) (Continued) Expenses are misstated because: 1. The income statement is missing cost of goods sold expense which has been shown as inventory on the balance sheet. 2. D. Zytel’s personal transactions are incorrectly included as expenses of the business. 3. D. Zytel’s drawings should not appear on the income statement as an expense but should instead be reported in the statement of owner’s equity. 4. The building expense is a capital asset and should appear on the balance sheet. Depreciation expense should be recorded on the building addition for the current year. 5. There is no interest expense reported on the bank loan. 6. Depreciation expense in the amount of $85,000 has been listed as an asset on the balance sheet instead of an expense on the income statement. (c) Zytel has not followed the guidance for relevance and faithful representation. As mentioned in the details of part (b) the violations include: 1. Reporting entity 2. Revenue recognition 3. Periodicity 4. Full disclosure 5. Measurement (allowance for doubtful accounts for accounts receivable) and depreciation expense for the building that was expensed 6. Historical cost (for the omission of the building).

Solutions Manual .

11-41

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-1B (Continued) (d) As mentioned in the details of part (b) there have been revenues included in the income statement that have not been realized or not based on transactions. The measurement problems exist for the reporting of accounts receivable at realizable value. An allowance for doubtful accounts should be created in the amount of 5% of the accounts receivable balance and a bad debt expense reported on the income statement. There was also an issue of the measurement of depreciation expense caused by not applying the appropriate useful life of some capital assets. (e) Because transactions of another business have been included in the records of the business the reporting entity principle has been violated. Not all financial statements have been prepared. No notes to the financial statements have been provided. These are violations of the full disclosure principle.

Taking It Further: Using the revaluation model, public companies following IFRS can choose to report property, plant, and equipment at their fair value, as long as a fair value can be reliably measured. Certain industries, such as investment or real estate companies, where fair values are more relevant than cost find this a logical alternative. The revaluation model is not allowed under ASPE. From the perspective of a current or potential investor more upto-date information is available to assess the value of businesses they have or are considering investing in.

Solutions Manual .

11-42

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-2B (a)

Financial statements help me as a potential partner in the business in my assessment of the business’s financial position, profitability, and ability meet its financial obligations. With accurate and complete financial information, I can assess the impact the expansion plans will have on the financial performance of the business and determine if my investment can provide me with a return that is satisfactory based on the risks associated with making my investment.

(b) Current assets Less: Inventory already sold (3) Eliminate prepaid advertising (4) Revised current assets

$90,000 (35,000) (4,800) $50,200

Current liabilities Add: Unearned revenue from contract (1) Unearned warranty sales (2) Revised current liabilities

$65,000 22,000 10,000 $97,000

Net sales and consulting revenue Less: Reduce for unearned warranty sales (2) Less: Unearned Revenue (1) Revised net sales and consulting revenue

$650,000 (10,000)* (22,000) $618,000

Total operating expenses Add: Advertising expense (4) Revised total operating expenses * ($500 × 20)

$106,000 4,800 $110,800

1. The service contract extends for a twelve-month period and so 11 months or $22,000 remains unearned at December 31, 2017 ($24,000 × 11 ÷ 12).

Solutions Manual .

11-43

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-2B (Continued) (b)

(Continued) 2. The cash obtained from the sale of extended warranties should not be included in revenue as no warranty services have yet been delivered to earn this revenue ($500 × 20). 3. Eugene has double counted the inventory items in accounts receivable and in inventory. The merchandise inventory was sold and so the recording of the sale and corresponding cost of goods sold is correctly recorded. The amount of the cost of the items sold must be removed from the inventory count and balance. There is no impact on cost of goods sold. 4. The promotional expense recorded as a prepaid expense must be expensed as there is no measurable future benefit realized as of December 31, 2017.

Taking It Further: My review of the required revisions to Eugene Company’s financial statements leads to the recalculation of the current ratio below: Before adjustment

Current ratio

$ 90,000 $ 65,000

1.38:1

After adjustment

Current ratio

$ 50,200 $ 97,000

0.52: 1

As a result of the required adjustments, Eugene’s current ratio is considerably worse as it has declined from the initial 1.38 to 0.52. Since the adjustments that were required are in the same direction (reducing profit, decreasing current assets, and increasing current liabilities), there appears to be bias in the errors made by Eugene. Whether the errors are intentional or not, I have concluded that the liquidity and profitability of Eugene Company does not warrant my investment. I would look into how Eugene has arrived at the pricing of the new extended warranty program, for any possible errors in the estimates. Solutions Manual .

11-44

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-3B (a) Step Question 1. Is there a contract? If so, describe the contract. 2. What is Brilliance’s performance obligation(s)? 3. What is the transaction price?

Is there a need to allocate the transaction price? Has the performance obligation(s) been satisfied? If so, when?

Answer Provide one box of lights and one hour of service to hang the lights. 1) Deliver one box of lights. 2) Provide one hour of service to hang the lights. The transaction price for both performance obligations is a combined price of $110 allocated on a basis of their pre-holiday package individual selling prices. Yes. For the lights $28.52 ($35 ÷ $135 x $110) and the one hour of service to hang the lights $81.48 ($100 ÷ $135 x $110) The performance obligation to provide one box of lights has been satisfied on November 15, 2017 and the service of hanging the lights will be satisfied on December 5, 2017.

(b) Cash (40 x $110) ......................................... 4,400 Sales (40 x $28.52) .............................. 1,141 Unearned Revenue (40 x $81.48) ....... 3,259 (upon delivery of the box of lights and the collection) Unearned Revenue ..................................... 3,259 Revenue............................................... (upon completion of the installation of lights)

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-3B (Continued)

Taking It Further: If Brilliance adds a 30-day warranty on the lights offered in their holiday package, it will need to establish the costs that are likely to be incurred for this assurance type warranty. The warranty revenue would be recognized as a separate performance obligation under the contract. In part (b) an additional liability would be recognized for the warranty liability when the cash is collected which would be adjusted to revenue 30 days later.

Solutions Manual .

11-46

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-4B Oct. 4

Asset (Cash and Building) Liability (Bank Loan)

Oct. 10

No elements as there has been no exchange and there is no transaction for the business.

Oct. 15

Asset (Cash and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)

Oct. 18

No elements as there has been no exchange and there is no transaction.

Oct. 20

Asset (Accounts Receivable and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)

Oct. 24

Asset (Cash) Expenses (Salaries Expense)

Oct. 31

Liability (Accounts Payable) Expenses (Telephone Expense)

Oct. 31

Asset (Accumulated Depreciation – Equipment) Expenses (Depreciation Expense)

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11-47

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-4B (Continued)

Taking It Further: When estimating returns, accountants use information of past returns’ history or research the level of returns that are expected for their particular industry. Since returns can occur in an accounting period following the accounting period in which the sale was recognized, arriving at an accurate estimate of returns will become even more important. An understatement of the liability for the return obligation will result in an overstatement of profit in the year of the sale and an understatement of profit in the year when the return occurs.

Solutions Manual .

11-48

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-5B (a) 1.

Crittenden’s performance will be complete when the phones reach the destination of Joe’s Country Corner Store. This is the point where the risks and rewards of ownership will pass to Joe’s and when Joe’s has legal title of the goods.

Crittenden has no control over the goods or continuing involvement as there are no returns expected and the warranty on the goods is provided by the manufacturer of the phones.

The transaction can be measured reliably at the selling price of the phones since no sales discount is offered for early payment. The potential revenue is $450 (10 x $45).

There is a risk that collection will not be achieved. Crittenden cannot determine that it is probable that collection will be received. Consequently, the probability that there will be an increase in the economic resources to Crittenden cannot be established.

The cost of the goods sold ($300) is known but the bad debt expense is not known.

The critical event in this case that will trigger the revenue will be the collection of the account from Joe’s.

Solutions Manual .

11-49

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-5B (Continued) (b) March 15, 2017 Accounts Receivable (10 x $45) ................ Deferred Gross Profit.......................... Merchandise Inventory (10 x $30) ...... April 30, 2017 Cash ............................................................ Accounts Receivable ......................... Cost of Goods Sold .................................... Deferred Gross Profit ................................. Sales ....................................................

450 150 300 450 450 300 150 450

Taking It Further: Additional costs that could be incurred after the sale include the cost of sales returns and allowances, sales discounts, freight on sales returns, and bad debt expenses.

Solutions Manual .

11-50

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-6B (a) Dusky’s performance obligation is completed when the 50 bracelets are in the possession of Tara’s Boutique. (b) The transaction can be reliably measured at the contract price of $4,250 (50 x $85). (c) It is probable that there will be an increase in the economic resources to Dusky from the sale. (d) The costs associated with the sale are the cost of goods sold of $1,250 (50 x $25) less 10% for estimated returns for a net of $1,125. (e) The critical event that triggers revenue recognition is the passage of the title to Tara’s when delivery of the bracelets is made. (f) June 1, 2017 Accounts Receivable ....................................... Refund Liability ($4,250 X 10%).............. Sales ........................................................ Inventory Returns (50 X 10% x $25) ................ Cost of Goods Sold.......................................... Merchandise Inventory (50 X $25)..........

4,250 425 3,825 125 1,125 1,250

June 20, 2017 Refund Liability (5 x $85) ................................. Accounts Receivable ...............................

425

Merchandise Inventory (5 x $ 25) .................... Inventory Returns ...................................

125

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425 125

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-6B (Continued) (f) (Continued) June 30, 2017 Cash ($4,250 - $425) ......................................... Accounts Receivable ...............................

3,825 3,825

Taking It Further: If the returns could not have been estimated, all costs relating to the sale of the goods could not be reliably measured and so not all of the revenue recognition criteria would have been met.

Solutions Manual .

11-52

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-7B (a) and (b) 1.

Measurement criteria (historical cost basis). Recording the equipment at its estimated fair value would not be proper because estimated fair value in this case does not represent an exchange price (since Desktop has not adopted the revaluation model for accounting for its property, plant, and equipment). The purchase should be recorded at cost, not at a fair value that someone believes the equipment is worth. The correct entry is: Equipment................................................... Cash .....................................................

60,000 60,000

Measurement criteria (historical cost basis). Appreciation in value does not justify recognizing a gain on the land, until the land is sold (since Desktop has not adopted the revaluation model for accounting for its property, plant, and equipment). Appreciation does not involve an exchange transaction. No entry is necessary.

18,000 18,000

Expense recognition criteria (matching concept). The equipment should not be expensed immediately. Only costs which have no probable future benefits are recognized immediately as expenses. Therefore, the following entries are necessary:

Solutions Manual .

11-53

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-7B (Continued) (a) and (b) (Continued) 4. (Continued) Equipment................................................... Cash .....................................................

54,000

9,000 Depreciation Expense ($54,000  6) .......... Accumulated Depreciation—Equipment

54,000

9,000

Going concern assumption. The lower of cost and fair value is a conservative characteristic of accounting information. If a loss due to impairment is anticipated, it should be recorded immediately, rather than waiting until realized. But since the company will continue using the building in the foreseeable future, it is not intended to be sold, and the value is expected to increase in the future there does not appear to be an impairment. The adjustment should not be recorded. No entry is necessary.

Expense recognition criteria (matching concept). The marketing plan will be designed and implemented in 2018. To date, no revenue has been earned from the plan and no efforts spent to develop the plan. Therefore the marketing expense should be matched to revenue and recorded in 2018. No entry necessary.

Taking It Further: The revaluation model of accounting for property, plant, and equipment is an alternative method under IFRS. Under the revaluation model, the carrying amount of the equipment can be adjusted to fair value. The revaluation model can be applied only to assets whose fair value can be reliably measured, and revaluations must be carried out often enough that the carrying amount is not materially different from the asset’s fair value at the balance sheet date. Solutions Manual .

11-54

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 11-8B (a)

EastJet Airlines prepared its financial statement using the cost model because it satisfied the going concern assumption for its operations.

(b)

EastJet Airlines faces challenges but it is not insolvent, so not following the going concern assumption is premature and inappropriate. The company’s financial disclosure, such as its statement of earnings and balance sheet, will reflect the difficulties that the company is facing. A company has to be virtually certain that it will not continue operations in the near future in order to stop applying the going concern assumption.

Taking It Further: The full disclosure concept requires that the company provide information that can affect the financial health of a company. This disclosure involves the data in the financial statements as well as the accompanying notes. In the notes to its financial statements, EastJet Airlines is required to disclose the significant risks that it is subject to, such as interest rate, foreign exchange, liquidity, market, and fuel price risk.

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE—CHAPTERS 6 TO 11 (a)

Information on the two companies’ accounting principles would be found in the first or second note to the financial statements. It is in the note on significant accounting policies that you would learn what inventory cost formula the company used, what depreciation method, including rates of depreciation or useful lives, and any significant estimates made by each company.

(b)

Johan Company

Nordlund Company

Cash Accounts receivable Allowance for doubtful accounts Merchandise inventory Total current assets

$ 70,300 309,700 (13,600) 477,000 843,400

$ 48,400 312,500 (20,000) 520,200 861,100

Property, plant, and equipment Accumulated depreciation (1) Net property, plant, and equipment

255,300 (188,374) 66,926

257,300 (189,850) 67,450

Total assets

$910,326

$928,550

Current liabilities Long-term liabilities Total liabilities

$440,200 78,000 518,200

$436,500 80,000 516,500

Owner’s equity (2)

392,126

412,050

Total liabilities and owner’s equity

$910,326

$928,550

Note: Supporting calculations are shown on the next page.

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) (Continued) Calculations (1) Accumulated depreciation—Johan:

Year 1 2 3 4 5 6

Carrying Amount $255,300 204,240 163,392 130,714 104,571 83,657

DiminishingBalance Rate (10% × 2) 20% 20% 20% 20% 20% 20%

Depreciation Expense $51,060 40,848 32,678 26,143 20,914 16,731

Accumulated Depreciation $ 51,060 91,908 124,586 150,729 171,643 188,374

(2) Owner’s equity: Johan: $454,750 + $13,100 ($477,000 – $463,900) change in inventory value – $75,724 ($188,374 – $112,650) change in accumulated depreciation = $392,126 Nordlund: $432,050 – $20,000 allowance for doubtful accounts = $412,050 (c) The quality of the financial information has improved for both companies. Better comparisons can now be made between the two businesses as there is now some consistency in the way in which the accounting policies have been applied and in the way in which the estimates have been arrived at. Users of the information will not be unduly influenced by the amounts reported that may be biased - based completely on the choices of accounting policies and the use of estimates.

Solutions Manual .

11-57

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BYP11-1 FINANCIAL REPORTING AND ANALYSIS (a)

Corus reports its short-term investments in marketable securities at their fair value because this basis of measurement is required under IFRS followed by Corus and because this is a more relevant measure for these particular assets which are expected to be sold in the near future.

(b)

Advertising revenues are recognized in the period in which the advertising is aired under broadcast contracts and collection is reasonably assured. Subscriber fee revenues are recognized monthly based on estimated subscriber levels for the period-end, which are based on the preceding month’s actual subscribers as submitted by the broadcast distribution undertakings. The revenue recognition criteria state that revenue is recognized when there is an increase in an asset or a decrease in a liability due to profit-generating activities. Under the earnings approach the following criteria must be met for revenue to be recognized: a) performance is complete and the seller has performed the services; b) the amount of revenue can be reliably measured; c) it is probable there will be an increase in economic resources (that is, cash will be collected); and d) costs relating to providing the services can be reliably measured.

(c)

The disclosure provided in Note 27 on commitments, contingencies, and guarantees is required as a result of the full disclosure principle. The information provides relevant information to users of the financial statements concerning Corus’s obligations and expected cash flows in the future.

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BYP11-1 (Continued) (d)

The auditors’ report adds credibility to Corus’s financial statements for users such as creditors and shareholders. In the last paragraph of their report, the auditors expressed the opinion that “the financial statements presented fairly, in all material respects, the financial position of Corus Entertainment Inc. as at August 31, 2014 and 2013 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.”

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BYP11-2 INTERPRETING FINANCIAL STATEMENTS (a)

Besides the owners, additional users of McCain’s financial statements include creditors and government entities such as the Canada Revenue Agency.

(b)

Since the vast majority of countries throughout the globe follow IFRS, it is most cost effective for McCain to adopt and follow IFRS.

(c)

In spite of the fact that McCain Foods Limited is a private company and is therefore not required to prepare financial statements in accordance with International Financial Reporting Standards, management has chosen to do so to enhance its ability to make comparison of its performance with other multinational companies that are public companies. As well, if at any time in the future McCain chooses to go public, or sells the business to an international public company already using IFRS, this decision will not cause any difficulty or delay in implementation because of the financial reporting standards followed for historical financial information.

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BYP11-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP11-4 COMMUNICATION ACTIVITY MEMO To:

President of Junk Grrlz

From:

Accountant

Re:

Revenue Recognition

The purpose of this memorandum is to provide you with my advice as to (a) when to recognize the revenue from the sale of real animal fur costs to Cheap But Good, and (b) the way in which this inventory of fur coats should be reported in the financial statements of Junk Grrlz for the year ending September 30, 2017. (a)

In arriving at a reasonable conclusion as to when to recognize revenue on the transaction with Cheap But Good, some important factors need to be taken into account. You have provided Cheap But Good a very generous return policy and arrangement for payment. No orders have been received in the last year for real fur coats. It is unlikely that you can reasonably estimate how many of the coats will be returned by Cheap But Good. In order to be fair, you cannot predict the likely results from the transaction with Cheap But Good at this time. Consequently, you will need to postpone the revenue recognition until Cheap But Good actually sells the real fur coats and pays you for their purchase. This approach would be a similar treatment to a consignment sale.

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BYP 11-4 (Continued) (b)

Also similar to the treatment of a consignment sale will be the treatment of inventory of real fur coats on your balance sheet at September 30, 2017. The items should be reported at the lower of cost and the net realizable value of the items. Should Cheap But Good succeed in selling all of the coats, you will realize a gross profit on the sale. On the other hand, if no sales are made, the items of inventory might not have any realizable value by the end of your agreement with Cheap But Good, which is December 31, 2017. You will need to estimate the probability of these two results. If you are not optimistic of Cheap But Good’s potential for obtaining sales, you will need to write down the value of the inventory to the best estimate of what you believe you will ultimately be able to obtain for these real fur coats.

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BYP11-5 “ALL ABOUT YOU” ACTIVITY (a) The bank is in the business to make profit for its shareholders at the least amount of risk. What the banker is trying to determine is what type of risk the bank is facing if they lend you money to purchase a car. To do this, the bank needs to determine your ability to repay the loan and the interest on the loan, when the amounts are due. The cash budget will tell the bank what kind of revenues and costs you expect to have during the loan period and when the corresponding cash inflows and outflows will occur. The second report will determine the amount of resources and obligations you will have at your disposal during the loan period. (b) In order for the bank manager to have confidence in you as a client, your financial information has to be complete and accurate. The qualitative characteristics of reliability and faithful representation best describe what the expectations of the bank manager are concerning the information you provide. As well, the information has to be verifiable. (c) The cash flow budget is part of your loan application and will provide information about what future cash inflows and outflows you are expected to experience. For example, when you provide information about your salary, the banker will likely ask you for a pay stub as evidence of the salary level you have provided in the loan application. If you have other sources of income, your personal income tax return might be used to provide evidence of the cash flows from additional sources of income. The bank manager could also evaluate your projected expenses by comparison with expenses from other loan applicants. (d) If it is determined that the statements you have made in your loan application are false or misleading, the bank manager will surely deny you the loan. An example of misleading information is your claim to ownership of a home, which upon investigation, using a title search, reveals is owned jointly with someone else.

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BYP11-6 Santé Smoothie Saga (a)

1. Sasha Petrolinski is not accounting for the revenue correctly. Although it is beneficial to a business to have an order to provide goods into the future, this does not constitute the earning of revenue. 2.

Sasha Petrolinski is not accounting for the purchase of brewing supplies correctly. Since Sasha has taken possession of the goods, he must recognize the liability for the purchase of the supplies, based on the shipping terms of delivery.

The bank should be informed of the standing order for 150 cases of craft beer every week. This type of order is large and is also indicative of a steady source of revenue and cash flows in the future.

Without any corrections to the issues mentioned above, Blazing Skies Brew’s income statement will not be representationally faithful of the operations nor will it provide relevant information to Sasha’s bank. As well, the treatment of the purchase of the supplies has the effect of showing an improved liquidity on the balance sheet from the postponement of the recording of the liability for the purchase.

(b) Revenue will be earned when the goods will be delivered and the performance obligation under the contract has been satisfied. Correspondingly, Sasha’s customers will have an obligation to pay Sasha for the goods when they are delivered and no earlier.

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BYP11-6 (Continued) (c)

The purchase of brewing supplies should be recorded based on the delivery terms of the shipment. Once Sasha takes possession of the brewing supplies, he should record the supplies and the corresponding accounts payable.

(d) Although the contractual arrangement with Libations Bar is not a transaction that is reported on the financial statements, Sasha could inform the bank of this order by showing some additional documentation concerning this order in his application for the loan.

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CHAPTER 12 Accounting for Partnerships ASSIGNMENT CLASSIFICATION TABLE Exercises

Problems Set A

Problems Set B

1, 6

4, 5, 6

2, 3

1, 6, 13

1, 6, 12

3. Allocate and record profit or loss to partners.

7, 8

4, 5, 6, 7, 8, 9

2, 3, 4, 5, 6, 10, 13

2, 3, 4, 5, 6, 9, 12

4. Prepare partnership financial statements.

9, 10, 11

3, 4, 5, 6, 13

2, 3, 4, 5, 6, 12

5. Account for the admission of a partner.

12, 13,14

11, 12

7, 8, 9, 10, 13

7, 9, 12

6. Account for the withdrawal of a partner.

15, 16

13, 14,

10, 13

8, 9, 12

7. Account for the liquidation of a partnership.

17, 18

15, 16, 17, 18

11, 12

10, 11

Learning Objectives

Questions

1. Describe the characteristics of the partnership form of business organization.

1, 2, 3

2. Account for the formation of a partnership.

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Difficulty Level

Time Allotted (min.)

Discuss advantages and disadvantages of partnerships and record formation of partnership and prepare balance sheet. Calculate and record division of profit. Prepare closing entries.

Moderate

20-25

Moderate

25-35

Calculate and record division of profit. Prepare statement of partners’ equity. Calculate and record division of profit. Prepare statement of partners’ equity and closing entries. Prepare financial statements and closing entries.

Moderate

25-30

Moderate

25-30

Moderate

30-40

Moderate

25-30

Prepare entries allocate profit and prepare financial statements. Record admission of partner.

Moderate

20-25

Record admission of partner.

Moderate

20-25

Record withdrawal of partner.

Moderate

20-25

10A

Record withdrawal and admission of partner; allocate profit.

Complex

25-35

11A

Prepare and post entries for partnership liquidation.

Moderate

20-30

12A

Record liquidation of partnership.

Moderate

30-40

13A

Account for the formation of a partnership, allocation of profits, and withdrawal and admission of partners; prepare partial balance sheet. Discuss advantages and disadvantages of partnerships and record formation of partnership and prepare balance sheet. Record formation of partnership and prepare closing entries.

Complex

50-60

Moderate

20-25

Moderate

25-35

3A 4A

Description

Calculate and record division of profit. Prepare statement of partners’ equity.

Moderate

25-35

Calculate division of profit or loss. Prepare statement of partners’ equity, and closing entries.

Moderate

25-35

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare financial statements and closing entries.

Moderate

30-40

Moderate

25-30

Prepare entries allocate profit and prepare financial statements. Record admission of partner.

Moderate

20-25

Record admission of partner.

Moderate

20-25

Record withdrawal of partner.

Moderate

20-30

10B

Record withdrawal and admission of partner; allocate profit.

Moderate

25-35

11B

Prepare and post entries for partnership liquidation.

Moderate

20-30

12B

Record liquidation of partnership.

Moderate

25-35

13B

Account for the formation of a partnership, allocation of profits, and admission and withdrawal of partners; prepare partial balance sheet.

Complex

50-60

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Objective 1. Describe the characteristics of the partnership form of business organization. 2. Account for the formation of a partnership.

Knowledge Q12-1 Q12-3 BE12-1

Comprehension Q12-2

Q12-4 Q12-5 Q12-6

Application P12-1A P12-1B

BE12-2 BE12-3 E12-2 E12-3 P12-1A P12-6A

P12-12A P12-13A P12-1B P12-6B P12-12B P12-13B P12-2A P12-3A P12-4A P12-5A P12-6A P12-9A P12-10A P12-13A P12-2B P12-3B P12-4B P12-5B P12-6B P12-9B P12-10B P12-13B P12-6A P12-12A P12-13A P12-3B P12-4B P12-5B P12-6B P12-12B P12-13B P12-9A P12-10A P12-13A P12-7B P12-8B P12-9B P12-10B P12-13B P12-10A P12-12A P12-13A P12-9B P12-10B P12-12B P12-13B

Allocate and record profit or loss to partners.

Q12-7 Q12-8

BE12-4 BE12-5 BE12-6 BE12-7 BE12-8 BE12-9 E12-4 E12-5 E12-6 E12-7 E12-8

Prepare partnership financial statements.

Q12-9 Q12-10 Q12-11

BE12-10 E12-7 E12-8 P12-3A P12-4A P12-5A

Account for the admission of a partner.

Q12-13 Q12-14

Q12-12 BE12-11 BE12-12 E12-9 E12-10 P12-7A P12-8A

Account for the withdrawal of a partner.

Q12-15 Q12-16

BE12-13 BE12-14 E12-9 E12-10 E12-11 E12-12 P12-9A

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Analysis E12-1

Synthesis Evaluation

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE (Continued) 7.

Learning Objective Account for the liquidation of a partnership.

Broadening Your Perspective

Solutions Manual .

Knowledge Q12-17

Comprehension Q12-18

BPY12-2

BYP12-1

Application BE12-15 E12-16 BE12-16 E12-17 BE12-17 P12-11A BE12-18 P12-12A E12-13 P12-13A E12-14 P12-11B E12-15 P12-12B P12-13B BYP12-3 BYP12-6 Santé Saga

12-5

Analysis

Synthesis

Evaluation

BYP12-4

BYP12-5

Chapter 12

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Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

(a) Association of individuals: A partnership is a voluntary association of two or more individuals that can be based on an act as simple as a handshake. It is far more common and preferable to have a legal, written agreement that outlines the rights and obligations of the partners. (b)

Limited life: A partnership does not have unlimited life. A partnership may be ended voluntarily or involuntarily. Thus, the life of a partnership is definite. In a partnership, a change in ownership ends the existing partnership. Consequently, whenever a partner withdraws from the partnership or a new partner is admitted, the partnership faces dissolution and so it is said to have a limited life. The end of the partnership can be avoided by provisions in the partnership agreement.

(c)

Co-ownership of property: In a partnership, assets are owned jointly by the partners. In the case of a dissolution, the asset originally invested into the partnership does not get returned to the partner who invested the asset.

The advantages of a partnership are: (1) combining skills and resources of two or more individuals, (2) ease of formation, (3) relatively free from governmental regulations and restrictions, and (4) ease of decision-making. Disadvantages are: (1) mutual agency, (2) limited life, and (3) unlimited liability.

(a) The partnership agreement should contain basic information such as the name and location of the firm, the purpose of the business, and the date of inception. In addition, the agreement should specify the names and capital contributions of the partners, the rights and duties of the partners, the basis for sharing profit or loss, provisions for withdrawal of assets, procedures for settling disputes, procedures for withdrawal or admission of a partner, the rights and duties of a surviving partner if a partner dies, and procedures for liquidating a partnership. (b)

If a partnership agreement is not written, the provisions of the Partnership Act will apply to the partnership. This could include equal sharing of profit and loss, amongst other provisions, which may not meet the requirements and needs of the partners.

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QUESTIONS (Continued) 4.

(a)

The value of the partners’ investment would equal the fair value of the contributed assets at the date of their transfer to the partnership.

(b)

This is consistent with the cost principle because fair value represents the cost, or amount given up by the partnership, to acquire these assets.

When a partner contributes equipment as his initial investment, any depreciation that has accumulated on the equipment and recorded in a previous business is not part of the investment transaction. Since the equipment is invested into a new business at its fair value, the investment is treated the same way as the purchase of a used asset. The equipment has not yet been used by the partnership so there is no accumulated depreciation.

When the accounts receivable are transferred into the partnership, they should be recorded at their realizable value. In the case of Naheed’s accounts receivable, although they total $8,000 their realizable value is only $6,000. Consequently, the amount recorded as accounts receivable will be the full $8,000 but that amount will be reduced by an allowance for doubtful accounts of $2,000 in Naheed’s investment entry. Similarly, Franca’s accounts receivable should be recorded at $8,000 but reduced by the allowance for doubtful accounts amount of $1,000 for a net realizable value of $7,000.

There is no direct relationship between a salary allowance for allocating profit among partners and partners’ cash withdrawals. While withdrawals reduce the capital balance of a partner, they are not used in profit allocation formulas, the way salary allowance can be used. A salary allowance is used when allocating profit to the partners and is intended to reward a partner for efforts put forth for the business.

Salary expense and interest expense are elements of the income statement and represent reductions of profit before it is allocated to the partners. Salary allowance and interest allowance are part of the process of allocating the profit to the partners, and are not elements of the income statement. Salary allowance is a means of recognizing levels of effort put forth by the partners in earning profit. Interest allowance rewards partners for their levels of investment in the partnership, based on the capital account balances.

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QUESTIONS (Continued) 9.

The statement of partners’ equity has the same content as the statement of owner’s equity except that it contains the details of all the changes in each partner’s capital as well as the changes in total for the partnership. These changes include: investments, profits, losses, and drawings.

10. The statement of income of a partnership does not include the details of how the profit or loss is divided among the partners. Instead, the statement of partners’ equity is used to show this information. 11. The equity section of a partnership’s balance sheet does not show the total amount invested by the partners separate from the profit earned to date and retained in the business. Rather, that distinction for the current fiscal year (between investments and profit) is outlined in the statement of partners’ equity. Once added (or deducted in the case of a loss) to each partner’s capital account balance, the distinction between the sources of changes is no longer tracked in the subsequent financial statements of the partnership. Only the balances of the capital accounts of each partner carry forward to the next fiscal year. 12. When an admission of a new partner into a partnership occurs as a result of a purchase of an existing partner’s interest, the net assets and corresponding total partners’ equity of the partnership will remain unaffected. If the interest is purchased with an additional investment of assets in the partnership, net assets and corresponding total partners’ equity will increase by the amount of the investment. 13. Partnership net assets increase $25,000. R. Minoa’s capital balance will not necessarily be $25,000. No, R. Minoa does not necessarily acquire a 1/6 profit and loss ratio. Profit and loss will be divided according to what is stated in the partnership agreement. If no division is specified, profit or loss is divided evenly. 14. Existing partners may be willing to pay a bonus to a new partner because the new partner may bring in a strong potential to increase profit in the future. For example, the new partner may bring goodwill he has generated in the past from a strong relationship with clients he is bringing to the business.

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QUESTIONS (Continued) 15. (a) There is no impact on the net assets or total capital on the partnership balance sheet if a withdrawing partner is paid from personal assets of remaining partners. In the equity section, the withdrawing partner’s capital account will be removed, and its balance added to one or more of the remaining partners’ capital accounts. (b)

If the withdrawing partner is paid from partnership assets, the net assets and the total capital of the partnership will decrease.

16. A bonus to the remaining partners occurs when the cash paid to the departing partner is less than the balance in their capital account. The departing partner may grant such a bonus to the remaining partners if the partners feel that the recorded assets are overvalued, if the partnership has a poor earnings record, or if the partner is anxious to leave the partnership. 17. The steps to liquidate a partnership are: (1) (2) (3) (4)

Sell noncash assets for cash and recognize any gain or loss on realization. Allocate any gain or loss on realization to the partners, based on their profit and loss ratios. Pay partnership liabilities in cash. Distribute the remaining cash to partners, based on their capital balances.

18. If the partner with the capital deficiency pays the amount owed to the partnership, the deficiency is eliminated. The remaining cash is then distributed to the partners, based on their capital balances. If the partner with the deficiency is unable to pay the amount owed, the other partners must absorb the loss. This loss is allocated to the remaining partners in the ratio of their profit allocation formula. The remaining cash is then distributed to the partners, based on their reduced capital balances.

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

8 Limited liability partnership 9 General partnership 1 Profit and loss ratio 2 Admission by investment 6 Withdrawal by payment from partners’ personal assets 4 Mutual agency 5 Salary allowance 10 Partnership dissolution 7 Capital deficiency 3 Partnership liquidation

BRIEF EXERCISE 12-2 Cash .................................................... 15,000 B. Ripley, Capital ...........................

15,000

Cash .................................................... 10,000 Equipment............................................. 3,000 F. Nichols, Capital .........................

13,000

BRIEF EXERCISE 12-3 July 1

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Cash .................................................... 10,000 R. Black, Capital ............................ Accounts Receivable ........................... 2,400 Cash ...................................................... 8,000* Allowance for Doubtful Accounts B. Rivers, Capital ........................... *[$10,000 – ($2,400 – $400) = $8,000

12-10

10,000

400 10,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 12-4 (a)

Proportions 2:1

Fractions 2/3 & 1/3

Percentages 66.67% & 33.33%

(b)

6:4

3/5 & 2/5

60% & 40%

(c)

3:8

3/11 & 8/11

27.27% & 72.73%

(d)

4:3:2

4/9 & 3/9 & 2/9

44.45% & 33.33% & 22.22%

(e)

1:2:1

¼&½&¼

25% & 50% & 25%

BRIEF EXERCISE 12-5 (a)

(b)

Income Summary ........................................ 75,000 Rodd, Capital .......................................... Dall, Capital .............................................

37,500 37,500

Rodd, Capital ............................................... 37,500 Dall, Capital .................................................. 37,500 Income Summary....................................

75,000

BRIEF EXERCISE 12-6 (a) A. Scrimger D. Woods (b)

$84,000 × 3/8 = $31,500 $84,000 × 5/8 = $52,500

Income Summary ........................................ 84,000 A. Scrimger, Capital................................ D. Woods, Capital ...................................

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31,500 52,500

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BRIEF EXERCISE 12-7 MET CO. Division of Profit M. TungJ. Moses T. Eaton Ching Profit ..................................... Salary allowance J. Moses ........................... $24,000 T. Eaton ........................... $30,000 M. Tung-Ching.................. Total ............................. Profit remaining for allocation Fixed ratio 6,600 J. Moses ($11,000 × 60%) T. Eaton ($11,000 × 20%) . 2,200 M. Tung-Ching ($11,000 × 20%) Total ............................. Profit remaining for allocation Profit allocated to partners .. $30,600 $32,200

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Total $70,000

$5,000 59,000 11,000

2,200 11,000 0 $7,200 $70,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 12-8 THE MILLSTONE PARTNERSHIP Division of Profit Year Ended February 28, 2017 H. Mills Profit................................................. Salary allowance H. Mills .......................................... $45,000 S. Stone ....................................... Total ........................................ Profit (deficiency) remaining for allocation ............. Interest allowance H. Mills ($72,000 × 5%)................ 3,600 S. Stone ($47,000 × 5%) .............. Total ........................................ Profit (deficiency) remaining for allocation ............. Fixed ratio H. Mills [$(15,950) × 50%] ................ (7,975) S. Stone [$(15,950) × 50%].......... Total ........................................ Profit (deficiency) remaining for allocation ............. Profit allocated to the partners....... $40,625

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S. Stone

Total $60,000

$25,000 70,000 (10,000)

2,350 5,950 (15,950)

(7,975) (15,950)

$19,375

0 $60,000

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BRIEF EXERCISE 12-9 (a) TOGNAZZINI COMPANY Division of Profit – Oct. 31, 2017 Tognazzini Lilia Terry Total Loss.................................................. $(15,300) Salary allowance L. Tognazzini ............................... $24,900 T. Tognazzini ............................... $15,000 Total ........................................ 39,900 Deficiency remaining for allocation (55,200) Interest allowance L. Tognazzini ............................... 5,300 T. Tognazzini ............................... 9,300 Total ........................................ 14,600 Deficiency remaining for allocation (69,800) Fixed ratio L. Tognazzini [$(69,800) × 75%] . (52,350) T. Tognazzini [$(69,800) × 25%] . (17,450) Total ........................................ (69,800) Loss remaining for allocation ........ 0 Loss allocated to the partners........ $(22,150) $6,850 $(15,300)

(b)

L. Tognazzini, Capital ................................... 22,150 T. Tognazzini, Capital ............................. Income Summary....................................

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6,850 15,300

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BRIEF EXERCISE 12-10 (a) DRS. JARRATT AND BRAMSTRUP Income Statement Year Ended April 30, 2017 Service revenue ................................................................ $377,000 Operating expenses .......................................................... 149,400 Profit .................................................................................. $227,600 (b) DRS. JARRATT AND BRAMSTRUP Statement of Partners’ Equity Year Ended April 30, 2017

Capital, May 1, 2016 .................... Add: Profit.................................... Less: Drawings............................ Capital, April 30, 2017 .................

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W. M. Jarratt Bramstrup Total $ 36,900 $ 50,400 $ 87,300 113,800 113,800 227,600 150,700 164,200 314,900 127,000 121,000 248,000 $ 23,700 $ 43,200 $ 66,900

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BRIEF EXERCISE 12-10 (Continued) (b) (Continued) DRS. JARRATT AND BRAMSTRUP Balance Sheet April 30, 2017

Assets Current assets Cash................................................................ Property, plant, and equipment Equipment ...................................................... $75,100 Less: Accumulated depreciation.................. 17,100 Total assets ........................................................

$36,000

58,000 $94,000

Liabilities and Partners’ Equity Current liabilities Accounts payable .......................................... Partners’ equity W. Jarratt, capital ........................................... $23,700 M. Bramstrup, capital .................................... 43,200 Total liabilities and partners’ equity .................

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$27,100

66,900 $94,000

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BRIEF EXERCISE 12-11 June 9 K. Carter, Capital .............................. 18,000 D. Dutton, Capital ........................ ($36,000 × ½ = $18,000)

18,000

BRIEF EXERCISE 12-12 Oct. 1 Cash .................................................... 58,000 Irey, Capital (50% × $8,600*) ................ 4,300 Pedigo, Capital (50% × $8,600*) ........... 4,300 Vernon, Capital (45% × $148,000)

66,600

* [($40,000 + $50,000 + $58,000) × 45%] – $58,000 = $8,600

BRIEF EXERCISE 12-13 (a)

Dec. 31

T. Morden, Capital .......................... 25,000 R. Neepawa, Capital ................ S. Altona, Capital ....................

12,500 12,500

(b) Same journal entry as part (a). Regardless of the amount

paid for T. Morden’s capital, the entry to record T. Morden’s withdrawal from the partnership would remain the same.

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BRIEF EXERCISE 12-14 (a) T. Morden receives $35,000 cash Dec. 31

T. Morden, Capital .......................... 25,000 R. Neepawa, Capital (62.5% × $10,000)......................... 6,250 S. Altona, Capital (37.5% × $10,000)......................... 3,750 Cash .........................................

35,000

(b) T. Morden receives $20,000 cash Dec. 31

T. Morden, Capital .......................... 25,000 R. Neepawa, Capital (62.5% × $5,000) S. Altona, Capital (37.5% × $5,000) Cash .........................................

3,125 1,875 20,000

BRIEF EXERCISE 12-15 A, Capital ...................................... B, Capital ...................................... C, Capital ...................................... Cash .........................................

Solutions Manual .

12-18

8,000 9,000 4,000 21,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 12-16 Cash Balances before liquidation

$ 15,000

Sale of noncash assets and allocation of gain New balances

125,000 140,000

Pay liabilities New balances Cash distribution to partners Final balances

(40,000) 100,000 (100,000) 0

Noncash Assets

$ 90,000

= Liabilities +

40,000

(90,000)

Cisneros, Capital

Gunselman, + Capital +

Forren, Capital

$ 32,000

$13,000

20,000

40,000

13,125 (1) 33,125

(40,000) -

33,125

40,750

26,125

(33,125) 0

(40,750) 0

(26,125) 0

8,750 40,750

(2)

13,125 26,125

(1) ($125,000 - $90,000) X 3 ÷ 8 = $13,125 (2) ($125,000 - $90,000) X 2 ÷ 8 = $8,750

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 12-17 (a) Nov. 15 Cash .................................................... 20,000 Other Assets .................................. Gain on Realization........................

17,000 3,000

(b) Nov. 15

Gain on Realization ............................ D. Dupuis, Capital (1/3 × $3,000) ... V. Dueck, Capital (1/3 × $3,000)..... B. Veitch, Capital (1/3 × $3,000) ....

3,000 1,000 1,000 1,000

Solutions Manual .

D. Dupuis, Capital ($12,000 + $1,000) 13,000 V. Dueck, Capital ($10,000 + $1,000) . 11,000 4,000 B. Veitch, Capital ($3,000 + $1,000) ... Cash ($8,000 + $20,000).................

28,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 12-18 (a) Nov. 15

Cash ................................................... 14,000 Loss on Realization............................ 3,000 Other Assets ..................................

17,000

(b) Nov. 15 D. Dupuis, Capital (1/3 × $3,000)........ V. Dueck, Capital (1/3 × $3,000) ......... B. Veitch, Capital (1/3 × $3,000) ......... Loss on Realization .......................

1,000 1,000 1,000 3,000

(c) Nov. 15 D. Dupuis, Capital ($12,000 – $1,000) 11,000 V. Dueck, Capital ($10,000 – $1,000) . 9,000 2,000 B. Veitch, Capital ($3,000 – $1,000) ... Cash ($8,000 + $14,000).................

Solutions Manual .

12-21

22,000

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 12-1 1.

Since Angelique and David are only planning on operating the business for the summer, a partnership would probably be the best form of business organization. A partnership is easy to form and relatively free from government regulation and restriction, which would make it easy to operate during their summer break.

Since Joe and Cathy will need to raise funds in the next year, it would probably be advisable for them to operate their business as a corporation. While a new private corporation may have the same amount of difficulty as a partnership in raising capital, as shareholders of the corporation, Joe and Cathy will be personally liable for only the amounts they have invested in the business and the amount of loans they personally guarantee. If the business were to find itself in financial difficulty, Joe and Cathy would be held personally liable for all of the debt of the business if they were to operate it as a partnership.

A partnership would work for these professors but to avoid liability resulting from the negligence of the other partners, a limited liability partnership may be the best form of organization for this business.

A limited partnership may be appropriate, particularly if the venture is set up as a real estate investment trust. Myles would be a general partner, and the large amount of capital could be raised from the other investors who would be limited partners. Another option would be a corporation.

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-2 Cash ......................................................... 50,000 K. Decker, Capital...............................

50,000

Land ......................................................... 15,000 Building ................................................... 80,000 S. Rosen, Capital................................

95,000

Cash........................................................... 9,000 Accounts Receivable .............................. 32,000 Equipment... ...................................... 39,000 Allowance for Doubtful Accounts ..... E. Toso, Capital ..................................

3,000 77,000

(b) Partners’ Equity K. Decker, capital ..................................................... $50,000 S. Rosen, capital....................................................... 95,000 E. Toso, capital ......................................................... 77,000 Total partners’ equity ............................................... $222,000

EXERCISE 12-3 Jan. 1

Solutions Manual .

Cash .................................................... 12,000 Accounts Receivable ......................... 14,000 Equipment........................................... 23,500 Allowance for Doubtful Accounts S. Vopat, Capital ............................

12-23

3,000 46,500

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-4 (a)

Income Summary ........................................ 60,000 K. Ison, Capital ($60,000 × 55%) ............ I. McCoy, Capital ($60,000 × 45%)..........

33,000 27,000

(b) Division of Profit K. Ison Profit................................................. Salary allowance K. Ison ......................................... $30,000 I. McCoy....................................... Total ........................................ Profit remaining for allocation ....... Fixed ratio K. Ison ($10,000 × 55%) .............. 5,500 I. McCoy ($10,000 × 45%) ........... Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $35,500

I. McCoy

Total $60,000

$20,000 50,000 10,000

4,500

$24,500

10,000 0 $60,000

Income Summary ........................................ 60,000 K. Ison, Capital........................................ I. McCoy, Capital .....................................

35,500 24,500

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-4 (Continued) (c) Division of Profit K. Ison I. McCoy Profit................................................. Salary allowance K. Ison ...........................................$40,000 I. McCoy....................................... $30,000 Total ........................................ Profit (deficiency) remaining for allocation Interest allowance K. Ison ($50,000 × 10%) .............. 5,000 I. McCoy ($80,000 × 10%) ........... 8,000 Total ........................................ Profit (deficiency) remaining for allocation Fixed ratio K. Ison ($23,000 × 50%) ................ (11,500) I. McCoy ($23,000 × 50%) ........... (11,500) Total ........................................ Profit remaining for allocation ......... Profit allocated to the partners ........ $33,500 $26,500 Income Summary ........................................ 60,000 K. Ison, Capital........................................ I. McCoy, Capital .....................................

Solutions Manual .

12-25

Total $60,000

70,000 (10,000)

13,000 (23,000)

23,000 0 $60,000

33,500 26,500

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-5 (a) (1) HUMA AND HOW Division of Profit Year Ended June 30, 2017 R. Huma Profit................................................. Salary allowance R. Huma ....................................... $30,900 W. How ....................................... Total ........................................ Profit remaining for allocation ....... Interest allowance R. Huma ($62,000 × 6%).............. 3,720 W. How ($58,000 × 6%) ............... Total ........................................ Profit remaining for allocation ....... Fixed ratio R. Huma ($10,000 × 60%)............ 6,000 W. How ($10,000 × 40%) ............. Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $40,620

Solutions Manual .

12-26

W. How

Total $70,000

$21,900 52,800 17,200

3,480 7,200 10,000

4,000

$29,380

10,000 0 $70,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-5 (Continued) (a)

(2) HUMA AND HOW Division of Profit Year Ended June 30, 2017 R. Huma

Profit................................................. Salary allowance R. Huma ....................................... $30,900 W. How ....................................... Total ........................................ Profit remaining for allocation ....... Interest allowance R. Huma ($62,000 × 6%).............. 3,720 W. How ($58,000 × 6%) ............... Total ........................................ Profit (deficiency) remaining for allocation ............ Fixed ratio R. Huma ($5,000 × 60%).............. (3,000) W. How ($5,000 × 40%) ............... Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $31,620

W. How

Total $55,000

$21,900 52,800 2,200

3,480 7,200 (5,000) (2,000)

$23,380

(5,000) 0 $55,000

(1) June 30 Income Summary ........................... 70,000 R. Huma, Capital ....................... W. How, Capital .........................

40,620 29,380

(2) June 30 Income Summary ........................... 55,000 R. Huma, Capital ....................... W. How, Capital .........................

31,620 23,380

(b)

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-6 (a) BRODSKY AND LEIGH Division of Loss D. Brodsky J. Leigh Total Loss.................................................. $(15,000) Salary allowance D. Brodsky ....................................$60,000 J. Leigh ....................................... $40,000 Total ........................................ 100,000 Deficiency remaining for allocation (115,000) Interest allowance D. Brodsky ($62,000 × 8%) ......... 4,960 J. Leigh ($88,000 × 8%)............... 7,040 Total ........................................ 12,000 Deficiency remaining for allocation (127,000) Fixed ratio D. Brodsky ($127,000 × 55%) ....... (69,850) J. Leigh ($127,000 × 45%)........... (57,150) Total ........................................ (127,000) Loss remaining for allocation ........... 0 Loss allocated to the partners .......... $(4,890) $(10,110) $(15,000)

(b) D. Brodsky, Capital .......................................... 4,890 J. Leigh, Capital ............................................. 10,110 Income Summary ................................

Solutions Manual .

12-28

15,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-7 (a) COPPERFIELD DEVELOPMENTS Statement of Partners’ Equity Year Ended December 31, 2017

Capital, January 1........................ Add: Investment .......................... Profit............................................. Less: Drawings............................ Capital, December 31 ..................

A. E. Rodriguez Carrieri Total $67,140 $78,140 $145,280 3,540 3,540 33,099 * 44,131 ** 77,230 100,239 125,811 226,050 36,010 58,940 94,950 $64,229 $66,871 $131,100

* $77,230 × 3/7 = $33,099 ** $77,230 × 4/7 = $44,131 (b) COPPERFIELD DEVELOPMENTS Balance Sheet (partial) December 31, 2017

Partners' equity Alvaro Rodriguez, capital ............................................... $64,229 Elisabetta Carrieri, capital ............................................ 66,871 Total partners' equity ........................................................ $131,100

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-8 (a) DRS. KOVACIK AND DONOVAN Income Statement Year Ended November 30, 2017 Fees earned ...................................................................... $425,000 Expenses Salaries expense......................................... $ 80,100 Office expense ............................................... 83,600 Interest expense ........................................... 4,100 167,800 Profit .................................................................................. $257,200

DRS. KOVACIK AND DONOVAN Statement of Partners’ Equity Year Ended November 30, 2017

Capital, December 1, 2016 .......... Add: Profit.................................... Less: Drawings............................ Capital, November 30, 2017 ........

J. S. Kovacik Donovan Total $ 59,000 $ 33,000 $ 92,000 154,320* 102,880 257,200 213,320 135,880 349,200 142,000 94,000 236,000 $ 71,320 $ 41,880 $113,200

* $257,200 × 60% = $154,320

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-8 (Continued) (a) (Continued) DRS. KOVACIK AND DONOVAN Balance Sheet November 30, 2017

Assets Current assets Cash............................................................. $33,900 Supplies....................................................... 16,150 Total current assets ............................... 50,050 Property, plant, and equipment Equipment .................................................... $176,300 Less: Accumulated depreciation ............... 41,450 134,850 Total assets ............................................ $184,900 Liabilities and Partners’ Equity Current liabilities Accounts payable ....................................... $15,700 Long-term liabilities Notes payable, due 2021 ............................ 56,000 Total liabilities ........................................ 71,700 Partners’ equity J. Kovacik, capital .......................................... $71,320 S. Donovan, capital..................................... 41,880 113,200 Total liabilities and partners’ equity ..... $184,900

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-8 (Continued) (b) Closing entries dated November 30, 2017 Fees Earned ................................................... 425,000 Income Summary.................................... 425,000 Income Summary ........................................... 167,800 Salaries Expense .................................... Office Expense........................................ Interest Expense .....................................

80,100 83,600 4,100

Income Summary ........................................... 257,200 J. Kovacik, Capital .................................. 154,320 S. Donovan, Capital ................................ 102,880 J. Kovacik, Capital ......................................... 142,000 J. Kovacik, Drawings.............................. 142,000 S. Donovan, Capital ........................................ 94,000 S. Donovan, Drawings ...........................

Solutions Manual .

12-32

94,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-9 (a) (1) Sept. 1 A. Veveris, Capital ................. 21,000 S. Weiss, Capital ............. ($42,000 × 1/2) = $21,000 (2) Sept. 1 A. Veveris, Capital ($42,000 × 25%) ................. 10,500 J. Rubenis, Capital ($33,000 × 25%) ................... 8,250 S. Weiss, Capital .............

(b) Alternative 1 Beginning balance S. Weiss admission Ending balance Alternative 2 Beginning balance S. Weiss admission Ending balance

Solutions Manual .

21,000

18,750

A. Veveris J. Rubenis Capital Capital $ 42,000 $ 33,000 (21,000) $ 21,000 $ 33,000

S. Weiss Capital

A. Veveris J. Rubenis Capital Capital $ 42,000 $ 33,000 (10,500) (8,250) $ 31,500 $ 24,750

S. Weiss Capital

12-33

$ 21,000 $ 21,000

$ 18,750 $ 18,750

Total Capital $ 75,000 $ 75,000 Total Capital $ 75,000 $ 75,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-10 (a) (1) Jan. 1 Cash ........................................................ 65,000 M. Stavros, Capital (3/5 × $10,000) .......... 6,000 G. Metaxas, Capital (2/5 × $10,000) ......... 4,000 I. Xanthos, Capital............................

75,000

Total capital of existing partnership .......................... $160,000 Investment by new partner, I. Xanthos ....................... 65,000 Total capital of new partnership ................................ $225,000 I. Xanthos’ capital credit (33 1/3% × $225,000) ............ $75,000 Investment by new partner, I. Xanthos ........................ $65,000 I. Xanthos’ capital credit .......................................... 75,000 Bonus to new partner ................................................... $10,000 (2) Jan. 1

Cash .................................................. 95,000 M. Stavros, Capital (3/5 × $10,000) G. Metaxas, Capital (2/5 × $10,000) I. Xanthos, Capital .......................

6,000 4,000 85,000

Total capital of existing partnership .......................... $160,000 Investment by new partner, I. Xanthos ...................... 95,000 Total capital of new partnership ................................ $255,000 I. Xanthos’ capital credit (33 1/3% × $255,000) ............ $85,000 Investment by new partner, I. Xanthos ........................ $95,000 I. Xanthos’ capital credit .......................................... 85,000 Bonus to old partners................................................... $10,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-10 (Continued) (b) Alternative 1 Beginning balance I. Xanthos admission Ending balance

Alternative 2 Beginning balance I. Xanthos admission Ending balance

Solutions Manual .

M. Stavros Capital $ 95,000

G. Metaxas Capital $ 65,000

I. Xanthos Capital

(6,000) $ 89,000

(4,000) $ 61,000

$75,000 $75,000

M. Stavros Capital $ 95,000

G. Metaxas Capital $ 65,000

I. Xanthos Capital

6,000 $101,000

4,000 $ 69,000

$85,000 $85,000

12-35

Total Capital $160,000 65,000 $225,000

Total Capital $160,000 95,000 $255,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-11 (a) 1. Dec. 31

Dec. 31

A. Noll, Capital ............................... 30,000 S. Miles, Capital.........................

30,000

A. Noll, Capital ............................... 30,000 Cash ...........................................

30,000

A. Noll, Capital ............................... 30,000 J. Lane, Capital (5/8 × $5,000) ..... 3,125 S. Miles, Capital (3/8 × $5,000) . 1,875 Cash ...........................................

35,000

(b) Condition 1 Beginning balance A. Noll withdrawal Ending balance Condition 2 Beginning balance A. Noll withdrawal Ending balance

Solutions Manual .

J. Lane Capital $ 50,000 $ 50,000

S. Miles Capital $ 40,000 30,000 $ 70,000

A. Noll Capital $ 30,000 (30,000) 0

$120,000

J. Lane Capital $ 50,000

S. Miles Capital $ 40,000

$ 50,000

$ 40,000

A. Noll Capital $ 30,000 (30,000) 0

Total Capital $120,000 (30,000) $ 90,000

12-36

Total Capital $120,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-12 (a) 1. Sept. 30 K. White, Capital ............................ 74,000 D. Nagel, Capital .............................. 6,000 I. Mbango, Capital ............................ 3,000 Cash ........................................... Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to retiring partner .........................................

83,000 $74,000 $9,000

Allocation of bonus: D. Nagel, Capital ($9,000 × 4/6) ..................... $6,000 I. Mbango, Capital ($9,000 × 2/6) ....................

$9,000

Sept. 30 K. White, Capital ............................ 74,000 D. Nagel, Capital........................ I. Mbango, Capital ..................... Cash ...........................................

10,000 5,000 59,000

Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to remaining partners...................................

$74,000 59,000 $15,000

Allocation of bonus: D. Nagel, Capital ($15,000 × 4/6) .................... $10,000 I. Mbango, Capital ($15,000 × 2/6)................ 5,000, $15,000 (b) Condition 2 Beginning balance K. White withdrawal Ending balance

Solutions Manual .

D. Nagel Capital

K. White Capital

$92,000

$74,000

$6,000

$172,000

10,000 $ 102,000

(74,000) -

5,000 $11,000

(59,000) $113,000

12-37

I. Mbango Capital

Total Capital

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-13 (a)

Balance before liquidation Final liquidation Final balances

Cash

Windl Capital

$172,700

$ 87,400

$ 34,500

$ 50,800

$ 172,700

(172,700) 0

(87,400) 0

(34,500) 0

(50,800) 0

(172,700) 0

(b)

Balance before liquidation Sale of assets share of losses Balance Final liquidation Final balances

Solutions Manual .

Partners' Capital Houghton Pahli Capital Capital

Total Capital

Cash

Windl Capital

$172,700

$ 87,400

$ 34,500

$ 50,800

$ 172,700

(30,000) 142,700

(10,000) 77,400

(10,000) 24,500

(10,000) 40,800

(30,000) 142,700

(142,700) -

(77,400) -

(24,500) -

(40,800) -

(142,700) -

12-38

Total Capital

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-14 THE BRAUN COMPANY Liquidation Schedule December 31 Assets = Liabilities + Partners' Capital Noncash Ho Li Total Cash Assets Capital Capital Capital

(a)

Account balances prior to liquidation Sale of noncash assets Balances Payment of liabilities Balances Distribution of cash to partners Final balances

$15,000 110,000 125,000 (60,000) 65,000 (65,000) -

$110,000 (110,000) -

$60,000

$40,000

$25,000

$65,000

60,000 (60,000) -

40,000

25,000

65,000

40,000

25,000

65,000

(40,000) -

(25,000) -

(65,000) -

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-14 (Continued) THE BRAUN COMPANY Liquidation Schedule December 31 = Liabilities + Partners' Capital Ho Li Total Capital Capital Capital

Assets Noncash Cash Assets

(b)

Account balances prior to liquidation Sale of noncash assets Balances Payment of liabilities Balances Distribution of cash to partners Final balances

$15,000

$110,000

60,000 (110,000) 75,000 (60,000) 15,000 (15,000) -

$ 60,000

60,000 (60,000) -

$40,000

$25,000

$65,000

(30,000) 10,000

(20,000) 5,000

(50,000) 15,000

10,000

5,000

15,000

(10,000) -

(5,000) -

(15,000) -

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-15 Summary (a), (b), and (c)

Account balances prior to liquidation Sale of assets and share of gain Balances Payment of liabilities Balances Distribution of cash to partners Final balances

Cash

BAYLEE COMPANY Liquidation Schedule December 31 Assets = Liabilities + Partners' Capital Acc. Depr. H. Bayer J. Leech Total Equipment Equipment Capital Capital Capital

$40,000

$ 130,000

$ (40,000)

100,000 140,000

(130,000) 0

(55,000) 85,000 (85,000) $ 0

$ 55,000

$ 45,000

$30,000

$75,000

40,000 0

55,000

5,000 50,000

5,000 35,000

10,000 85,000

(55,000) 0

50,000

35,000

85,000

(50,000) $ 0

(35,000) (85,000) $ 0 $ 0

(a) Gain of $10,000 ($100,000 - $90,000) is (b) allocated equally between the partners $5,000 each. (c) Balance of cash paid Dec. 31: H. Bayer $50,000 and J. Leech $35,000.

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-16 (a) Dec. 31

Accumulated Depreciation ......... 40,000 Cash ............................................. 100,000 Equipment ............................... Gain on Realization.................

(b) Dec. 31 Gain on Realization ..................... H. Bayer, Capital ($10,000 × 50%) ....................... J. Leech, Capital ($10,000 × 50%) ....................... (c) Dec. 31 (d) Dec. 31

Solutions Manual .

130,000 10,000

10,000 5,000 5,000

Liabilities...................................... 55,000 Cash .........................................

55,000

H. Bayer, Capital .......................... 50,000 J. Leech, Capital .......................... 35,000 Cash .........................................

85,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-17 (b)

LOL PARTNERSHIP Liquidation Schedule December 31 = Liabilities + Partners' Capital O. Low A. Olson S. Lokum Capital Capital Capital

Assets Noncash Cash Assets Account balances prior to liquidation Sale of assets and share of gain Balances (b) Payment of liabilities Balances (a) Payment of capital deficiency Balances Distribution of cash to partners Final balances

$22,000

$ 45,100

$ 59,900

$9,000

$114,000

(121,000) 0

22,000

(12,000) 33,100

(12,000) 47,900

(12,000) (3,000)

(36,000) 78,000

(22,000) 0

33,100

47,900

(3,000)

78,000

3,000 0

3,000 81,000

(81,000) $ 0

$15,000

$ 121,000

85,000 100,000 (22,000) 78,000 3,000 81,000 (81,000) $ 0

Total Capital

33,100

47,900

(33,100) $ 0

(47,900) $ 0

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

EXERCISE 12-17 (Continued) (a) Proceeds from the sale of noncash assets Book value of noncash assets Loss on sale of noncash assets

$85,000 121,000 $36,000

Cash balance after paying the liabilities Refer to Liquidation Schedule above

$78,000

(b) Refer to Liquidation Schedule above (c) Dec. 31 Cash ............................................... S. Lokum, Capital ......................

3,000

31 O. Low, Capital............................... A. Olson, Capital............................ Cash ...........................................

33,100 47,900

(d) Dec. 31 O. Low, Capital ($3,000 × 50%) ..... A. Olson, Capital ($3,000 × 50%)... S. Lokum, Capital ......................

1,500 1,500

3,000

81,000

3,000

31 O. Low, Capital ($33,100 – $1,500) 31,600 A. Olson, Capital ($47,900 – $1,500) 46,400 78,000 Cash ...........................................

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-1A (Continued) (b) (Continued) Jan.

1 Cash................................................ 10,000 Accounts Receivable ..................... 24,000 Merchandise Inventory .................. 13,000 Equipment ...................................... 15,000 Allowance for Doubtful Accounts Accounts Payable ................... P. Dasilva, Capital ...................

3,000 34,000 25,000

1 Cash ($39,000 – $25,000)............. 14,000 P. Dasilva, Capital ...................

14,000

Taking It Further: Advantages of forming a partnership instead of operating as two proprietorships include: i.

ii. iii. iv. v.

The skills of the two individuals forming the partnership may be complementary and so their ability to provide better services to their customers is enhanced. The partnership will provide an ability to share the tasks involved in running the business. A partnership will likely provide more security to the individual partners in case of illness or absence. The combined capital of the partners will help secure debt for operations. The partnership structure might assist one of the partners in a succession plan.

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PROBLEM 12-2A (a) Dec. 31 Income Summary ............................. 90,000 Z. Gable, Capital ........................ M. Smith, Capital .......................

45,000 45,000

Profit is shared equally.

(b) Division of Profit Z. Gable M. Smith Profit................................................. Salary allowance Z. Gable .........................................$42,000 M. Smith....................................... $30,000 Total ........................................ Profit (deficiency) remaining for allocation Fixed ratio Z. Gable ($12,000 × 50%) ............... (6,000) M. Smith ($12,000 × 50%) ........... (6,000) Total ........................................ Profit remaining for allocation ......... Profit allocated to the partners ........ $36,000 $24,000 Dec. 31 Income Summary ............................. 60,000 Z. Gable, Capital ........................ M. Smith, Capital .......................

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Total $60,000

72,000 (12,000)

12,000 0 $60,000

36,000 24,000

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PROBLEM 12-2A (Continued) (c) Division of Profit Z. Gable M. Smith Profit................................................. Salary allowance Z. Gable ........................................ $40,000 M. Smith....................................... $30,000 Total ........................................ Profit (deficiency) remaining for allocation Interest allowance Z. Gable ($20,000 × 6%) .............. 1,200 Profit (deficiency) remaining for allocation Fixed ratio Z. Gable ($11,200 × 70%) ............... (7,840) M. Smith ($11,200 × 30%) ........... (3,360) Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $33,360 $26,640 Dec. 31 Income Summary ............................. 60,000 Z. Gable, Capital ........................ M. Smith, Capital .......................

Total $60,000

70,000 (10,000) 1,200 (11,200)

11,200 0 $60,000

33,360 26,640

Taking It Further: Delaying arriving at an agreement on how to share income before starting the fiscal year has the advantage of adding fairness by applying hindsight to the salary allowance portion of the formula based on the amount of work performed. The disadvantage in delaying is allowing for disputes to occur after the fact, particularly if the results are not in line with expectations, or if unforeseen events cause one of the partners not being able to work as hard as was initially expected.

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PROBLEM 12-3A (a) 1. Dec. 31 Income Summary ............................. 40,000 J. Chapman-Brown, Capital ...... C. Duperé, Capital ..................... H. Weir, Capital ..........................

6,666 14,667 18,667

CDW PARTNERS Division of Profit Year Ended December 31, 2017 J. Chapman -Brown C. Duperé H. Weir Profit............................... Salary allowance C. Duperé................... $8,000 H. Weir ....................... $12,000 Total ...................... Profit remaining for allocation ............. Fixed ratio (remainder shared equally) J. Chapman-Brown ($20,000 × 1/3) ........... $6,666 C. Duperé ($20,000 × 1/3) ........... 6,667 H. Weir ($20,000 × 1/3) ........... 6,667 Total ...................... Profit remaining for allocation ............. _ _ _ Profit allocated to the partners ............... $6,666 $14,667 $18,667

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Total $40,000

20,000 20,000

20,000 0 $40,000

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PROBLEM 12-3A (Continued) (a) (Continued) 2. Dec. 31 Income Summary ........................... 40,000 J. Chapman-Brown, Capital ...... C. Duperé, Capital ..................... H. Weir, Capital ..........................

7,000 16,300 16,700

CDW PARTNERS Division of Profit Year Ended December 31, 2017 J. Chapman -Brown C. Duperé H. Weir Profit............................... Interest allowance J. Chapman-Brown ($30,000 × 5%) ........... $1,500 C. Duperé ($40,000 × 5%) $2,000 H. Weir ($50,000 × 5%) $2,500 Total ...................... Profit remaining for allocation ............. Salary allowance J. Chapman-Brown ... 15,000 C. Duperé .................. 20,000 H. Weir ....................... 18,000 Total ...................... Profit (deficiency) remaining for allocation Fixed ratio (remainder shared equally) Chapman-Brown [$(19,000) × 5/10] ....... (9,500) Duperé [$(19,000) × 3/10] (5,700) H. Weir [$(19,000) × 2/10] (3,800) Total ...................... Profit remaining for allocation ............. _ _ _ Profit allocated to the partners........... $7,000 $16,300 $16,700 Solutions Manual .

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Total $40,000

6,000 34,000

53,000 (19,000)

(19,000) 0 $40,000 Chapter 12

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-3A (Continued) (b) CDW PARTNERS Statement of Partners’ Equity Year Ended December 31, 2017

J. ChapmanBrown C. Duperé Capital, January 1 $30,000 $40,000 Add: Profit 7,000 16,300 37,000 56,300 Less: Drawings 10,100 7,000 Capital, December 31 $26,900 $49,300

H. Weir Total $50,000 $120,000 16,700 40,000 66,700 160,000 5,000 22,100 $61,700 $137,900

Taking It Further: The partnership would include an interest allowance in its profit- and loss-sharing arrangements to reward those partners that assist in the financing of the business by leaving their capital in the business. Were it not for this willingness, the partnership would have to incur additional interest costs in order borrow cash to finance operations.

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PROBLEM 12-4A (a) STOREY ROGERS PARTNERSHIP Income Statement Year Ended December 31, 2017 Sales................................................................................. Cost of goods sold .......................................................... Gross profit...................................................................... Operating expenses ........................................................ Loss..................................................................................

$340,000 250,000 90,000 130,000 $(40,000)

(b) STOREY ROGERS PARTNERSHIP Division of Loss Year Ended December 31, 2017 V. Storey G. Rogers

Total $(40,000)

Loss................................................ Salary allowance ........................... V. Storey .................................... $30,900 G. Rogers .................................. $39,700 Total ...................................... 70,600 Deficiency remaining for allocation (110,600) Interest allowance V. Storey ($82,000 × 5%)........... 4,100 G. Rogers ($101,000 × 5%) ....... 5,050 Total ...................................... 9,150 Deficiency remaining for allocation (119,750) Fixed ratio V. Storey [$(119,750) × 2/5]....... (47,900) G. Rogers [$(119,750) × 3/5] ..... (71,850) Total ...................................... (119,750) Loss remaining for allocation ...... 0 Loss allocated to the partners...... $(12,900) $(27,100) $(40,000)

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PROBLEM 12-4A (Continued) (c) STOREY ROGERS PARTNERSHIP Statement of Partners’ Equity Year Ended December 31, 2017 G. Rogers $101,000 28,800 27,100 55,900 $ 45,100

Total $183,000 52,800 40,000 92,800 $ 90,200

(d) Dec. 31 Sales ............................................... 340,000 Income Summary ......................

340,000

31 Income Summary ........................... 380,000 Cost of Goods Sold .................. Operating Expenses..................

250,000 130,000

Capital, January 1................... Less: Drawings...................... Loss ............................. Capital, December 31 .............

Solutions Manual .

V. Storey $ 82,000 24,000 12,900 36,900 $ 45,100

V. Storey, Capital .......................... 12,900 G. Rogers, Capital.......................... 27,100 Income Summary ......................

40,000

V. Storey, Capital ........................... 24,000 G. Rogers, Capital.......................... 28,800 V. Storey, Drawings................... G. Rogers, Drawings .................

24,000 28,800

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PROBLEM 12-4A (Continued)

Taking It Further: While it might be reasonable to revisit the agreement for sharing profit or loss in light of this information, Veda Storey cannot force a change in the agreement on her partner. Veda should appeal to fairness with her partner and either amend the agreement prior to the current year allocation of the loss, or devise another method, such as change the profit allocation formula for the next year.

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PROBLEM 12-5A (a) KANT-ADDER PARTNERSHIP Income Statement Year Ended March 31, 2017

Fees earned ....................................................................... $255,000 Expenses Salaries expense ............................................ $80,000 Rent expense .............................................. 36,000 Interest expense ......................................... 5,000 Depreciation expense................................. 8,000 Supplies expense........................................... 5,000 Total expenses ............................................................... 134,000 Profit ................................................................................... $121,000 KANT-ADDER PARTNERSHIP Statement of Partners’ Equity Year Ended March 31, 2017

Capital, April 1 ........................... Add: Investment ........................ Profit* ................................ Less: Drawings.......................... Capital, March 31....................... * I. Kant: U. Adder:

Solutions Manual .

I. Kant $25,000 5,000 80,667 110,667 90,000 $ 20,667

U. Adder $ 30,000 0 40,333 70,333 60,000 $ 10,333

Total $ 55,000 5,000 121,000 181,000 150,000 $ 31,000

$121,000 × 2/3 = $80,667 $121,000 × 1/3 = $40,333

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PROBLEM 12-5A (Continued) (a) (Continued) KANT-ADDER PARTNERSHIP Balance Sheet March 31, 2017

Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies....................................................................... Total current assets ...............................................

$ 14,000 61,000 1,500 76,500

Property, plant, and equipment Equipment ...................................................... $42,000 Less: Accumulated depreciation .................. 12,000 30,000 Total assets .............................................................. $106,500 Liabilities and Partners' Equity Current liabilities Accounts payable ....................................................... $ 12,500 Salaries payable.......................................................... 8,000 Unearned revenue ...................................................... 5,000 Current portion of notes payable ................................... 1,500 Total current liabilities ........................................... 27,000 Long-term liabilities Notes payable, net of current portion ....................... 48,500 Total liabilities ........................................................... 75,500 Partners' equity I. Kant, capital ............................................................. 20,667 U. Adder, capital ......................................................... 10,333 Total partners' equity ............................................. 31,000 Total liabilities and partners' equity............................... $106,500

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PROBLEM 12-5A (Continued) (b) Mar. 31 Fees Earned ................................... 255,000 Income Summary ......................

255,000

31 Income Summary ........................... 134,000 Salaries Expense....................... Rent Expense ............................ Interest Expense ....................... Depreciation Expense ............... Supplies Expense......................

80,000 36,000 5,000 8,000 5,000

31 Income Summary ........................... 121,000 I. Kant, Capital ........................... U. Adder, Capital .......................

80,667 40,333

31 U. Adder, Capital .............................. 60,000 I. Kant, Capital .................................. 90,000 U. Adder, Drawings ................... I. Kant, Drawings .......................

60,000 90,000

Taking It Further: In this case, once the profit is added to the capital accounts, drawings were less than the capital balances. The amount of the drawings taken by individual partners can be any amount that the partners agree to. However, problems may arise in the future if insufficient capital is left in the business to fund operations.

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PROBLEM 12-6A (a) Dec. 31 T. Gilligan, Drawings............................... 20,000 M. Melnyk, Drawings ............................... 10,000 Salaries Expense................................ (b)

Profit as reported:................................... Add back salaries expense .................... Revised Profit .........................................

30,000 $11,600 30,000 $41,600

The profit allocation is $20,800 ($41,600 ÷ 2) to each partner since no agreement as to the allocation of profit was arrived at. (c) TY & MATT SNOW REMOVAL SERVICES Statement of Partners’ Equity Year Ended December 31, 2017 T. Gilligan Capital, Jan. 1 ............................ 0 Add: Investment ............................ $ 4,000 Profit ..................................... 20,800 24,800 Less: Drawings .............................. 20,000 Capital, December 31 .................... $ 4,800

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M. Melnyk 0 $11,000 20,800 31,800 10,000 $21,800

Total 0 $15,000 41,600 56,600 30,000 $26,600

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-6A (Continued) (d) TY & MATT SNOW REMOVAL SERVICES Balance Sheet December 31, 2017 Assets Current assets Cash ................................................................................ $ 17,000 Property, plant, and equipment Equipment ......................................... $ 2,000 Less: Accumulated depreciation... 400 $1,600 Vehicles .............................................. 10,000 Less: Accumulated depreciation... 2,000 8,000 Total property, plant, and equipment 9,600 Total assets.......................................................................... $26,600 Partners' Equity Partners' equity T. Gilligan, capital ....................................................... $ 4,800 M. Melnyk, capital ...................................................... 21,800 Total partners' equity .......................................................... $26,600 Taking It Further: Due to inexperience, Tyler and Matt failed to come to an agreement on their allocation of profit before they began their business together. This failure caused the profit to be shared equally at the end of the first year of operations. While Tyler is correct that an equal allocation might not be fair if he worked twice as hard as Matt, Matt also has a good point in arguing that he should be rewarded for his larger investment into the business on January 1, 2017. Tyler and Matt should come to some agreement to a fair allocation of profit for the coming year and document the details in writing.

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PROBLEM 12-7A (a)

May 1 Cash .................................................. 23,500 Watson, Capital .........................

23,500

Total capital of existing partnership .............. $94,000 Investment by Watson ................................... 23,500 Total capital of new partnership................... $117,500 Watson's capital credit ($117,500 × 20%) ..

$23,500

Investment by Watson .................................... $23,500 Watson’s capital credit ............................... 23,500 Bonus .......................................................... $0 (b)

May 1 Cash .................................................. 35,000 Dexter, Capital ($9,200 × 5/10) .. Emley, Capital ($9,200 × 3/10)... Sigle, Capital ($9,200 × 2/10)..... Watson, Capital .........................

4,600 2,760 1,840 25,800

Total capital of existing partnership .............. $94,000 Investment by Watson ................................... 35,000 Total capital of new partnership................... $129,000 Watson's capital credit ($129,000 × 20%) ..

$25,800

Investment by Watson .................................... $35,000 Watson’s capital credit ............................... 25,800 Bonus to old partners................................. $ 9,200

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PROBLEM 12-7A (Continued) (c)

May 1 Cash .................................................. 10,000 Dexter, Capital ($10,800 × 5/10) ......... 5,400 Emley, Capital ($10,800 × 3/10).......... 3,240 Sigle, Capital ($10,800 × 2/10)............ 2,160 Watson, Capital .........................

20,800

Total capital of existing partnership.......... Investment by Watson ................................ Total capital of new partnership ................

$94,000 10,000 $104,000

Watson's capital credit ($104,000 × 20%) ..

$20,800

Investment by Watson ................................ Watson’s capital credit ............................... Bonus to new partner .................................

$10,000 20,800 $ 10,800

Taking It Further: Limited Liability Partnerships (LLP) are designed to protect innocent partners from negligent actions of other partners. Partners remain fully liable for their own negligence as well as those they supervise and control, but have limited liability for negligence of the other partners. Since all partners will be active in the DESW Partnership, this type of partnership might be the way to address Watson’s concerns.

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PROBLEM 12-8A (a)

(b)

May 1 W. Sanga, Capital ($59,000 × 50%) 29,500 N. Osvald, Capital......................

29,500

May 1 Cash................................................ R. Short, Capital ($5,600 × 3/9) .................................. K. Osborne, Capital ($5,600 × 2/9) .................................. W. Sanga, Capital ($5,600 × 4/9) .................................. N. Osvald, Capital......................

73,600

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68,000 1,867 1,244 2,489

Total capital of existing partnership.......... Investment by N. Osvald ............................ Total capital of new partnership ................

$116,000 68,000 $184,000

N. Osvald's capital credit ($184,000 × 40%)

$73,600

Investment by N. Osvald ............................ N. Osvald's capital credit ........................... Bonus to new partner .................................

$68,000 73,600 $ 5,600

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PROBLEM 12-8A (Continued) (c)

(d)

May 1 Cash .................................................. 41,000 R. Short, Capital ($9,600 × 3/9).............................. K. Osborne, Capital ($9,600 × 2/9).............................. W. Sanga, Capital ($9,600 × 4/9).............................. N. Osvald, Capital......................

4,267 31,400

Total capital of existing partnership.......... Investment by N. Osvald ............................ Total capital of new partnership ................

$116,000 41,000 $157,000

N. Osvald's capital credit ($157,000 × 20%)

$31,400

Investment by N. Osvald ............................ N. Osvald's capital credit ........................... Bonus to old partners.................................

$41,000 31,400 $ 9,600

May 1 Cash .................................................. 29,000 N. Osvald, Capital......................

29,000

Total capital of existing partnership.......... Investment by N. Osvald ............................ Total capital of new partnership ................

$116,000 29,000 $145,000

N. Osvald's capital credit ($145,000 × 20%)

$29,000

3,200 2,133

No bonus to new or existing partners. Taking It Further: A new partner would be willing to give a bonus to existing partners because he does not have any experience in the business and would like to be in a position to take over parts of the business from any retiring partners in the future. The admission of the new partner fits within the succession plan of the existing partners. This is often true in a dental practice. Solutions Manual .

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PROBLEM 12-9A (a) Dec. 31

R. Antoni, Capital ........................... 48,000 P. Jiang, Capital ........................

(b) Dec. 31 R. Antoni, Capital ........................... H. Fercho, Capital ($10,000 × 6/9) ................................ P. Jiang, Capital ($10,000 × 3/9) ................................ Cash ...........................................

48,000

48,000 6,667 3,333 58,000

R. Antoni’s capital balance.............. $48,000 Payment to R. Antoni ..................... 58,000 Bonus to R. Antoni......................... $10,000 (c) Dec. 31

R. Antoni, Capital ........................... 48,000 H. Fercho, Capital ($9,800 × 6/9).............................. P. Jiang, Capital ($9,800 × 3/9).............................. Cash ...........................................

6,533 3,267 38,200

R. Antoni's capital balance ............ $48,000 Payment to R. Antoni ..................... 38,200 Bonus to remaining partners ......... $ 9,800

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PROBLEM 12-9A (Continued)

Taking It Further: The partnership agreement should contain a clause covering the options for payment to a withdrawing partner. Assuming the partnership agreement provides for some flexibility or choice, the next factor would be to determine if the necessary cash is currently available from the partnership assets. On the other hand, if the remaining partners have sufficient personal cash, they might be willing to pay the withdrawing partner from personal cash. This would ensure that sufficient cash remains in the business and the business does not have to take on additional debt to pay off the withdrawing partner.

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PROBLEM 12-10A (a) March 1 H. Deol, Capital .............................. 72,000 M. Kumar, Capital ($18,000 × 4/5) ..................... 14,400 A. Kassam, Capital ($18,000 × 1/5) ....................... 3,600 Cash .........................................

90,000

(b) M. Kumar, Capital $85,000 – $14,400 = $70,600 A. Kassam, Capital $43,000 – $3,600 = $39,400 (c) Feb. 28

Income Summary ........................... 24,000 M. Kumar, Capital ($24,000 × 4/6) A. Kassam, Capital ($24,000 × 2/6)...................

(d) M. Kumar, Capital ($70,600 + $16,000) ....... A. Kassam, Capital ($39,400 + $8,000) ....... Total partnership capital .............................

16,000 8,000 $86,600 47,400 $134,000

(e) March 1 Cash ................................................ 75,000 M. Kumar, Capital ($19,050 × 4/6) ..................... 12,700 A. Kassam, Capital ($19,050 × 2/6) ....................... 6,350 C. Mawani, Capital ............

94,050

Total capital of existing partnership.......... Investment by C. Mawani ........................... Total capital of new partnership ................

$134,000 75,000 $209,000

C. Mawani’s capital credit ($209,000 × 45%) $94,050 Investment by C. Mawani ........................... C. Mawani’s capital credit .......................... Bonus to new partner .................................

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PROBLEM 12-10A (Continued) (f) M. Kumar, Capital ($86,600 – $12,700) ....... A. Kassam, Capital ($47,400 – $6,350) ....... C. Mawani, Capital ...................................... Total partnership capital .............................

$73,900 41,050 94,050 $209,000

Taking It Further: The remaining partners would be willing to pay a bonus to a withdrawing partner if, for example, the withdrawing partner leaves their clients with the continuing partners. Or, there might have been conflict between the withdrawing partner and the remaining partners that lead to the remaining partners asking the withdrawing partner to withdraw. In that situation, the remaining partners may pay a bonus to the withdrawing partner to ensure the person leaves. A bonus to a withdrawing partner may also be paid when the book value of the partnership’s assets is less than their fair value.

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PROBLEM 12-11A (a) Item Balances before liquidation Sale of noncash assets

Payment of liabilities

Allocation of Cash based on capital balances

Accounts Receivable

$32,600

D. Portman Capital

Equipment

Accum. Depreciation

Accounts Payable

A Hunt Capital

$28,000

$48,600

$(16,800)

$30,200

$42,100

$18,800

$1,300

59,800

(28,000)

(48,600)

16,800

92,400

(62,200)

(42,100)

(18,800)

(1,300)

Cash

(30,200)

62,200

K. Lally Capital

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PROBLEM 12-11A (Continued) (a) (Continued) June

June

30 Cash .................................................. 59,800 Accumulated Depreciation – Equipment .............................. 16,800 Accounts Receivable ................ Equipment..................................

28,000 48,600

30 Accounts Payable .......................... 30,200 Cash ...........................................

30,200

30 A. Hunt Capital ............................... 42,100 K. Lally, Capital .............................. 18,800 D. Portman, Capital......................... 1,300 Cash ............................................

62,200

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PROBLEM 12-11A (Continued) (b)

Item Balances before liquidation Sales of Noncash assets and loss on sale of assets

Payment of liabilities Payment of deficiency Allocation of Cash

Accounts Receivable

Equipment

Accum. depreciation

Accounts Payable

A Hunt Capital

K. Lally Capital

D. Portman Capital

$32,600

$28,000

$48,600

$(16,800)

$30,200

$42,100

$18,800

$1,300

45,000

(28,000)

(48,600)

16,800

(7,400)

(4,440)

(2,960)

77,600

34,700

14,360

(1,660)

Cash

(30,200) 47,400

-30,200 -

1,660 49,060

1,660 0

(49,060)

(34,700)

(14,360)

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PROBLEM 12-11A (Continued) (b) (Continued) June

30 Cash................................................ 45,000 Accumulated Depreciation – Equipment .............................. 16,800 Loss on Realization ....................... 14,800 Accounts Receivable ................ Equipment..................................

28,000 48,600

30 A. Hunt, Capital ($14,800 × 50%) ...................... K. Lally, Capital ($14,800 × 30%) ...................... D. Portman, Capital ($14,800 × 20%) ..................... Loss on Realization...................

14,800

7,400 4,440 2,960

30 Accounts Payable .......................... 30,200 Cash ...........................................

30,200

30 Cash ($1,300 – $2,960) ................... D. Portman, Capital ...................

1,660

30 A. Hunt, Capital ($42,100 – $7,400) .................. 34,700 K. Lally, Capital ($18,800 – $4,440) .................. 14,360 Cash ($32,600 + $45,000 – $30,200 + $1,660) ....................

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PROBLEM 12-11A (Continued) (c)

Item Balances before liquidation Sales of noncash assets and loss on sale of assets

Cash

Accounts Receivable

Accounts Accum. Equipment Depreciation Payable

K. Lally Capital

D. Portman Capital

$42,100

$18,800

$1,300

$32,600

$28,000

$48,600

$(16,800)

30,000

(28,000)

(48,600)

16,800

(14,900)

(8,940)

(5,960)

62,600

27,200

9,860

(4,660)

Transfer of deficiency

(2,913)

(1,747)

4,660

8,113 (8,113) -

Allocation of Cash

24,287 (24,287) -

Payment of liabilities

$30,200

A Hunt Capital

(30,200)

32,400

(32,400) -

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-11A (Continued) (c) (Continued) June

30 Cash................................................ 30,000 Accumulated Depreciation – Equipment .............................. 16,800 Loss on Realization ....................... 29,800 Accounts Receivable ................ Equipment..................................

28,000 48,600

30 A. Hunt, Capital ($29,800 × 50%) ...................... 14,900 K. Lally, Capital ($29,800 × 30%) ...................... 8,940 D. Portman, Capital ($29,800 × 20%) ..................... 5,960 Loss on Realization...................

29,800

30 Accounts Payable .......................... Cash ...........................................

30,200

30 A. Hunt, Capital ($4,660 × 5 ÷ 8) ....................... 2,913 K. Lally, Capital ($4,660 × 3 ÷ 8) ........................... 1,747 D. Portman, Capital ($1,300 – $5,960)

4,660

30 A. Hunt, Capital ($42,100 – $14,900 – $2,913) .... 24,287 K. Lally, Capital ($18,800 – $8,940 – $1,747) ........ 8,113 Cash ($32,600 + $30,000 – $30,200)

32,400

Taking It Further: The profit and loss ratio should not be used when distributing cash to partners in a liquidation. The relevant balance that must be used is the balance in each partner’s capital account, which will likely not bear any relationship to the profit and loss ratio

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PROBLEM 12-12A (a) (1)

Cash

Inventory

Bank Loan Payable

H. Brumby Capital

R. Criolio Capital

A. Paso Capital

$113,000

$227,900

$179,900

$24,700

10,367

10,366

238,267

190,267

35,066

(238,267)

(190,267)

(35,066)

Item Balances before liquidation

$142,600

$402,900

Sale of Inventory

434,000

(434,000)

576,600 Payment of liabilities

Payment of Cash

(113,000)

463,600

(463,600)

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-12A (Continued) (a) (1) (Continued)

Aug.

Solutions Manual .

Cash................................................. 434,000 Gain on Realization................. Inventory..................................

31,100 402,900

Gain on Realization........................... 31,100 H. Brumby, Capital ($31,100 × ⅓) R. Criolio, Capital ($31,100 × ⅓) A. Paso, Capital ($31,100 × ⅓)

10,367 10,367 10,366

Bank Loan Payable ......................... 113,000 Cash .........................................

113,000

H. Brumby, Capital ($227,900 + $10,367)............... 238,267 R. Criolio, Capital ($179,900 + $10,367)............... 190,267 A. Paso, Capital ($24,700 + $10,366) .................. 35,066 Cash ($142,600 + $434,000 – $113,000).........................

463,600

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-12A (Continued) (a) (2)

Item Balances before liquidation Sale of Inventory

Payment of liabilities Payment of Deficiency Allocation of Cash

Inventory

Bank Loan Payable

$142,600

$402,900

$113,000

318,000

(402,900)

(28,300)

460,600

199,600

151,600

(3,600)

Cash

H. Brumby Capital

(113,000)

347,600

R. Criolio Capital

A. Paso Capital

$227,900

$179,900

$24,700

3,600 351,200 (351,200) -

3,600 (199,600) -

(151,600) -

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-12A (Continued) (a) (2) (Continued) Aug.

Cash ................................................ 318,000 Loss on Realization ........................ 84,900 Inventory..................................

402,900

H. Brumby, Capital ($84,900 × ⅓) .. 28,300 R. Criolio, Capital ($84,900 × ⅓)..... 28,300 A. Paso, Capital ($84,900 × ⅓) ....... 28,300 Loss on Realization ................

84,900

Bank Loan Payable......................... 113,000 Cash .........................................

113,000

Cash ................................................ A. Paso, Capital ($24,700 – $28,300)...............

3,600

8 H. Brumby, Capital ($227,900 – $28,300) ................ 199,600 R. Criolio, Capital ($179,900 – $28,300) ................ 151,600 Cash ($142,600 + $318,000 – $113,000 + 3,600) ..........

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3,600

351,200

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-12A (Continued) (b)

Inventory

H. Brumby Capital

R. Criolio Capital

A. Paso Capital

$113,000

$227,900

$179,900

$24,700

Item Balances before liquidation

$142,600

$402,900

Sale of Supplies

318,000

(402,900)

(28,300)

460,600

199,600

151,600

(3,600)

(1,800)

3,600 -

(197,800) -

(149,800) -

Payment of liabilities

Cash

Bank Loan Payable

(113,000)

347,600

Allocation of Deficiency Allocation of Cash

(347,600) -

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-12A (Continued) (b) (Continued) Aug.

H. Brumby, Capital ($3,600 × 50%) R. Criolio, Capital ($3,600 × 50%) .. A. Paso, Capital ($24,700 – $28,300) ...........

1,800 1,800

H. Brumby, Capital ($227,900 – $28,300– $1,800) .............. 197,800 R. Criolio, Capital ($179,900 – $28,300 – $1,800) ............. 149,800 Cash ($142,600 + $318,000 – $113,000) .......................

3,600

347,600

Taking It Further: In order to ensure that no partners have a deficit (debit balances) when the partnership is liquidated, the partnership agreement should provide for a minimum capital balance which should be sufficient to address any losses experienced on liquidation.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-13A (a) 2016 Mar. 2

Cash ....................................................... Equipment.............................................. Z. Moreau, Capital ............................

15,000 18,000

Cash ....................................................... Furniture ................................................ Notes Payable .................................. K. Krneta, Capital .............................

10,000 17,000

Cash ....................................................... Equipment.............................................. V. Visentin, Capital...........................

20,000 13,000

Z. Moreau, Drawings ............................. K. Krneta, Drawings .............................. V. Visentin, Drawings ............................ Cash..................................................

30,000 30,000 30,000

Dec. 20

33,000

5,000 22,000

33,000

90,000

Income Summary................................... 110,000 Z. Moreau, Capital ($110,000 × 3/8). 41,250 K. Krneta, Capital ($110,000 × 2/8).. 27,500 V. Visentin, Capital ($110,000 × 3/8) 41,250 MKV PERSONAL COACHING Capital Balances December 31, 2016

Investments Drawings Profit Ending Balance

Solutions Manual .

Z. Moreau K. Krneta V. Visentin Total $33,000 $22,000 $33,000 $88,000 (30,000) (30,000) (30,000) (90,000) 41,250 27,500 41,250 110,000 $44,250 $19,500 $44,250 $108,000

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PROBLEM 12-13A (Continued) (a) (Continued) 2017 Jan. 5

K. Krneta, Capital................................... Z. Moreau, Capital ............................ V. Visentin, Capital........................... Cash..................................................

19,500 2,250 2,250 15,000

Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to remaining partners................................... Allocation of bonus: Z. Moreau, Capital ($4,500 × 3/6) ................... $2,250 V. Visentin, Capital ($4,500 × 3/6) ............. 2,250 Dec. 20 Z. Moreau, Drawings ............................. V. Visentin, Drawings ............................ Cash..................................................

$19,500 15,000 $ 4,500 $4,500

42,750 45,000 87,750

31 Income Summary................................... 123,750 Z. Moreau, Capital ($123,750 × 4/9) . 55,000 V. Visentin, Capital ($123,750 × 5/9) 68,750 2018 Jan. 4

Cash ....................................................... Z. Moreau, Capital (4/9 × $9,000) .......... V. Visentin, Capital (5/9 × $9,000) ......... D. Hirjikaka, Capital .........................

31,000 4,000 5,000 40,000

Total capital of existing partnership [see (b)]......... Investment by new partner, D. Hirjikaka ................. Total capital of new partnership ..............................

$129,000 31,000 $160,000

D. Hirjikaka capital credit (25% × $160,000)............

$40,000

Investment by new partner, D. Hirjikaka ................. D. Hirjikaka capital credit ......................................... Bonus to new partner...............................................

$31,000 40,000 $ 9,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-13A (Continued) (b) MKV PERSONAL COACHING Balance of Partners’ Capital Accounts January 4, 2018

Balance Dec. 31, 2016 Withdrawal of partner Drawings 2017 Profit 2017 Balance Dec. 31, 2017 Admission new partner Balance Jan. 4, 2018

Solutions Manual

D. Hirjikaka

Z. Moreau

K. Krneta

V. Visentin

$19,500 (19,500)

$40,000 $40,000

$44,250 2,250 (42,750) 55,000 58,750 (4,000) $54,750

$44,250 2,250 (45,000) 68,750 70,250 (5,000) $65,250

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Total $108,000 (15,000) (87,750) 123,750 129,000 31,000 $160,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-13A (Continued) (b) (Continued) MKV PERSONAL COACHING Balance Sheet (partial) January 4, 2018 Partners’ equity D. Hirjikaka, Capital Z. Moreau, Capital V. Visentin, Capital Total partners' equity

$40,000 54,750 65,250 $160,000

Taking It Further: Most partnerships agree to continue the partnership year while allowing partners to withdraw or be admitted to the partnership. This is particularly the case in large partnerships where these events often occur. The process to be followed should be spelled out in the partnership agreement. Formulas on how to calculate and allocate the profit for a partial year are necessary so that a partner can be admitted or withdrawn without the books being closed. In the case of MKV Personal Coaching, the business carried on in spite of the withdrawal by Karen Krneta and the admission of Dela Hirjikaka. None of the temporary accounts of the partnership were closed, nor were new accounting records created.

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PROBLEM 12-1B (Continued) (b) (Continued) Jan. 1 Cash .................................................... 5,000 Accounts Receivable ....................... 20,000 Merchandise Inventory .................... 15,000 Equipment ........................................ 14,000 Allowance for Doubtful Accounts Accounts Payable ....................... P. Vanbakel, Capital ....................

4,500 20,000 29,500

4,500

Taking It Further: Advantages of forming a partnership instead of operating as two proprietorships include: i.

ii. iii. iv. v.

The skills of the two individuals forming the partnership may be complementary and so their ability to provide better services to their customers is automatically enhanced. The partnership will provide an ability to share the tasks involved in running the business. A partnership will likely provide more security to the individual partners in case of illness or absence. The combined capital of the partners will help secure debt for operations. The partnership structure might assist one of the partners in a succession plan.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-2B (a) Dec. 31 Income Summary ........................... 170,500 K. Ali, Capital ............................. P. Ramsey, Capital ....................

85,250 85,250

Profit is shared equally. (b) Division of Profit K. Ali P. Ramsey Total Profit.............................................. $170,500 Salary allowance K. Ali ......................................... $82,000 P. Ramsey ................................ $33,000 Total ..................................... 115,000 Profit remaining for allocation .... 55,500 Fixed ratio K. Ali ($55,500 × 50%) .............. 27,750 P. Ramsey ($55,500 × 50%) ..... 27,750 Total ..................................... 55,500 Profit remaining for allocation .... 0 Profit allocated to the partners.... $109,750 $60,750 $170,500 Dec. 31 Income Summary ........................... 170,500 K. Ali, Capital ............................. P. Ramsey, Capital ....................

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109,750 60,750

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-2B (Continued) (c) Division of Profit K. Ali P. Ramsey Profit.............................................. Salary allowance K. Ali ......................................... $60,000 $55,000 P. Ramsey ................................ Total ..................................... Profit (deficiency) remaining for allocation Interest allowance K. Ali ($53,500 × 5%) ................ 2,675 Profit (deficiency) remaining for allocation Fixed ratio K. Ali ($27,675 × 65%) ................. (17,989) (9,686) P. Ramsey ($27,675 × 35%) ..... Total ..................................... Profit remaining for allocation ..... Profit allocated to the partners ..... $44,686 $45,314 Dec. 31 Income Summary ............................. 90,000 K. Ali, Capital ............................. P. Ramsey, Capital ....................

Total $90,000

115,000 (25,000) (2,675) (27,675)

27,675 0 $90,000

44,686 45,314

Taking It Further: Each partner is jointly and severally liable for all partnership liabilities. Ali should be concerned with the possibility that the business does not succeed and there are insufficient assets to pay all debt outstanding. If this happens, the creditors could then make claims against the personal assets of the partners. In this case, Ali has more assets to lose than his partner Ramsey, who is less cautious about handling expenses.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-3B (a) 1.

Dec. 31 Income Summary .............................. 55,000 S. Little, Capital ......................... L. Brown, Capital....................... P. Gerhardt, Capital...................

10,000 30,000 15,000

LBG COMPANY Division of Profit Year Ended December 31, 2017 S. L. P. Little Brown Gerhardt Total Profit............................... $55,000 Salary allowance S. Little........................... $5,000 L. Brown .................... P. Gerhardt ................ Total ...................... Profit remaining for allocation ............. Fixed ratio (remainder shared equally) S. Little ($15,000 × 1/3) ........... $5,000 L. Brown ($15,000 × 1/3) ........... P. Gerhardt ($15,000 × 1/3) ........... Total ...................... Profit remaining for allocation ............. _ Profit allocated to the partners ............... $10,000

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$25,000 $10,000 40,000 15,000

5,000 5,000 15,000 _ $30,000

$15,000 $55,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-3B (Continued) (a) (Continued) 2.

Dec. 31 Income Summary .............................. 25,000 S. Little, Capital.............................. 4,825 L. Brown, Capital....................... P. Gerhardt, Capital...................

11,550 18,275

LBG COMPANY Division of Profit Year Ended December 31, 2017 S. L. P. Total Little Brown Gerhardt Profit............................... $25,000 Interest allowance S. Little ($65,000 × 7%) $4,550 L. Brown ($40,000 × 7%) $2,800 P. Gerhardt ($20,000 × 7%) $1,400 Total ...................... 8,750 16,250 Profit remaining for allocation Salary allowance 15,000 L. Brown .................... P. Gerhardt ................ 20,000 Total ...................... 35,000 Profit (deficiency) remaining for allocation (18,750) Fixed ratio (remainder shared equally) S. Little [$(18,750) × 3/6] ......... (9,375) L. Brown (6,250) [$(18,750) × 2/6] ......... P. Gerhardt (3,125) [$(18,750) × 1/6] ......... Total ...................... (18,750) Profit remaining _ _ _ 0 for allocation ............. Profit allocated to the partners........... $(4,825) $11,550 $18,275 $25,000 Solutions Manual .

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PROBLEM 12-3B (Continued) (b) LBG COMPANY Statement of Partners’ Equity Year Ended December 31, 2017

Capital, January 1 Add: Profit Less: Drawings Capital, December 31

S. Little $65,000 (4,825) 60,175 21,000 $39,175

L. Brown $40,000 11,550 51,550 14,000 $37,550

P. Gerhardt Total $20,000 $125,000 18,275 25,000 38,275 150,000 9,000 44,000 $29,275 $106,000

Taking It Further: The partnership would include a salary allowance in its profitand loss-sharing arrangements to reward partners that contribute more time and effort in generating revenues for the business or bring specialized talents. This element of the allocation of profit provides fairness in rewarding effort.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-4B (a) LAM TAN PARTNERSHIP Division of Loss Year Ended January 31, 2017 T. Lam

C. Tan

Total $(30,000)

Loss................................................ Salary allowance T. Lam ........................................ $20,000 C. Tan ........................................ $30,000 Total ...................................... 50,000 Deficiency remaining for allocation (80,000) Interest allowance T. Lam ($100,000 × 5%)............. 5,000 C. Tan ($120,000 × 5%) ............. 6,000 Total ...................................... 11,000 Deficiency remaining for allocation (91,000) T. Lam [($91,000 × 3/7)] ............ (39,000) C. Tan [($91,000 × 4/7)] ............. (52,000) Total ...................................... 91,000 Loss remaining for allocation ...... _ _ 0 Loss allocated to the partners $(14,000) $(16,000) $(30,000)

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-4B (Continued) (b) LAM TAN PARTNERSHIP Statement of Partners’ Equity Year Ended January 31, 2017

Capital, February 1, 2016 ............ Less: Drawings........................... Loss .................................. Capital, January 31, 2017............

T. Lam C. Tan Total $100,000 $120,000 $220,000 12,000 14,400 26,400 14,000 16,000 30,000 26,000 30,400 56,400 $ 74,000 $ 89,600 $163,600

(c) Jan. 31 T. Lam, Capital ............................... 14,000 C. Tan, Capital ................................ 16,000 Income Summary ....................

30,000

31 T. Lam, Capital ............................... 12,000 C. Tan, Capital ................................ 14,400 T. Lam, Drawings .................... C. Tan, Drawings.....................

12,000 14,400

Taking It Further: There is no relationship between the salary allowance specified in the profit and loss ratio and a partner’s drawings.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-5B (a) CLAY AND OGLETREE, LLP Income Statement Year Ended September 30, 2017 Fees earned ..................................................... $515,000 Expenses Salaries expense......................................... $225,000 Depreciation expense................................. 12,000 Insurance expense ..................................... 18,500 Interest expense ......................................... 5,000 Property tax expense ................................. 15,000 Total expenses............................................ 275,500 Profit................................................................. $239,500

CLAY AND OGLETREE, LLP Statement of Partners’ Equity Year Ended September 30, 2017 G. Clay M. Ogletree Total Capital, October 1, 2016............ $ 65,000 $ 37,500 $102,500 Add: Investment ........................ 10,000 0 10,000 Profit* ................................ 143,700 95,800 239,500 218,700 133,300 352,000 Less: Drawings.......................... 150,000 100,000 250,000 Capital, September 30, 2017 ..... $68,700 $ 33,300 $102,000 *G. Clay $239,500 × 3/5 = $143,700 M. Ogletree $239,500 × 2/5 = $95,800

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PROBLEM 12-5B (Continued) (a) (Continued) CLAY AND OGLETREE, LLP Balance Sheet September 30, 2017

Assets Current assets Cash............................................................................. $ 13,500 Accounts receivable ................................................... 105,000 Prepaid insurance....................................................... 3,500 Total current assets ............................................... 122,000 Property, plant, and equipment Equipment ...................................................... $60,000 Accumulated depreciation ........................... 12,000 Total property, plant, and equipment ................... 48,000 Total assets ..................................................................... $170,000 Liabilities and Partners' Equity Current liabilities Accounts payable ....................................................... $ 21,500 Unearned revenue ...................................................... 24,000 Current portion of notes payable .................................. 5,000 Total current liabilities ........................................... 50,500 Long-term liabilities Notes payable, net of current portion ........................... 17,500 Total liabilities ........................................................... 68,000 Partners' equity G. Clay, Capital ........................................................... 68,700 M. Ogletree, Capital .................................................... 33,300 Total partners' equity ............................................. 102,000 Total liabilities and partners' equity............................... $170,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-5B (Continued) (b) Sept. 30

Fees Earned .............................. Income Summary .................

515,000

30 Income Summary...................... Salaries Expense ................. Depreciation Expense.......... Insurance Expense .............. Interest Expense .................. Property Tax Expense .........

275,500

30 Income Summary...................... G. Clay, Capital..................... M. Ogletree, Capital..............

239,500

30 G. Clay, Capital ......................... M. Ogletree, Capital .................. G. Clay, Drawings ................ M. Ogletree, Drawings .........

150,000 100,000

515,000 225,000 12,000 18,500 5,000 15,000 143,700 95,800

150,000 100,000

Taking It Further: The amount of the drawings taken by individual partners can be of any amount that the partners agree to, although a deficit position in any capital account should be avoided. Since the amount of the capital balances at September 30, 2017 are disproportionate, the partners may want to provide for an interest allowance in their formula to arrive at the allocation of any profit in the future. M. Ogletree should not be allowed to draw as high an amount in the future because he will risk having a deficit position in his capital account.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-6B (a) Dec. 31 C. Maguire, Drawings.............................. 12,000 F. Whelan, Drawings ................................. 8,000 Salaries Expense................................ (b)

Profit as reported:................................... Add back salaries expense .................... Revised Profit .........................................

20,000 $10,100 20,000 $30,100

The profit allocation is $15,050 ($30,100 ÷ 2) to each partner since no agreement as to the allocation of profit was arrived at. (c) MAGUIRE & WHELAN CLEANING SERVICES Statement of Partners’ Equity Year Ended December 31, 2017 C. Maguire Capital, Jan. 1 ............................ $ 0 Add: Investment ........................ 2,500 Profit ..................................... 15,050 17,550 Less: Drawings .............................. 12,000 Capital, December 31 .................... $ 5,550

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F. Whelan $ 0 8,750 15,050 23,800 8,000 $15,800

Total $ 0 11,250 30,100 41,350 20,000 $21,350

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Accounting Principles, Seventh Canadian Edition

PROBLEM 12-6B (Continued) (d) MAGUIRE & WHELAN CLEANING SERVICES Balance Sheet December 31, 2017 Assets Current assets Cash ................................................................................ $ 13,750 Property, plant, and equipment Equipment ......................................... $ 1,500 Less: Accumulated depreciation... 300 $1,200 Vehicles ........................................... 8,000 Less: Accumulated depreciation... 1,600 6,400 Total property, plant, and equipment 7,600 Total assets.......................................................................... $21,350 Partners' Equity Partners' equity C. Maguire, capital ...................................................... $ 5,550 F. Whelan, capital ...................................................... 15,800 Total partners' equity .......................................................... $21,350 Taking It Further: Due to inexperience, Caitlin and Fiona failed to come to an agreement on the allocation of profit before they began their business together. This failure caused the profit to be split evenly at the end of the first year of operations. While Caitlin is correct that an equal allocation might not be fair if she worked twice as hard as Fiona, Fiona also has a good point in arguing that she should be rewarded for her larger investment into the business on January 1, 2017. Caitlin and Fiona should come to some agreement to a fair allocation of profit for the coming year and document the details in writing.

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PROBLEM 12-7B (a)

May 1 Cash ................................................ 100,000 Kai, Capital.................................

100,000

Total capital of existing partnership ............ $400,000 Investment by Kai .......................................... 100,000 Total capital of new partnership................... $500,000 Kai 's capital credit ($500,000 × 20%)........... $100,000 Investment by Kai ......................................... $100,000 Kai’s capital credit ................................................ 100,000 Bonus .......................................................... $0 (b)

May 1 Cash ................................................ 145,000 Ho, Capital ($36,000 × 4/7) ........ Ishikawa, Capital ($36,000 × 2/7) Jay, Capital ($36,000 × 1/7) ....... Kai, Capital.................................

20,571 10,286 5,143 109,000

Total capital of existing partnership ............ $400,000 Investment by Kai .......................................... 145,000 Total capital of new partnership................... $545,000 Kai's capital credit ($545,000 × 20%) ........... $109,000 Investment by Kai ......................................... $145,000 Kai’s capital credit ................................................ 109,000 Bonus to old partners .................................... $ 36,000

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PROBLEM 12-7B (Continued) (c)

May 1 Cash .................................................. 65,000 Ho, Capital ($28,000 × 4/7) ............... 16,000 Ishikawa, Capital ($28,000 × 2/7) ....... 8,000 Jay, Capital ($28,000 × 1/7) ................ 4,000 Kai, Capital.................................

93,000

Total capital of existing partnership.......... Investment by Kai ....................................... Total capital of new partnership ................

$400,000 65,000 $465,000

Kai's capital credit ($465,000 × 20%) .........

$93,000

Investment by Kai ....................................... Kai’s capital credit ...................................... Bonus to new partner .................................

$65,000 93,000 $28,000

Taking It Further: A new partner may purchase a partnership interest with a gain or loss. A gain to the new partner may be experienced if the new partner’s capital received when joining the partnership is greater than the amount paid by the new partner to be admitted to the partnership. A loss to the new partner may be experienced if the new partner’s capital received when joining the partnership is less than the amount paid by the new partner to be admitted to the partnership. The two main factors that determine the outcome (gain or loss) are: 1) the percentage of the total partnership capital to be given to the new partner and 2) the amount of the total capital of the original partners prior to the admission of the new partner.

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PROBLEM 12-8B (a) Oct. 1

A. Nolan, Capital ($60,000 × 25%) ...... 15,000 15,000 C. Santos, Capital .........................

(b) Oct. 1

Cash..................................................... 80,000 A. Nolan, Capital (50% × $18,500) 9,250 D. Elder, Capital (40% × $18,500) . 7,400 T. Wuhan, Capital (10% × $18,500) 1,850 C. Santos, Capital ......................... 61,500

Total capital of existing partnership ................ Investment by C. Santos ................................... Total capital of new partnership .......................

$125,000 80,000 $205,000

C. Santos' capital credit ($205,000 × 30%) .......

$61,500

Investment by new partner, C. Santos ............. C. Santos’ capital credit .................................... Bonus to old partners .......................................

$80,000 61,500 $18,500

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PROBLEM 12-8B (Continued) (c) Oct. 1

Cash..................................................... 36,000 A. Nolan, Capital ($12,300 × 50%)... 6,150 D. Elder, Capital ($12,300 × 40%).... 4,920 T. Wuhan, Capital ($12,300 × 10%) . 1,230 C. Santos, Capital ....................... 48,300

Total capital of existing partnership .............. Investment by C. Santos ................................. Total capital of new partnership .....................

$125,000 36,000 $161,000

C. Santos’ capital credit ($161,000 × 30%).....

$48,300

Investment by new partner ............................. C. Santos’ capital credit .................................. Bonus to new partner......................................

$36,000 48,300 $12,300

(d) Solve for x 30% × ($125,000 + x) = x $37,500 + .3x = x $37,500 = .7x x = $53,571 Proof: ($125,000 + $53,571) × 30% = $53,571

Taking It Further: Existing partners would be willing to give a bonus to a new partner because he is bringing badly needed expertise and an excellent reputation to the partnership. These qualities will yield greater revenues and consequently profits for all partners. The skills of the new partner are very complementary to the existing partners, making it easier to obtain and retain clients. This is often true in law firms offering a variety of specialties to clients.

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PROBLEM 12-9B (a) Dec. 31 (b) Dec. 31

R. Dixon, Capital .......................... 35,000 G. Khan, Capital ......................

35,000

R. Dixon, Capital .......................... 35,000 B. Vuong, Capital ($12,500 × 5/8) 7,813 G. Khan, Capital ($12,500 × 3/8).. 4,687 Cash .........................................

47,500

Dixon's capital balance ............... Payment to Dixon ........................ Bonus to Dixon ............................

$35,000 47,500 $12,500

(c) Dec. 31 R. Dixon, Capital .......................... 35,000 B. Vuong, Capital ($5,500 × 5/8) G. Khan, Capital ($5,500 × 3/8) Cash ......................................... Dixon's capital balance ............... Payment to Dixon ........................ Bonus to old partners .................

3,437 2,063 29,500

$35,000 29,500 $ 5,500

Taking It Further: In order for a new partner to be admitted, the remaining partners must approve Dixon’s sale of her interest to S. Meyers. The remaining partners cannot be forced to accept a change in partners dictated by the withdrawing partner.

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PROBLEM 12-10B (a) Feb.

1 T. Radzik, Capital ........................... 98,000 Cash ......................................... S. Kopel, Capital ($8,000 × ¾) E. Falkenberg, Capital ($8,000 × ¼).......................

90,000 6,000 2,000

(b) S. Kopel, Capital $79,000 + $6,000 = $85,000 E. Falkenberg, Capital $47,000 + $2,000 = $49,000 (c) Dec. 31

Income Summary ........................... 45,000 S. Kopel, Capital ($45,000 × 2/3) E. Falkenberg, Capital ($45,000 × 1/3)...................

(d) S. Kopel, Capital ($85,000 + $30,000) ......... E. Falkenberg, Capital ($49,000 + $15,000) Total partnership capital ............................. (e) Mar. 1

30,000 15,000 $115,000 64,000 $179,000

Cash.............................................. 110,000 S. Kopel, Capital ($20,050 × 2/3) . 13,367 E. Falkenberg, Capital ($20,050 × 1/3) ....................... 6,683 D. Malkin, Capital..............

130,050

Total capital of existing partnership.......... Investment by D. Malkin ............................. Total capital of new partnership ................

$179,000 110,000 $289,000

D. Malkin’s capital credit ($289,000 × 45%) $130,050 Investment by D. Malkin ............................. D. Malkin’s capital credit ............................ Bonus to new partner .................................

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PROBLEM 12-10B (Continued) (f) S. Kopel, Capital ($115,000 – $13,367) ....... E. Falkenberg, Capital ($64,000 – $6,683) .. D. Malkin, Capital ........................................ Total partnership capital .............................

$101,633 57,317 130,050 $289,000

Taking It Further: There might be several reasons why a withdrawing partner would be motivated to agree to a cash payment that results in a bonus to the remaining partners. A penalty might have been applied because of some circumstances that were adverse to the partnership caused by the withdrawing partner. The partnership agreement might contain a clause that provides for the discounting of the withdrawing partners’ capital upon his departure under certain circumstances. Or, the withdrawing partner may have personal reasons for needing cash immediately, and is willing to accept a lesser amount as a result.

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PROBLEM 12-11B (a) Item Balances before liquidation Sale of noncash assets

Payment of liabilities

Allocation of Cash based on capital balances

Cash

Accounts Receivable

Accum. Equipment Depreciation

33,000

20,000

75,200

(6,400)

88,800

(20,000)

(75,200)

6,400

121,800

Accounts Payable

B. Hally Capital

H. Lockyear Capital

A. Vu Capital

53,160

39,600

25,200

3,840

(39,600)

(25,200)

(3,840)

(53,160)

68,640

(68,640)

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PROBLEM 12-11B (Continued (a) (Continued) May

31 Cash................................................ 88,800 Accumulated Depreciation – 6,400 Equipment.............................. Accounts Receivable ................ Equipment .................................

20,000 75,200

31 Accounts Payable.......................... Cash ...........................................

53,160

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53,160

B. Hally, Capital ............................ 39,600 H. Lockyear, Capital ..................... 25,200 A. Vu, Capital ................................. 3,840 Cash ...........................................

68,640

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PROBLEM 12-10B (Continued) (b) Item Balances before liquidation Sale of noncash assets

Accounts Receivable

Equipment

$33,000

$20,000

$75,200

$(6,400)

60,000

(20,000)

(75,200)

93,000

Cash

Accum. Depreciation

Accounts B. Hally Payable Capital

H. Lockyear Capital

A. Vu Capital

$39,600

$25,200

$3,840

6,400

(14,400)

(8,640)

(5,760)

25,200

16,560

(1,920)

$53,160

Payment of liabilities

(53,160)

39,840 1,920

Payment of Deficit Allocation of Cash based on capital balances

(41,760)

(25,200)

(16,560)

1,920

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PROBLEM 12-11B (Continued) (b) (Continued) May

31 Cash................................................ 60,000 Accumulated Depreciation – Equipment.............................. 6,400 Loss on Realization ....................... 28,800 Accounts Receivable ................ Equipment .................................

20,000 75,200

31 B. Hally, Capital ($28,800 × 50%)...................... 14,400 H. Lockyear, Capital ($28,800 × 30%)...................... 8,640 A. Vu, Capital ($28,800 × 20%)..................... 5,760 Loss on Realization ..................

28,800

31 Accounts Payable.......................... 53,160 Cash ...........................................

53,160

31 Cash ($3,840 – $5,760)................... A. Vu, Capital .............................

1,920

31 B. Hally, Capital ($39,600 – $14,400) ................ 25,200 H. Lockyear, Capital ($25,200 – $8,640) .................. 16,560 Cash ($33,000 + $60,000 – $53,160 + $1,920) ....................

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PROBLEM 12-11B (Continued) (c) Item Balances before liquidation Sale of noncash assets Payment of liabilities

Accounts Receivable

B. Hally Capital

H. Lockyear Capital

A. Vu Capital

$39,600

$25,200

$3,840

(24,400) 15,200

(14,640) 10,560

(9,760) (5,920)

(3,700)

(2,220)

5,920

(19,840)

(11,500)

(8,340)

Cash

Accum. Depreciation

$33,000

$20,000

$75,200

$(6,400)

40,000 73,000

(20,000) -

(75,200) -

6,400 -

Accounts Payable $53,160

(53,160)

19,840

Allocation of Loss Allocation of Cash based on capital balances

Equipment

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PROBLEM 12-11B (Continued) (c) (Continued) May

31 Cash................................................ 40,000 Accumulated Depreciation – 6,400 Equipment .............................. Loss on Realization ....................... 48,800 Accounts Receivable ................ Equipment..................................

20,000 75,200

31 B. Hally, Capital ($48,800 × 50%) ...................... 24,400 H. Lockyear, Capital ($48,800 × 30%) ...................... 14,640 A. Vu, Capital ($48,800 × 20%) ..................... 9,760 Loss on Realization...................

48,800

31 Accounts Payable .......................... Cash ...........................................

53,160

31 B. Hally, Capital ($5,920 x 5 ÷ 8) ....................... 3,700 H. Lockyear, Capital ($5,920 x 3 ÷ 8) ........................... 2,220 A. Vu, Capital ($3,840 – $9,760)

5,920

31 B. Hally, Capital ($39,600 – $24,400 – $3,700) .... 11,500 H. Lockyear, Capital ($25,200 – $14,640 – $2,220) ...... 8,340 Cash ($33,000 + $40,000 – $53,160) ...................................

19,840

Taking It Further: Creditors must be paid before the partners upon liquidation and failing to do so would be defrauding creditors of their legal claim against the business. Solutions Manual .

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PROBLEM 12-12B (a) (1)

Item Balances before liquidation

Cash

Supplies

Accounts Payable

$100,000

$110,000

$90,000

Sale of Supplies

130,000

(110,000)

230,000 Payment of liabilities

Payment of Cash

(90,000)

140,000

(140,000) -

M. Nokota Capital

S. Taishuh Capital

A. Paso Capital

$70,000

$30,000

$20,000

10,000

5,000

80,000

35,000

25,000

(80,000) -

(35,000) -

(25,000) -

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PROBLEM 12-12B (Continued) (a) (1) (Continued) Sept. 30

Solutions Manual .

Cash................................................. 130,000 Gain on Realization................. Supplies ...................................

20,000 110,000

Gain on Realization........................... 20,000 M. Nokota, Capital ($20,000 × ½) S. Taishuh, Capital ($20,000 × ¼) A. Paso, Capital ($20,000 × ¼)

10,000 5,000 5,000

Accounts Payable ............................. 90,000 Cash .........................................

90,000

M. Nokota, Capital ($70,000 + $10,000) .................. 80,000 S. Taishuh, Capital ($30,000 + $5,000) .................... 35,000 A. Paso, Capital ($20,000 + $5,000) .................... 25,000 Cash ($100,000 + $130,000 – $90,000)................................

140,000

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PROBLEM 12-12B (Continued) (b) (2)

Item Balances before liquidation Sale of Supplies Payment of liabilities Payment of Deficit Payment of Cash

Cash

Supplies

Accounts Payable

$100,000

$110,000

$90,000

25,000 125,000

(110,000)

(90,000)

35,000

M. Nokota Capital

S. Taishuh Capital

A. Paso Capital

$70,000

$30,000

$20,000

(42,500) 27,500

(21,250) 8,750

(21,250) (1,250)

1,250 (36,250) -

1,250 (27,500) -

(8,750) -

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PROBLEM 12-12B (Continued) (a) (2) (Continued) Sept. 30

Solutions Manual .

Cash ................................................ 25,000 Loss on Realization ........................ 85,000 Merchandise Inventory ...........

110,000

M. Nokota, Capital ($85,000 × ½) ... 42,500 S. Taishuh, Capital ($85,000 × ¼) .. 21,250 A. Paso, Capital ($85,000 × ¼) ....... 21,250 Loss on Realization ................

85,000

Accounts Payable........................... Cash .........................................

90,000 90,000

Cash ................................................ A. Paso, Capital ($20,000 – $21,250)..................

1,250 1,250

M. Nokota, Capital ($70,000 – $42,500).................. 27,500 S. Taishuh, Capital 8,750 ($30,000 – $21,250).................. Cash ($100,000 + $25,000 – $90,000 + $1,250) ..........

36,250

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PROBLEM 12-12B (Continued) (b) Sept.

30 M. Nokota, Capital ($1,250 × 2/3) ........................... S. Taishuh, Capital ($1,250 × 1/3) ........................... A. Paso, Capital ($20,000 – $21,250) ........... 30

833 417

M. Nokota, Capital ($70,000 – $42,500 – $833) ........ 26,667 S. Taishuh, Capital ($30,000 – $21,250 – $417) .......... 8,333 Cash ($100,000 + $25,000 – $90,000) .........................

1,250

35,000

Taking It Further: The reasons a partnership might decide to liquidate include: 1) the activity generating the revenue of the business has stopped; 2) government regulations have caused the business to be no longer viable; 3) internal discord among the partners; and 4) the business might not have intended to last very long and this is the logical end of the business model.

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PROBLEM 12-13B (a) 2016 Feb. 14 Cash ....................................................... Furniture ................................................ I. Moretti, Capital ..............................

9,000 15,000 24,000

14 Cash ....................................................... Equipment.............................................. A. Kam, Capital ................................

12,000 24,000

14 Cash ....................................................... Equipment.............................................. Accounts Payable ............................ C. Fenandoe, Capital .......................

18,000 40,000

Dec. 20 I. Moretti, Drawings ($72,000 × 2/9) ...... A. Kam, Drawings ($72,000 × 3/9) ......... C. Fenandoe, Drawings ($72,000 × 4/9) Cash..................................................

16,000 24,000 32,000

36,000

10,000 48,000

72,000

31 Income Summary................................... 81,900 I. Moretti, Capital ($81,900 × 2/9) ..... 18,200 A. Kam, Capital ($81,900 × 3/9) ....... 27,300 C. Fenandoe, Capital ($81,900 × 4/9) 36,400

MKF MARKETING Capital Balances December 31, 2016 C. FeI. Moretti A. Kam nandoe Total Investments $24,000 $36,000 $48,000 $108,000 Drawings (16,000) (24,000) (32,000) (72,000) Profit 18,200 27,300 36,400 81,900 Ending Balance $26,200 $39,300 $52,400 $117,900

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PROBLEM 12-13B (Continued) (a) (Continued) 2017 Jan. 5

C. Fenandoe, Capital (1/2 × $52,400) ........ 26,200 C. Wells, Capital .......................... 26,200

Dec. 20 I. Moretti, Drawings ($91,800 × 2/9)........... 20,400 A. Kam, Drawings ($91,800 × 3/9) ............. 30,600 C. Fenandoe, Drawings ($91,800 × 2/9) 20,400 C. Wells, Drawings ($91,800 × 2/9)............ 20,400 Cash.................................................. 91,800 31 Income Summary..................................... 103,050 I. Moretti, Capital ($103,050 × 2/9) ... A. Kam, Capital ($103,050 × 3/9) ..... C. Fenandoe, Capital ($103,050 × 2/9) C. Wells, Capital ($103,050 × 2/9) .... 2018 Jan. 2

22,900 34,350 22,900 22,900

C. Fenandoe, Capital ................................. 28,700 I. Moretti, Capital .............................. 900 A. Kam, Capital ................................ 1,350 C. Wells, Capital ............................... 900 Cash.................................................. 25,550

Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to remaining partners...................................

$28,700 25,550 $ 3,150

Allocation of bonus: I. Moretti, Capital ($3,150 × 2/7) .................. A. Kam, Capital ($3,150 × 3/7) ..................... C. Wells, Capital ($3,150 × 2/7) ...................

$3,150

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PROBLEM 12-13B (Continued) (b) MKFW MARKETING Statement of Partners’ Equity Year ended December 31, 2017

Capital January 1 Admission of partner Add: Profit Less: Drawings Capital, December 31

I. Moretti $26,200 22,900 49,100 20,400 $28,700

A. Kam $39,300 34,350 73,650 30,600 $43,050

C. Fenandoe $52,400 (26,200) 22,900 49,100 20,400 $28,700

C. Wells

Total $117,900

$26,200 22,900 49,100 20,400 $28,700

103,050 220,950 91,800 $129,150

Balance Dec. 31, 2017 Withdrawal of partner Balance Jan. 2, 2018

Solutions Manual

I. Moretti

A. Kam

C. Fenandoe

C. Wells

Total

$28,700 900 $29,600

$43,050 1,350 $44,400

$28,700 (28,700) $ 0

$28,700 900 $29,600

$129,150 (25,550) $103,600

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PROBLEM 12-13B (Continued)

Taking It Further: No, Moretti is not correct. Each partner’s capital account balance is their claim on the net assets of the partnership. Since cash is the only remaining asset, it must be distributed to the partners based on the capital account balances.

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BYP12-1 FINANCIAL REPORTING PROBLEM (a) The main deciding factor in choosing between the partnership and the corporate structure when the business was founded was likely the availability of cash needed to finance the business. In this case the owners likely chose the corporate structure. Limited liability may have also been a welcome feature of the corporate form of organization. In order to have its shares traded on a stock exchange Corus would have needed to adopt the corporate structure. The transfer of ownership would have been easier with the corporate structure. With the continued expansion came a greater need for financing and consequently the involvement of more and more creditors. Consequently, the owners needed the corporate structure to attract more capital and ensure limited liability to its owners.

(b) 1) Statements of Income and Comprehensive Income: There would not be any income tax on the partnership income statement. Partnership earnings are taxed in the hands of the partners. Nor would there be any earnings per share disclosure. 2) Statement of Financial Position: The equity section of this statement would be called Partnership Equity instead of Shareholders’ Equity. Each partner’s capital account balance would be listed, in place of Share Capital, Contributed Surplus, Retained Earnings, and Accumulated Other Comprehensive Income. 3) The Statements of Changes in Shareholders’ Equity would be replaced with a Statement of Partners’ Equity. 4) Statement of Cash Flows: There would be no difference.

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BYP12-2 INTERPRETING FINANCIAL STATEMENTS The advantage of operating as a limited partnership is that it allows some (limited) partners to invest in the partnership and have limited liability. This appeals to many individuals who want to invest in the business but do not want to take the risk of having unlimited liability for all the partnership liabilities. From the business’ perspective, the company would be able to attract more investors and capital if they could offer investors limited liability. The General Partner also maintains control of the dayto-day operations.

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BYP12-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP12-4 COMMUNICATION ACTIVITY To:

Drs. Chatterjie and Unger

From:

Your Accountant

Subject:

Partnership Agreement for Medical Practice

All provinces have a Partnership Act that provides the basic rules for the formation and operation of partnerships. Partnerships are easy to form and are not subject to much government regulation. There are three forms of partnership organizations that share the following characteristics:  A partnership is a voluntary association of individuals.  Assets of the partnership are co-owned.  Profit is divided among the partners as specified in the partnership agreement.  Each partner acts for the partnership when doing partnership business and the action of any partner is binding on all other partners.  The life of the partnership is not unlimited. Any change in ownership dissolves the partnership. 1.

General Partnership Each partner has unlimited personal liability for all of the debts of the partnership. This is the main disadvantage of a general partnership.

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BYP12-4 (Continued) 2.

Limited Partnership (LP) One or more of the partners retain unlimited liability and are called general partners. The remaining partners have limited liability and are called limited partners. Limited partners tend to be investors who are not active in the business. Their liability is limited to their initial investment in the business.

Limited Liability Partnership (LLP) Most professionals form this type of partnership, which is designed to protect innocent partners from negligent actions of other partners. Partners remain fully liable for their own negligence as well as those they supervise and control, but have limited liability for negligence of the other partners.

I look forward to a productive session with both of you.

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BYP12-5 “ALL ABOUT YOU” ACTIVITY (a)

A partnership can exist although there might not be a formal agreement in place.

(b)

The revenues that could be earned from the band include: 1. Fees for performances 2. Royalties of proceeds on sale of songs to other performers 3. Fees for endorsements of products if they obtain sponsors or on sales of merchandise 4. SOCAN royalties for airing music

(c)

Expenses to operate the band could include: 1. Studio time to record songs 2. Repair on musical instruments 3. Rent for space to work 4. Electricity and other utilities 5. Travel costs to promote their music 6. Accommodation and meals while delivering performances in other cities 7. Promotion costs 8. Professional fees from an agent 9. Depreciation expense on musical instruments.

(d)

Some of the issues relating to sharing of the revenues and the costs incurred by the band could include: 1. Some band members might own their own musical instruments and feel that they should be reimbursed for the costs of these instruments. 2. Some band member might have contributed more talent and effort in writing songs or lyrics that are used by all band members. 3. Additional personal assets, such as a car might be used to travel. 4. Money might be used to finance the band which might have been spent more by one band member than the others.

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BYP12-5 (Continued) (e)

Should one of the band members want to leave, the issues that could come up and should be dealt with in the partnership agreement on a departure include: 1. How to deal with musical instruments that were used by this band member, and determining whose property it is if a new instrument was purchased. 2. The ownership of copyrights of the lyrics. 3. Royalties yet to be earned by the use of the songs created while in the band. 4. Cash invested to finance the operations of the band. 5. The possible need to change the name of the band. 6. Allowing the member leaving the band the right to use a song and receive a portion of the royalty of a song created while with the band but very successful after the member leaves the band.

(f)

Should another band member join the band, when revenues have already been earned issues would include: 1. A requirement for the new member to purchase some of the goodwill that has already been established by the existing band. 2. The ownership of copyrights of the lyrics already in place. 3. Royalties yet to be earned by the future use of the songs created before joining the band. 4. The possible need to change the name of the band.

(g)

Issues that would need to be dealt with if a band member were to do solo performances include: 1. Determining the rights to the songs being used in a performance. 2. Use of equipment or resources that are controlled and paid for by the band. 3. Association of the performance to the band and the repercussions on reputation and future earning ability.

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BYP12-5 (Continued) (h)

Should the band decide to split up, issues will be similar to the ones dealt with when the band was formed. They would include: 1. How to deal with musical instruments that were purchased. 2. Dealing with outstanding debts or obligations of the band, including any outstanding claims from previous band members. 3. The ownership of copyrights of the lyrics. 4. Royalties yet to be earned by the use of the songs created while in the band. 5. Rights to the band name.

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BYP12-6 Santé Smoothie Saga (a) 1. A formalized partnership agreement is imperative. A formal agreement will ensure that you consider all possible situations, contingencies, and disagreements that could arise. At present, you may be in agreement with all the decisions being made. However, if a disagreement occurs later on, you will be able to turn to the partnership agreement for guidance. The partnership agreement should contain basic information such as the name and principal location of the partnership, the purpose of the business, and the date of inception. In addition, the agreement should specify the names and capital contributions of the partners, the rights and duties of the partners, the basis for sharing profit or loss, provisions for withdrawal of assets, procedures for settling disputes, procedures for the withdrawal or admission of a partner, the rights and duties of a surviving partner if a partner dies, and procedures for liquidating a partnership.

2. Jade Wingert would need to borrow $6,900. Total fair value of Santé Smoothie’s net assets: ($8,050 + $800 + $1,200 + $450 + $1,500) $12,000 Total fair value of J Wingert’s (Gem Frogurt) net assets: ($1,500 + $5,250 + $500 + $350 + $7,500 – $10,000) 5,100 Difference $ 6,900

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BYP12-6 (Continued) (a) (Continued) 3. Both the total amount of assets and the total amount of Jade Wingert’s debt should be considered in making this decision. Each partner is jointly and severally liable for all partnership liabilities. If you go forward with the partnership, both partners will be signing the lease agreement. This debt will be in addition to the bank loan payable, which is due in the near future. If the business does not succeed and there are insufficient assets to pay all debt outstanding, creditors could then make claims against the personal assets of the partners. Jade Wingert appears to have few personal assets. This could leave you (Natalie Koebel) responsible for repaying all liabilities of the partnership. 4. Before becoming a partner with Jade Wingert, you (Natalie Koebel) should ask to see the financial statements of Gem Frogurt to assess its profitability. You should also consider what benefits (if any) would result from combining the businesses. Lastly, it would be helpful to develop a cash flow budget to see if the new business will generate enough cash to cover the lease payment and the upcoming bank loan repayment.

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BYP 12-6 (Continued) (b) SANTÉ SMOOTHIES Balance Sheet April 1, 2018 Assets Current assets Cash ................................................................................. $16,450* Accounts receivable ................................................... 6,050 Inventory ..................................................................... 1,700 Supplies....................................................................... 800 Total current assets ............................................... 25,000 Property, plant, and equipment Equipment ....................................................................... 9,000 Total assets ................................................................ $34,000 Liabilities and Partners' Equity Current liabilities Bank loan payable........................................................... $10,000 Partners' equity J. Wingert, Capital .......................................... $12,000 N. Koebel, Capital ......................................... 12,000 24,000 Total liabilities and partners' equity .......................... $34,000 * Value of N. Koebel’s proprietorship net assets.................. $12,000 Value of Jade Wingert’s proprietorship net assets............ 5,100 Cash Jade Wingert borrowed ....................................... 6,900 Cash from N. Koebel’s proprietorship ......................... 8,050 Cash from Jade Wingert’s proprietorship ............................ 1,500 Total cash when partnership is formed............................ $16,450

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CHAPTER 13 Introduction to Corporations ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Problems Brief Set A Exercises Exercises

Problems Set B

1. Identify and discuss the major characteristics of the corporate form of organization.

1, 2, 3, 4

1, 2

2. Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

5, 6, 7, 8, 9, 10

2, 3, 4, 5

2, 3, 4, 5, 7, 11

2, 3, 4, 7, 8, 12

3. Prepare a corporate income statement.

6, 7

6, 10

5, 6, 9, 12

5, 6, 9, 10, 12

7, 8, 10

4, 5, 6, 7, 8, 12

9, 10

5, 6, 9, 10, 12

11, 12

7, 8, 9, 10, 11, 12

7, 8, 9, 11, 12

4. Explain and 12, 13, 14 demonstrate the accounting for cash dividends. 5. Prepare a statement 15, 16 of retained earnings and closing entries for a corporation. 6. Prepare the 17, 18 shareholders’ equity section of the balance sheet and calculate return on equity.

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine form of business organization.

Simple

15-20

Record and post share transactions. Determine balances and answer questions.

Moderate

25-30

Allocate dividends between preferred and common shares.

Simple

15-20

Allocate dividends between preferred and common shares and record conversion.

Simple

25-30

Record dividends; prepare income statement and statement of retained earnings.

Simple

25-30

Prepare income statement, statement of retained earnings, and closing entries.

Moderate

30-35

Record and post transactions. Prepare shareholders’ equity section.

Moderate

40-50

Record and post transactions. Prepare shareholders’ equity section.

Moderate

50-60

Prepare financial statements.

Moderate

35-40

10A

Prepare financial statements and calculate return on equity.

Moderate

50-60

11A

Calculate return on assets and equity and comment.

Simple

20-25

12A

Record transactions and adjustments, prepare financial statements.

Moderate

35-40

Identify and discuss major characteristics of a corporation.

Simple

15-20

Record and post share transactions. Determine balances and answer questions.

Moderate

25-30

Allocate dividends between preferred and common shares.

Simple

15-20

Allocate dividends between preferred and common shares and record conversion.

Moderate

25-30

Record dividends; prepare income statement and statement of retained earnings.

Simple

25-30

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Difficulty Level

Time Allotted (min.)

Prepare income statement, statement of retained earnings, and closing entries Record and post transactions. Prepare shareholders’ equity section.

Moderate

35-40

Moderate

40-50

Record and post transactions. Prepare shareholders’ equity section.

Moderate

50-60

Prepare financial statements.

Moderate

35-40

10B

Prepare financial statements.

Moderate

50-60

11B

Calculate return on assets and equity and comment.

Simple

20-25

12B

Record transactions and adjustments; prepare financial statements.

Moderate

35-40

6B 7B

Description

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Knowledge Objectives 1. Identify and E13-2 discuss the major characteristics of the corporate form of organization. 2. Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Q13-8 E13-2

3. Prepare a corporate income statement.

4. Explain and demonstrate the accounting for cash dividends

Solutions Manual .

Q13-12 Q13-13

Comprehension

Application

Q13-1 Q13-2 Q13-3 Q13-4 BE13-1 E13-1

Q13-10

Q13-5 Q13-6

Q13-7 Q13-10 BE13-2 BE13-3 BE13-4 BE13-5 E13-3 E13-4 E13-5 E13-7 E13-11 P13-2A

P13-3A P13-4A P13-7A P13-8A P13-12A P13-2B P13-3B P13-4B P13-7B P13-8B P13-12B

Q13-11

BE13-6 BE13-7 E13-6 E13-10 P13-5A P13-6A P13-9A

P13-12A P13-5B P13-6B P13-9B P13-10B P13-12B

Q13-14

BE13-8 E13-7 E13-8 E13-10 P13-4A P13-5A P13-6A P13-7A

P13-8A P13-12A P13-4B P13-5B P13-6B P13-7B P13-8B P13-12B

13-4

Analysis

Synthesis

P13-1A P13-1B

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Evaluation

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE (Continued) Learning Objectives 5. Prepare a statement of retained earnings and closing entries for a corporation

Knowledge

6. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Q13-17

Broadening Your Perspective

Solutions Manual .

Comprehension

Application

Q13-15 Q13-16

BE13-9 BE13-10 E13-9 E13-10 P13-5A P13-6A P13-9A

Q13-18

BE13-11 P13-11A BE13-12 P13-12A E13-11 P13-7B E13-12 P13-8B P13-7A P13-9B P13-8A P13-11B P13-9A P13-12B P13-10A BYP13-4 BYP13-6 Santé Smoothie Saga

BYP13-1 BYP13-3

13-5

Analysis

Synthesis

BYP13-2

BYP13-5

P13-10A P13-12A P13-5B P13-6B P13-9B P13-10B P13-12B

Chapter 13

Evaluation

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ANSWERS TO QUESTIONS 1.

Classified by Purpose: A business may be incorporated to make a profit, like Tim Hortons. Or, it may be incorporated as a not-for-profit, like the Canadian Cancer Society. Classified by Ownership: A corporation can be publicly held or privately held. A publicly held corporation, like Corus Entertainment Inc., may have thousands of shareholders, and its shares trade in an organized securities market. A privately held corporation, like McCain Foods Limited, usually only has a few shareholders, and its shares are not offered for sale to the general public.

(a) 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. (b) Transferable ownership rights. Ownership of a corporation is held in capital shares. The shares are transferable units. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is usually entirely at the discretion of the shareholder. (c) Ability to acquire capital. A corporation has an easier time raising capital because of features such as limited liability and the ease of transferring shares. Also, because only small amounts of money need to be invested, many individuals can become shareholders. However, small, privately held corporations can have as much difficulty getting capital as any proprietorship or partnership.

3. (a)(1) Articles of incorporation form the company’s “constitution.” They include information such as (1) the name and purpose of the corporation, (2) the number of shares and the kinds of shares to be authorized, and (3) the location of the corporation’s head office. (2) Corporate bylaws are the internal rules and procedures for operations set by the corporation after receiving its articles of incorporation. Corporations that operate inter-provincially must also get a licence from each province they do business in. (3) Organization costs include legal and accounting fees, and registration costs incurred to incorporate. (b) Donna is incorrect. A corporation can be incorporated under the federal Canada Business Corporations Act., or it can be incorporated provincially. The location of the head office needs to be included in the articles of incorporation. A corporation may operate in several provinces and have a single head office.

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QUESTIONS (Continued) 4.

The ownership rights of shareholders are the rights to:  Vote on the election of the board of directors with each shareholder normally having one vote for each common share  Receive dividends on a pro-rata basis with other shareholders, and  Receive assets upon liquidation on a pro-rata basis with other shareholders. Shareholders manage the corporation indirectly through the board of directors that they have elected. The board of directors can then select and hire officers of the corporation to conduct business on a day-to-day basis. The board of directors decides on the corporation’s operating policies and the officers of the corporation execute the policies.

The total number of shares a company is allowed to sell is called its authorized shares—it may be an unlimited amount or a specified amount. No journal entry is recorded when the number of authorized shares is set. The number of authorized shares fixes the upper limit of how many shares can be sold by the corporation. This provides shareholders with an indication of the potential dilution of their ownership share. Issued shares are shares that have been sold. A journal entry will be prepared when shares are issued. The number of issued shares can never exceed the number of authorized shares. The number of shares issued allows users of financial statements to determine how many additional shares can be sold (up to the number authorized) and determine any future dilution of their ownership percentage. That said, under ASPE it is not necessary to show the number of shares authorized, just the number issued.

When Paul purchases the original shares as part of TechTop’s initial public offering, he is purchasing from the company. The $1,200 (100 × $12) he spends to buy the shares goes directly to TechTop and increases the company’s assets and shareholders’ equity. In the subsequent purchase, Paul is buying in the secondary market from another investor. The proceeds from this sale go to the seller and not to TechTop. Therefore, there is no impact on TechTop’s financial statements as a result of the second purchase.

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QUESTIONS (Continued) 7.

The basic ownership rights of preferred shareholders are the rights to receive:  dividends ahead of the common shareholder, and  assets upon liquidation ahead of the common shareholder. They may also have priority for reacquisition if they are redeemable or retractable. In exchange for these preferences, preferred shareholders normally are not entitled to vote. In the absence of restrictive provisions, the basic ownership rights of common shareholders are the rights to:  vote in the election of the board of directors and in corporate actions that require shareholders' approval,  share in corporate profit by receiving dividends, and  share in assets upon liquidation.

The factors that help determine the market price of share on an organized stock exchange include: The financial performance of the company The dividend history of the company The expectation of future profits determined by trends in the industry and the position the company holds when compared to its competitors External factors such as the strength of the local currency, wars, and terrorism

(a) The company is required to pay the previous two years of arrears on the cumulative preferred share dividends only, before paying current year dividends. (b) Dividends in arrears are disclosed in the notes to the financial statements; they are not recorded as liabilities.

10. When convertible preferred shares are converted into common shares, the shareholder simply exchanges preferred shares for common shares, according to a predetermined ratio. To record the conversion, the amount originally paid for the preferred shares is transferred from the preferred shares account into the common shares account. If multiple share issues have occurred at varying prices, then the average per share amount for each preferred share is used instead of the original cost. This entry has no effect on (a) total assets, (b) total liabilities, or (c) total shareholders' equity.

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QUESTIONS (Continued) 11.

The unique feature of corporation income statements is a separate section that shows income tax expense. The presentation is as follows: Profit before income tax........................................................... Income tax expense* ............................................................... Profit ........................................................................................

$500,000 150,000 $350,000

* This is usually subdivided, to show the portion which is currently due and the portion which is due in future periods. Proprietorship and partnership income statements do not show a section for income taxes since income is taxed personally in the hands of the proprietor or partner. 12.

Pro rata means proportional. If you own 5% of the shares, you are entitled to 5% of the dividends that are declared.

13.

A cash dividend becomes a liability on the declaration date. This is the date the board of directors formally declares the cash dividend and announces it to shareholders. This commits the corporation to a binding legal obligation that cannot be rescinded. On the declaration date, the company debits Cash Dividends and credits Dividends Payable. On the record date, there is no entry; the company simply determines ownership of the shares. On the payment date, the Dividends Payable is debited and Cash is credited as the dividend is paid.

14.

Undeclared dividends on cumulative preferred shares do not get accrued and reported as liabilities on the balance sheet because the company’s board of directors has not created an obligation from the declaration of the dividends. The amount of any dividend arrears is reported in the notes to the financial statements. This information is useful to shareholders because it warns the common shareholders of the amount of dividends that would first have to be declared to the cumulative preferred shareholders before any dividends could be declared to common shareholders.

15.

A statement of retained earnings shows the continuity of summary transactions that have occurred during the accounting period, reconciling the beginning balance in retained earnings to the ending balance. It contains details of increases from profits reported on the income statement (or decreases due to losses) and decreases from the declaration of dividends.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 16. Temporary accounts such as the revenue, expenses, gains, and losses from the income statement are closed to the Income Summary account. The Income Summary account is then closed to Retained Earnings. The Cash Dividend accounts are also closed to Retained Earnings. This process is the same as for proprietorships except that proprietorships have a capital account instead of retained earnings and a withdrawal account instead of cash dividends. 17. The main components of shareholders' equity on the balance sheet are: Contributed capital, Retained earnings, and Accumulated other comprehensive income (loss) for companies that follow IFRS. Contributed capital represents the amounts contributed by the shareholders. Share capital and additional contributed surplus (e.g., from reacquisition of shares) are components of contributed capital. Retained earnings represent the cumulative profit (or loss) since incorporation that has been retained in the company and not distributed to shareholders as dividends. Accumulated other comprehensive income (loss) represents gains and losses not resulting from share transactions, that bypass profit. The most common example is unrealized gains and losses on certain types of investments. 18. Company 1 would be a better investment since it can generate the same amount of profit using a smaller investment of capital by the shareholders. This can be shown by comparing the return on shareholders’ equity for each company. Company 1: $100,000 ÷ $300,000 = 33.3% and Company 2: $100,000 ÷ $350,000 = 28.6%.

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Chapter 13

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 1. 2. 3. 4. 5. 6. 7. 8.

(h) (c) (b) (d) (a) (g) (e) (f)

BRIEF EXERCISE 13-2 Aug.

Cash (2,000 × $12) ......................... Common Shares .......................

24,000 24,000

BRIEF EXERCISE 13-3 Sep. 10

Equipment ..................................... Common Shares .......................

9,500 9,500

The fair value of the equipment received has been used to value the transaction. Since Juke Joint Ltd. is a private company, the shares are not widely traded and the $20 per share price from March 12 is likely not a reliable indicator of the fair value on September 10.

BRIEF EXERCISE 13-4 (a)

Jan. 13

(b)

Cash (3,000 × $90) ............................ 270,000 Preferred Shares......................

270,000

Total dividend: $4 per share × 3,000 shares = $12,000

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BRIEF EXERCISE 13-5 (a) Dividends are in arrears by $225,000 ([45,000 × $2.50] × 2) if the preferred shares are cumulative. If the shares are noncumulative, there are no dividends in arrears. (b) Dividends in arrears should be reported in the notes to the financial statements.

BRIEF EXERCISE 13-6 June 30 Income Tax Expense....................... 33,750 Income Tax Payable ................... ($800,000 − $575,000) × 15%

33,750

BRIEF EXERCISE 13-7 VICERON INC. Income Statement Year Ended June 30, 2017 Revenues ................................................................ Operating expenses ............................................... Profit before income tax......................................... Income tax expense ............................................... Profit ........................................................................

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$800,000 575,000 225,000 33,750 $191,250

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BRIEF EXERCISE 13-8 Oct. 14 Cash Dividends—Preferred ............... 131,250 Dividends Payable (25,000 × $5.25) Nov.

131,250

1 No journal entry.

Nov. 21 Dividends Payable .............................. 131,250 Cash................................................

131,250

BRIEF EXERCISE 13-9 GRAYFAIR INC. Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1......................................... Add: Profit...................................................................... Less: Cash dividends .................................................... Retained earnings, December 31 ...................................

$248,000 175,000 423,000 120,000 $303,000

BRIEF EXERCISE 13-10 Dec. 31

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Sales ............................................. Income Summary.....................

745,000

Income Summary ......................... Cost of Goods Sold ................. Operating Expenses ................ Income Tax Expense ...............

620,000

Income Summary ......................... Retained Earnings ...................

125,000

Retained Earnings........................ Cash Dividends—Common ....

25,000

13-13

745,000

450,000 135,000 35,000

125,000

25,000 Chapter 13

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BRIEF EXERCISE 13-11 TRUE GREEN NURSERIES LTD. Balance Sheet (Partial) December 31, 2017

Shareholders' equity Share capital* $6.50 cumulative preferred shares, 1,000 shares issued Common shares, 15,000 shares issued Total share capital Retained earnings Total shareholders' equity

$100,000 150,000 250,000 285,000 $535,000

* Under ASPE, it is not necessary to show the number of shares authorized.

BRIEF EXERCISE 13-12 Return on equity $283,957 ($1,589,840 + $1,777,502) ÷ 2

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=16.87%

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SOLUTIONS TO EXERCISES EXERCISE 13-1 1. 2. 3. 4. 5. 6. 7. 8.

True. True. False. Common shareholders have the right to vote, but annual dividends are not guaranteed. False. Profit is taxed as a separate entity. False. Creditors have no legal claim on personal assets of shareholders. False. Share ownership transfers are handled by stock exchanges. True. False. Corporations are heavily regulated.

EXERCISE 13-2 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

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

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Retractable preferred shares Public corporation Redeemable preferred shares Authorized shares Issued shares Initial public offering Secondary market Retained earnings Liquidation preference Legal capital Convertible Cumulative

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EXERCISE 13-3 (a) Jan. 12

July 11

Oct.

(b)

Cash (50,000 × $5) ................... Common Shares .................

250,000

Legal Fees Expense ................ Common Shares .................

4,500

Cash (1,000 × $25) ................... Preferred Shares .................

25,000

Land.......................................... Common Shares .................

55,000

250,000

4,500

25,000 55,000

The average per share amount for the common shares is $5.08 [($250,000 + $4,500 + $55,000)  (50,000 + 950 + 10,000)].

EXERCISE 13-4 Mar

June 12

July 11

Nov. 28

Solutions Manual .

Legal Fees Expense ................ Common Shares .................

30,000

Cash ......................................... Common Shares .................

375,000

Cash (1,000 x $110) ................. Preferred Shares .................

110,000

Cash (2,000 x $95) ................... Preferred Shares .................

190,000

13-16

30,000

375,000

110,000 190,000

Chapter 13

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EXERCISE 13-5 (a) The preferred shareholders will convert their shares when the fair value of the common shares is either equal to or higher than the value of the preferred shares. The fair value of the common shares must be equal to at least $110 ÷ 4 = $27.50 each. This occurs on September 19. On September 28, the fair value of the common shares is in excess of $27.50. Therefore, if the preferred shareholders had not already converted, they would also be willing to convert on that day. (b) Sept. 19 Preferred Shares ...................... 11,000,000 Common Shares ................. 11,000,000 (100,000 × $110) (c) Preferred shareholders will want to convert their preferred shares into common shares before the fair value of the common shares reaches $28.75 per share ($115 ÷ 4). At this price, the company will likely redeem the shares.

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EXERCISE 13-6 SHRUNK INC. Income Statement Year Ended July 31, 2017 Sales................................................................................ Cost of goods sold ......................................................... Gross profit..................................................................... Operating expenses: Salaries expense ...........................................140,000 Supplies expense......................................... 10,000 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ($200,000 × 20%) .......................... Profit................................................................................

July 31

Solutions Manual .

Income Tax Expense ............... 10,000 Income Tax Payable............ ($200,000 × 20%) – $30,000 = $10,000

13-18

$665,000 310,000 355,000

150,000 205,000 5,000 200,000 40,000 $160,000

10,000

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EXERCISE 13-7 (a) Preferred shares, $3.50, cumulative: Arrears: $3.50 × 20,000 shares × 2 years = Current amount: Total

$140,000 70,000 $210,000

Preferred shares, $4.50, noncumulative: Current amount: $4.50 × 10,000 shares =

$45,000

Common shares: Current amount: $0.50 × 300,000 shares = Total

$150,000 $405,000

(b) 2017 Oct. 30 Cash Dividends—Preferred* .............. 255,000 Cash Dividends—Common ................ 150,000 Dividends Payable ......................... *($210,000 + $45,000) Nov. 16

No journal entry.

Dec. 1

Dividends Payable .............................. 405,000 Cash................................................

405,000

(c) Dividends to cumulative preferred shareholders would be 100% of the maximum dividend of $200,000. Non-cumulative preferred shareholders and common shareholders would not receive any dividends until the cumulative preferred shareholders have been paid in full. By the end of the year, assuming no other dividends are declared, Accentrics Limited will have dividends in arrears of $10,000 [$210,000 owing to the preferred shareholders (from (a) above) – $200,000 maximum dividend].

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EXERCISE 13-8 (a) 150,000 × $4.50 = $675,000 (b) Regular dividend Arrears from Year 1 Dividend paid Arrears

Year 1 $675,000

450,000 $225,000

Year 2 $675,000 225,000 900,000 900,000 $ 0

(c) Dividends in arrears should be disclosed in the notes to the financial statements. They are not recorded in the general ledger accounts. (d) The likely amount is $4.50 per share, for a total of $675,000.

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EXERCISE 13-9 (a)

SHRUNK INC. Statement of Retained Earnings Year Ended July 31, 2017 Retained earnings, August 1, 2016 ................................ Add: Profit ..................................................................... Less: Cash dividends .................................................... Retained earnings, July 31, 2017 ...................................

$352,000 160,000 512,000 60,000 $452,000

(b) July 31 Sales .................................................... 665,000 Income Summary ...........................

665,000

31 Income Summary................................ 505,000 Cost of Goods Sold ....................... Supplies Expense .......................... Salaries Expense ........................... Interest Expense ............................ Income Tax Expense .....................

310,000 10,000 140,000 5,000 40,000

31 Income Summary................................ 160,000 Retained Earnings ......................... ($665,000 – $505,000) 31 Retained Earnings ................................ 60,000 Cash Dividends—Common ...........

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160,000

60,000

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EXERCISE 13-9 (Continued) Income Summary Date July 31 31 31

Ref. Closing entry Closing entry Closing entry

Debit

Credit

Balance

665,000

665,000 160,000 0

Credit

Balance

 J1 160,000 J1 60,000

352,000 512,000 452,000

J1 J1 J1

505,000 160,000

Ref.

Debit

Retained Earnings Date Aug. 1 July 31 31

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Balance Closing entry Closing entry

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Accounting Principles, Seventh Canadian Edition

EXERCISE 13-10 (a) DIDSBURY DIGITAL LTD. Income Statement Year Ended September 30, 2017 Service revenue.............................................................. Operating expenses ....................................................... Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ($84,500 × 15%) ............................ Profit................................................................................

(b) Sep. 30 Income Tax Expense ............... Income Tax Payable............ ($84,500 × 15%)

$529,000 442,000 87,000 2,500 84,500 12,675 $71,825

12,675 12,675

(c) DIDSBURY DIGITAL LTD. Statement of Retained Earnings Year Ended September 30, 2017 Retained earnings, October 1, 2016 .................... Add: Profit............................................................. Less: Cash dividends declared ........................... Retained earnings, September 30, 2017 .............

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$237,500 71,825 309,325 40,000 $269,325

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Accounting Principles, Seventh Canadian Edition

EXERCISE 13-11 The memo would contain the following: (a)

600,000 common shares are issued.

(b) 10,000 preferred shares are authorized. (c) The most common sources of contributed surplus are: 1) the amount in excess of the actual share issue price and its par value (where par value shares are allowed, not the case here); 2) the retirement of shares for less than the average issue cost, and; 3) donations of assets to the corporation. (d) Retained earnings changes each year when the Income Summary account is closed to Retained Earnings for any profit or loss for the year. Dividends declared also cause Retained Earnings to decrease. Another possible transaction that will affect the Retained Earnings account is a transaction involving the repurchase of shares, which will be discussed in Chapter 14. (e) The preferred shares are cumulative and are in arrears for two years (2016 and 2017). Consequently, the amount of dividends that will need to be paid to preferred shareholders before any dividends can be declared to common shareholders is three times the annual dividend entitlement of preferred shareholders. There are 6,000 preferred shares issued X $2 annual dividend rate per share per year, so the amount will be: 6,000 X 3 X $2 = $36,000. This assumes the dividends were declared in 2018.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 13-12 (a)

RAIDERS LIMITED Balance Sheet (Partial) December 31, 2017

Shareholders' equity Share capital* $5 cumulative preferred shares, 1,000 issued 1 $ 105,000 2 Common shares, 35,000 issued 350,000 Total share capital ........................................... 455,000 3....................................................................................... Retained earnings 337,000 Total shareholders’ equity................................................... $792,000 * Under ASPE it is not necessary to show the number of authorized shares. 1 1,000 shares × $105 = $105,000 2 35,000 shares × $10 = $350,000 3 $287,000 + $125,000 – $75,000 = $337,000 (b) Return on equity

$125,000 ($742,000* + $792,000) ÷ 2

= 16.30%

* Shareholders’ equity December 31, 2016 = $455,000 share capital + $287,000 beginning retained earnings = $742,000.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 13-1A 1.

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

Darien would likely form a corporation because he needs to raise funds to buy equipment. It is normally easier to raise funds through a corporation. A corporation is also the only form of business that provides limited liability to its owners.

Joeline will likely operate her roofing services as a proprietorship because it is the simplest and least costly to form and maintain. If she feels that she has legal exposure to lawsuits from customers, she may choose to incorporate in order to limit her liability.

A proprietorship would be the most likely form of business for Frank. It is simpler to form than a corporation and less costly. A corporation is the only form of business that provides limited liability to its owners. However, it is unlikely that incorporating the business would shield Frank from personal liability in the event of an accident. In addition, a sole proprietorship means that Frank maintains control of the company. This could also be achieved in a corporation if it is closely held, although it would make attracting investors unlikely.

Taking It Further: The corporation’s by-laws would detail who can act as an agent on behalf of the corporation. The shareholders vote to approve the by-laws. These types of decisions are usually made at the annual general meeting and determine who has signing authority to make payments from the company’s bank account and who has signing authority to enter into contracts on behalf of the corporation. Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-2A GENERAL JOURNAL

(a)

Date

Account Titles

Debit

Credit

Feb. 10

Cash (80,000 × $4) .............................. 320,000 Common Shares ............................

320,000

Cash (5,000 × $115) ............................ 575,000 Preferred Shares ............................

575,000

Mar.

Apr.

1 Land .................................................... Common Shares ............................

Jun. 20

July

Sep.

Nov. 1

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90,000 90,000

Cash (78,000 × $4.50) ......................... 351,000 Common Shares ............................

351,000

Legal Fees Expense ........................... 45,000 Common Shares ............................

45,000

Cash (10,000 × $5) .............................. 50,000 Common Shares ............................

50,000

Cash (1,000 × $117) ............................ 117,000 Preferred Shares ............................

117,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-2A (Continued) (b) Preferred Shares Date Mar. Nov.

Ref. 1 1

Debit

J1 J1

Credit 575,000 117,000

Balance 575,000 692,000

Common Shares Date

Ref.

Feb. 10 Apr. 1 June 20 July 7 Sept. 1

J1 J1 J1 J1 J1

Debit

Credit 320,000 90,000 351,000 45,000 50,000

Balance 320,000 410,000 761,000 806,000 856,000

Average per share amount for the preferred shares = $692,000 ÷ 6,000 shares = $115.33 Number of common shares = 80,000 + 22,500 + 78,000 + 10,000 + 10,000 = 200,500 shares Average per share amount for common share = $856,000 ÷ 200,500 shares = $4.27 (d) The company is authorized to issue an additional 94,000

preferred shares (100,000 shares authorized – 6,000 shares issued) and an unlimited number of common shares.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-2A (Continued)

Taking It Further: April 1 and July 7 are examples of issuing share for services or noncash assets. If Wetland was a public corporation, the transactions would still be valued at the fair value of the assets or services received. In this case, the fair value of the land received and of the service received are the only amounts the company has to value the transactions. This is typical for private companies where the shares are not widely traded and the fair value of the shares given in exchange cannot be determined. For Wetland, the journal entries would be the same.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-3A

Year Dividend Paid 1 $20,000 2 15,000 3 30,000 4 35,000

(a) (b) Noncumulative Common Cumulative Common Preferred Preferred $20,000 $ 0 $20,000 $ 0 15,000 0 15,000 0 20,000 10,000 25,000 5,000 20,000 15,000 20,000 15,000

1. Regular dividend is $4 × 5,000 = $20,000 2b. Arrears = $20,000 − $15,000 = $5,000 3b. Preferred dividend = $20,000 (regular) + $5,000 (arrears) = $25,000

Taking It Further: Common shares have voting rights which allows investors some degree of influence over the company depending on how many shares are owned. Also, if the company is successful, the common shareholders will benefit more than the preferred shares from an increase in the value of their shares.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-4A (a)

GENERAL JOURNAL

Date 2016 Jan. 10

2017 Jan. 10

Account Titles

J1 Debit

Credit

Cash Dividends—Preferred ............... 12,000 Cash................................................

12,000

Cash Dividends—Preferred*.............. 68,000 4,000 Cash Dividends—Common ............... Cash................................................

72,000

* Arrears from 2016: 2016 Dividend: (8,000 × $5) .............. $40,000 Less: Dividend paid in 2016 ............. 12,000 Current year dividend (8,000 × $5) ........... Cash Dividend to Preferred....................... Mar. 1 Preferred Shares (8,000 shares) .........528,000 Common Shares (16,000 shares).. (8,000 × $66)

$28,000 40,000 $68,000

528,000

(b) The company needs to disclose dividends in arrears of

$28,000 in 2016, in the notes to the financial statements.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-4A (Continued) (c) A preferred shareholder will usually convert preferred shares

to common shares to participate in the growth of the market value of the common shares. Since preferred shares usually have no voting rights and carry a fixed dividend amount, their market price tends to remain fairly stable and is not subject to significant growth. Shareholders that own preferred shares can choose to keep their shares and receive stable, predictable dividends, but they can also choose to participate in the growth potential of common shares through conversion. If, through conversion, the market value of the common shares exceeds the market value of the preferred shares given up in the conversion, this would be a strong motivator to the preferred shareholder to convert, particularly if the shareholder intends to sell his investment.

Taking It Further: The conversion option allows a preferred shareholder to convert their shares to common shares and to participate in the growth of the market value of the common shares. Since preferred shares usually have no voting rights and carry a fixed dividend amount, their market price tends to remain fairly stable and is not subject to significant growth. Shareholders that own preferred shares can choose to keep their shares and receive stable, predictable dividends, but they can also choose to participate in the growth potential of common shares through conversion. This additional choice and possibility for additional returns on their investment makes convertible preferred shares more attractive to investors.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-5A

(a)

GENERAL JOURNAL

Date

Account Titles

J1 Debit

2017 June 30 Cash Dividends—Common ............... Dividends Payable .........................

25,000

July

25,000

8 Dividends Payable.............................. Cash................................................

Credit

25,000

Dec. 31 Cash Dividends—Common ............... 25,000 Dividends Payable .........................

25,000

(b) ZURICH LIMITED Income Statement Year Ended December 31, 2017

Sales................................................................................. $1,650,000 Cost of goods sold......................................................... 1,225,000 Gross profit .................................................................... 425,000 Operating expenses ....................................................... 210,000 Profit from operations.................................................... 215,000 Interest revenue .................................................$12,500 Interest expense ................................................. 35,000 22,500 Profit before income tax ................................................ 192,500 Income tax expense ($192,500 × 20%) .......................... 38,500 Profit ............................................................................... $154,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-5A (Continued) (c) ZURICH LIMITED Statement of Retained Earnings Year Ended December 31, 2017

Retained earnings, January 1.............................. Add: Profit ............................................................ Less: Cash dividends declared* ......................... Retained earnings, December 31 ........................

$ 550,000 154,000 704,000 50,000 $654,000

* $25,000 + $25,000

Taking It Further: A statement of retained earnings shows increases from profit and decreases from distributions to owners through dividends. It does not show investments by owners through the sale of shares or repurchases of shares. In contrast, a statement of owner’s equity shows investments by owner in addition to increases from profit and distributions to owners through withdrawals.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-6A (a) MEMPHIS LTD. Income Statement Year Ended October 31, 2017 Service revenue.............................................................. Operating expenses: Depreciation expense................................... $15,250 Insurance expense .................................... 5,100 Rent expense ............................................. 38,800 Salaries expense.......................................... 175,750 Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ....................................................... Profit ...............................................................................

$385,000

234,900 150,100 1,400 148,700 29,740 $118,960

(b) MEMPHIS LTD. Statement of Retained Earnings Year Ended October 31, 2017 Retained earnings, November 1 .......................... Add: Profit ............................................................ Less: Cash dividends – common........................ Retained earnings, October 31............................

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$ 610,000 118,960 728,960 40,000 $688,960

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-6A (Continued) GENERAL JOURNAL

Account Titles

Debit

Credit

Oct. 31 Service Revenue ................................. 385,000 Income Summary ...........................

385,000

31 Income Summary ................................266,040 Depreciation Expense ................... Income Tax Expense ..................... Insurance Expense ........................ Interest Expense ............................ Rent Expense ................................. Salaries Expense ...........................

15,250 29,740 5,100 1,400 38,800 175,750

31 Income Summary ................................118,960 Retained Earnings .........................

118,960

31 Retained Earnings .................................40,000 Cash Dividends—Common ...........

40,000

(d) Income Summary Date Oct. 31 31 31

Ref. Closing entry Closing entry Closing entry

Debit

J1 J1 J1

266,040 118,960

Ref.

Debit

Credit

Balance

385,000

385,000 118,960 0

Retained Earnings Date Oct. 31 31 31

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Balance Closing entry Closing entry

J1 J1 J1

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40,000

Credit

Balance

118,960

610,000 728,960 688,960

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-6A (Continued)

Taking It Further: If Memphis Ltd. had been following IFRS instead of ASPE, we would prepare a Statement of Changes in Shareholders’ Equity instead of a Statement of Retained Earnings. All other statements would remain the same.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-7A (a)

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Credit

Jan.

2 Cash ................................................. 5,000,000 Preferred Shares ............................ 5,000,000

Apr.

1 Cash Dividends—Preferred................ 100,000 Cash (100,000 × $4  4)..................

100,000

1 Cash Dividends—Preferred................ 100,000 Cash................................................

100,000

Aug. 12 Cash (100,000 × $1.70) ....................... 170,000 Common Shares ............................

170,000

July

Oct.

1 Cash Dividends—Preferred ............... 100,000 Cash Dividends—Common* .............. 275,000 Cash................................................ (1,000,000 + 100,000) × $0.25 = $275,000

375,000

Cash Dividends – Preferred ............... 100,000 Cash .............................................

100,000

Dec. 31 Retained Earnings .............................. 100,000 Income Summary ...........................

100,000

Dec. 31 Retained Earnings .............................. 675,000 Cash Dividends—Preferred........... Cash Dividends—Common ...........

400,000 275,000

Dec. 31

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-7A (Continued) (b) Preferred Shares Date Jan.

Ref. 2

Debit

Credit

Balance

5,000,000

Credit

Balance

170,000

1,500,000 1,670,000

Credit

Balance

400,000

100,000 200,000 300,000 400,000 0

Credit

Balance

275,000

275,000 0

Credit

Balance

Common Shares Date Jan. 1 Aug. 12

Ref. Balance

Debit

 J1

Cash Dividends—Preferred Date

Ref.

Debit

Apr. 1 July 1 Oct. 1 Dec. 31 Dec. 31

J1 J1 J1 J1 J1

100,000 100,000 100,000 100,000

Date

Ref.

Debit

Oct. 1 Dec. 31

J1 J1

275,000

Ref.

Debit

Closing entry

Cash Dividends—Common

Closing entry

Retained Earnings Date Jan. 1 Dec. 31 31

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Balance Closing entry Closing entry

 J1 100,000 J1 675,000

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1,800,000 1,700,000 1,025,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-7A (Continued) (c) SCHIPPER LTD. Balance Sheet (Partial) December 31, 2017 Shareholders' equity Share capital* $4 noncumulative preferred shares, 100,000 issued ................................................. Common shares, 1,100,000** issued .................. Total share capital................................................ Retained earnings..................................................... Total shareholders’ equity ..............................

$5,000,000 1,670,000 6,670,000 1,025,000 $7,695,000

* Under ASPE, it is not necessary to show the number of authorized shares. ** 1,000,000 + 100,000 = 1,100,000 common shares No disclosure of arrears is required since the preferred shares are noncumulative.

Taking It Further: The conditions to declare and pay dividends include (1) having sufficient cash to pay for ongoing operations and not make the company insolvent by paying a dividend; (2) maintain legal capital; and (3) a decision by the board of directors of the corporation. If all of these conditions are met, the company is allowed to declare and pay dividends even though it generated a loss in the current year.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-8A (a)

GENERAL JOURNAL

Date

Account Titles

Feb. 28

J1 Debit

Cash ................................................. Preferred Shares ..........................

Credit

275,000 275,000

Apr. 12 Cash ................................................. 3,200,000 Common Shares .......................... 3,200,000 May 25 Land ................................................. Common Shares ..........................

75,000

Jan.

Cash Dividends—Preferred ............ Cash [(10,000 + 5,000) × $2.50]....

37,500

Retained Earnings ........................... Income Summary .........................

50,000

Jan. 31 Retained Earnings ........................... Cash Dividends—Preferred.........

37,500

Jan. 31

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75,000

37,500

50,000 37,500

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-8A (Continued) (b) Preferred Shares Date Feb. 1 Feb. 28

Ref.

Debit

Credit

 J1

Balance

475,000 275,000 750,000

Common Shares Date Feb. 1 Apr. 12 May 25

Ref. Balance

Debit

 J1 J1

Credit

Balance

1,050,000 3,200,000 4,250,000 75,000 4,325,000

Cash Dividends—Preferred Date

Ref.

Debit

Jan. 1 Jan. 31

J1 J1

37,500

Closing entry

Credit

Balance

37,500

37,500 0

Retained Earnings Date

Ref.

Feb. 1 Balance Jan. 31 Closing Entry Jan. 31 Closing Entry

 J1 J1

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Debit 50,000 37,500

Credit

Balance 700,000 650,000 612,500

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-8A (Continued) (c) CATTRALL CORPORATION Balance Sheet (Partial) January 31, 2017 Shareholders' equity Contributed capital Share capital* $5 cumulative preferred shares, 15,000** issued $ 750,000 Common shares, 275,000*** issued ...................... 4,325,000 Total share capital ....................................................5,075,000 Retained earnings ....................................................... 612,500 Total shareholders’ equity .................................................... $5,687,500 * Under ASPE, it is not necessary to show the number of authorized shares. ** 10,000 + 5,000 = 15,000 preferred shares *** 70,000 + 200,000 + 5,000 = 275,000 common shares Dividends of $37,500 [15,000 × ($5 – $2.50)] are in arrears at January 31, 2017. Taking It Further: Under ASPE, shares issued in exchange for noncash assets are recorded at the fair value of whatever can more reasonably be determined — the fair value of the assets or the fair value of the shares. For a company applying ASPE, the fair value of the shares given in exchange can be particularly difficult to determine if there are no recent share transactions to provide a reliable fair value of the shares. For companies applying ASPE, the fair value of the noncash asset or service received can be used to value the transaction. The challenge remains of determining how many shares to issue if a fair value per share cannot be determined. This will usually be resolved by negotiation between the company and the supplier of the noncash asset or service. Solutions Manual .

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PROBLEM 13-9A CHOKE CHERRY LTD. Income Statement Year Ended December 31, 2017 Sales ............................................................................... Cost of goods sold ......................................................... Gross profit..................................................................... Operating expenses: Depreciation expense ....................................$20,000 Insurance expense ........................................... 8,200 Rent expense ...................................................32,600 Salaries expense ...........................................185,000 Supplies expense......................................... 12,500 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................

$515,000 159,000 356,000

258,300 97,700 1,800 95,900 14,385 $ 81,515

CHOKE CHERRY LTD. Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1.............................. Add: Profit............................................................. Less: Preferred share dividends ........................ $4,000 Common share dividends ........................ 50,000 Retained earnings, December 31 ........................

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$ 73,000 81,515 154,515 54,000 $100,515

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-9A (Continued) CHOKE CHERRY LTD. Balance Sheet December 31, 2017 Assets Current assets Cash............................................................................. $ 28,000 Inventory ..................................................................... 26,500 Supplies .......................................................................... 5,000 Total current assets ............................................... 59,500 Property, plant, and equipment Equipment .................................................... $300,000 Accumulated depreciation .......................... (65,000) Total property, plant, and equipment ...................... 235,000 Total assets .......................................................... $294,500 Liabilities and Shareholders’ Equity Current liabilities Accounts payable .......................................................... $ 34,000 Income tax payable..................................................... 8,985 Unearned revenue ...................................................... 21,000 Current portion of notes payable ................................. 12,000 Total current liabilities ........................................... 75,985 Long-term debt Notes payable, net of current portion .......................... 18,000 Total liabilities ........................................................... 93,985 Shareholders’ equity Share capital* $4 noncumulative preferred shares, 1,000 issued 40,000 Common shares, 120,000 issued .......................... 60,000 Total share capital.................................................. 100,000 Retained earnings ......................................................... 100,515 Total shareholders’ equity .............................................. 200,515 Total liabilities and shareholders’ equity ............. $294,500 * Under ASPE, it is not required to show the number authorized.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-9A (Continued)

Taking It Further: Withdrawals by partners are based on mutually agreed amounts amongst the partners and on the partnership’s and the partners’ cash needs for the year. Dividends are paid to the shareholders of the corporation on a pro-rata basis based on the number of shares within a class of shares. For preferred shares, the dividend amount is usually fixed and preferred shareholders cannot receive more than their specified dividend rate. Dividends must be approved by the corporation’s board of directors before they can be paid out. Corporations must also abide by the Corporations Act in paying out dividends to ensure the company remains solvent and to ensure there is a positive balance in retained earnings. Because withdrawals are a return to a partner or owner of his investment or of profit on which he has been taxed personally, the amount of a withdrawal has no tax consequences. On the other hand, dividends are generally taxable to those who receive them as income.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-10A (a) NORTHWOOD ARCHITECTS LTD. Statement of Retained Earnings Year Ended March 31, 2017

Retained earnings, April 1 ................................... Add: Profit............................................................. Less: Preferred share dividends ........................ $4,500 Common share dividends ........................ 40,000 Retained earnings, March 31 ...............................

$ 64,800 59,590 * 124,390 44,500 $ 79,890

* Calculation of profit: Consulting revenue ........................................................... $404,500 Operating expenses: Depreciation expense .................................. $ 11,825 Insurance expense ..................................... 6,550 Rent expense .................................................. 35,800 Salaries expense ........................................... 245,400 Supplies expense......................................... 25,800 325,375 Profit from operations.................................................... 79,125 Other expenses: Interest expense ........................................................ 3,000 Profit before income tax ................................................ 76,125 Income tax expense ....................................................... 16,535 Profit................................................................................ $ 59,590

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-10A (Continued) (a) (Continued) NORTHWOOD ARCHITECTS LTD. Balance Sheet (partial) March 31, 2017 Shareholders’ equity Share capital* $3 cumulative preferred shares, 1,500 issued ... $ 56,250 Common shares, 75,000 issued ............................ 75,000 Total share capital.................................................. 131,250 Retained earnings.................................................... 79,890 Total shareholders’ equity.................................. $ 211,140 * Under ASPE, it is not required to show the number authorized. (b) Return on equity = Profit ÷ Average shareholders’ equity $59,590 ($196,050* + $211,140) ÷ 2

= 29.27%

* $196,050 = Beginning Retained Earnings + Share Capital = $64,800 + $131,250 Taking It Further: Retained earnings represents the amount of past earnings that can be distributed to owners in the form of dividends. Share capital represents legal capital that cannot be distributed to shareholders. It must remain for the protection of corporate creditors.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-11A (a)

2014 Canadian Pacific Railway Limited Return on assets 8.76% (1) Return on equity 23.23% (3)

5.51% (2) 14.35% (4)

Canadian National Railway Company Return on assets 10.22% (5) Return on equity 23.97% (7)

9.19% (6) 21.79% (8)

(1) (2) (3) (4) (5) (6) (7) (8)

2013

8.76% = $1,476 ÷ (($16,640 + $17,060) ÷ 2) 5.51% = $875 ÷ (($17,060 + $14,727) ÷ 2) 23.23% = $1,476 ÷ (($5,610 + $7,097) ÷ 2) 14.35% = $875 ÷ (($7,097 + $5,097) ÷ 2) 10.22% = $3,167 ÷ (($31,792 + $30,163) ÷ 2) 9.19% = $2,612 ÷ (($30,163 + $26,659) ÷ 2) 23.97% = $3,167 ÷ (($13,470 + $12,953) ÷ 2) 21.79% = $2,612 ÷ (($12,953 + $11,018) ÷ 2)

The return on assets and return on equity ratios of both companies have both improved substantially.

(b) Canadian Pacific`s return on assets and return on equity

ratios both underperformed compared to those of Canadian National in 2014 and 2013.

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PROBLEM 13-11A (Continued) (c) Both Canadian Pacific and Canadian National significantly

exceeded the 5-year industry average for return on equity.

Taking It Further: Comparisons can be made using intracompany (comparing within a company with prior years), intercompany (comparing with a competing company), and industry averages. In evaluating ratios, different bases of comparison allow the user to extract additional information. Intracompany comparison allows the user to determine significant trends in financial relationships over time. Intercompany comparison allows users to evaluate a company`s competitive position. Comparison with industry averages allows users to examine the performance of a company within its industry. Using Canadian Pacific and Canadian National results, the intracompany comparison allows us to examine the change in the relationship of profit to shareholders’ equity and assets from 2013 to 2014 and determine whether improvement or deterioration is occurring. The intercompany comparison allows us to examine each company’s performance by comparison to its competitor. In this case, the comparison shows that Canadian National’s performance exceeds that of Canadian Pacific. Finally, the industry average comparison allows us to compare how each company is performing within its industry.

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PROBLEM 13-12A (a) Jan.

Jan.

1 Cash ................................................. Common Shares .......................... 2

150,000 150,000

Cash (30,000 x $40) ......................... 1,200,000 Preferred Shares .......................... 1,200,000

Dec. 1 Cash Dividends—Preferred*........... Cash Dividends—Common ............ Dividends Payable ....................... *(30,000 × $4)

120,000 105,000 225,000

(b) ANNORA INC. Income Statement (partial) Year Ended December 31, 2017 Profit before income tax ($915,000 - $610,000) ............ Income tax expense (15% × $305,000) .......................... Profit................................................................................

Dec. 31

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Income Tax Expense ....................... Income Tax Payable..................... ($45,750 – $40,000)

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$305,000 45,750 $259,250

5,750 5,750

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PROBLEM 13-12A (Continued) (c) ANNORA INC. Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1.............................. Add: Profit............................................................. Less: Preferred share dividends .................... $120,000 Common share dividends ...................... 105,000 Retained earnings, December 31 ........................

0 259,250 259,250

225,000 $ 34,250

ANNORA INC. Balance Sheet (partial) December 31, 2017 Shareholders’ equity Share capital* $4 cumulative preferred shares, 30,000 issued $1,200,000 Common shares, 300,000 issued ........................... 150,000 Total share capital ....................................................1,350,000 Retained earnings ......................................................... 34,250 Total shareholders’ equity.......................................... $1,384,250 * Under ASPE, it is not required to show the number of shares authorized. Taking It Further: Common shareholders are referred to as “residual owners” because once the claims of the creditors and the preferred shareholders are satisfied, the common shareholders own whatever is left.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-1B 1.

Limited liability of shareholders. If the company was operated as a sole proprietorship or a partnership, Kevin might have to satisfy the business liabilities from his personal assets if there were not sufficient assets in the business to pay the lawsuit claim.

Separate legal existence. Salik can negotiate a borrowing agreement on behalf of the corporation as an agent of the corporation. If the business was operated as a sole proprietorship or a partnership, only the business owner or partner could negotiate a borrowing agreement on behalf of the company since there is no separate legal existence.

Continuous life and transferable ownership rights. The corporation can continue with Marion’s daughter as President since the business is a separate legal entity. Marion can also transfer her ownership in the corporation by selling or bequeathing her shares to her daughter. If the business operated as a sole proprietorship or partnership, the business ceases to exist when Marion dies.

Ability to acquire capital. The division of ownership into shares and the possibility of selling shares to the public through a public offering allow a corporation to acquire significant amounts of capital. A partnership or sole proprietorship is not as attractive to investors and does not allow business owners to attract significant amounts of investment capital.

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PROBLEM 13-1B (Continued)

Taking It Further: Investors in the secondary market want to limit their exposure to liability risk. The characteristic of limited liability means that the most investors can lose is the amount that they have paid to purchase their shares. Their personal assets are not at risk from liabilities of the corporation. This characteristic makes investments in corporations very attractive to investors.

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PROBLEM 13-2B (a)

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Jan. 10 Cash (100,000 × $2) ........................ Common Shares ........................

200,000

Mar.

1 Cash (10,000 × $42) ........................ Preferred Shares ........................

420,000

Mar. 31 Cash (75,000 × $3) .......................... Common Shares ........................

225,000

Apr.

3 Land ................................................ Common Shares ........................

74,000

July 24 Cash ............................................... Equipment....................................... Common Shares ........................

60,000 12,000

Nov.

96,000

1 Cash (2,000 × $48) .......................... Preferred Shares ........................

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Credit

200,000

420,000

225,000

74,000

72,000 96,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-2B (Continued) (b) Preferred Shares Date Mar. Nov.

Ref. 1 1

Debit

J1 J1

Credit

Balance

420,000 420,000 96,000 516,000

Common Shares Date

Ref.

Jan. 10 Mar. 31 Apr. 3 July 24

J1 J1 J1 J1

Debit

Credit

Balance

200,000 225,000 74,000 72,000

200,000 425,000 499,000 571,000

(c) Number of preferred shares = 10,000 + 2,000 = 12,000 shares Average per share amount for preferred shares = $516,000 ÷ 12,000 shares = $43.00 Number of common shares = 100,000 + 75,000 + 25,000 + 20,500 = 220,500 shares Average per share amount common share = $571,000 ÷ 220,500 shares = $2.59 (d) Yes. Features can be added to preferred shares to make them more attractive to potential investors. The cumulative feature assures investors that dividends not currently declared may be paid out at some point in the future. With noncumulative preferred shares, if no dividends are declared, the dividend entitlement lapses and is lost to the investor. Since the cumulative feature makes the shares more attractive, it also results in a higher price for the shares. Solutions Manual .

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PROBLEM 13-2B (Continued)

Taking It Further: April 3 and July 24 are examples of issuing share for services or noncash assets. If Highland was a public corporation, the transactions would still be valued at the fair value of the assets or services received. In this case, the fair value of the land received and of the equipment received are the only amounts the company has to value the transactions. This is typical for private companies where the shares are not widely traded and the fair value of the shares given in exchange cannot be determined. For Highland, the journal entries would be the same.

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PROBLEM 13-3B (a)

(b)

Dividend Noncumulative Cumulative Year Paid Preferred Common Preferred Common 1 $15,000 $15,000 $ 0 $15,000 $ 0 2 12,000 12,000 0 12,000 0 3 27,000 15,000 12,000 18,000 9,000 4 35,000 15,000 20,000 15,000 20,000 1. Regular dividend is $5 × 3,000 = $15,000 2b. Arrears = $15,000 − $12,000 = $3,000 3b. Preferred dividend = $15,000 (regular) + $3,000 (arrears) = $18,000

Taking It Further: Common shares have voting rights which allow investors some degree of influence over the company depending on how many shares are owned. Also, if the company is successful, the common shareholders will benefit more than the preferred shareholders from an increase in the value of their shares.

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PROBLEM 13-4B (a) Date

GENERAL JOURNAL Account Titles

J1 Debit

2016 Jan. 10 Cash Dividends—Preferred ............... Cash................................................

12,000

2017 Jan. 10 Cash Dividends—Preferred*.............. Cash Dividends—Common ............... Cash................................................

28,000 4,000

Credit

12,000

* Arrears from 2016: 2016 Dividend: (5,000 × $4) ............. $20,000 Less Dividend paid in 2016 ............. 12,000 Current year dividend (5,000 × $4) ........... Cash Dividend to Preferred....................... Mar. 1 Preferred Shares (5,000 shares) .........400,000 Common Shares (20,000 shares).. (5,000 × $80)

32,000

$ 8,000 20,000 $28,000

400,000

(b) The company needs to disclose dividends in arrears of $8,000 in 2016, in the notes to the financial statements.

(c) Number of common shares before conversion Number of commons shares from conversion 5,000 preferred X 4 ....................................... Number of common shares issued after conversion

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10,000 20,000 30,000

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PROBLEM 13-4B (Continued)

Taking It Further: Retractable preferred shares are shares that give the shareholder the right to sell the shares to the issuer at specified future dates and prices. Convertible preferred shares are preferred shares the shareholder can convert into common shares at a specified ratio. From the perspective of the company, retractable shares represent an obligation to buy back shares whose market value is lower than the retractable price. This type of transaction causes cash and shareholders’ equity to decrease. On the other hand, at a conversion of preferred shares, there is no cash involved. Total shareholders’ equity remains the same.

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PROBLEM 13-5B (a)

GENERAL JOURNAL

Date

Account Titles

Debit

2014 June 26 Cash Dividends—Common ............... Dividends Payable .........................

80,000

July

80,000

9 Dividends Payable.............................. Cash................................................

Credit

80,000

Dec. 26 Cash Dividends—Common ............... 80,000 Dividends Payable .........................

80,000 80,000

HYPERCHIP LIMITED Income Statement Year Ended December 31, 2017

Net sales .......................................................................... $1,425,000 Cost of goods sold......................................................... 950,000 Gross profit .................................................................... 475,000 Operating expenses ....................................................... 270,000 Profit from operations.................................................... 205,000 Other revenues ...................................................$45,000 Other expenses .................................................. 30,000 15,000 Profit before income tax ................................................ 220,000 Income tax expense ($220,000 × 20%) .......................... 44,000 Profit ............................................................................... $ 176,000

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PROBLEM 13-5B (Continued) (b) HYPERCHIP LIMITED Statement of Retained Earnings Year Ended December 31, 2017

Retained earnings, January 1................................. Add: Profit ............................................................... Less: Cash dividends declared * ........................... Retained earnings, December 31 ...........................

$1,150,000 176,000 1,326,000 160,000 $1,166,000

* $80,000 + $80,000 Taking It Further: A statement of retained earnings would be replaced with a statement of changes in shareholders’ equity if Hyperchip were to follow IFRS.

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PROBLEM 13-6B (a) HAYDEN INC. Income Statement Year Ended November 30, 2017 Service revenue.............................................................. Operating expenses: Depreciation expense ................................... $51,650 Insurance expense .................................... 10,350 Rent expense ............................................. 43,500 Salaries expense.......................................... 220,000 Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................

$425,000

325,500 99,500 7,500 92,000 13,800 $ 78,200

(b) HAYDEN INC. Statement of Retained Earnings Year Ended November 30, 2017 Retained earnings, December 1 .......................... Add: Profit............................................................. Less: Cash dividends .......................................... Retained earnings, November 30 ........................

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$ 339,500 78,200 417,700 120,000 $ 297,700

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PROBLEM 13-6B (Continued) GENERAL JOURNAL

Account Titles

Debit

Credit

Nov. 30 Service Revenue................................. 425,000 Income Summary ...........................

425,000

30 Income Summary ............................... 346,800 Depreciation Expense ................... Income Tax Expense ..................... Insurance Expense ........................ Interest Expense ............................ Rent Expense ................................. Salaries Expense ...........................

51,650 13,800 10,350 7,500 43,500 220,000

30 Income Summary ............................... 78,200 Retained Earnings .........................

78,200

30 Retained Earnings .............................. 120,000 Cash Dividends—Common ...........

120,000

(d) Income Summary Date Nov. 30 30 30

Ref. Closing entry Closing entry Closing entry

Debit

J1 J1 J1

346,800 78,200

Ref.

Debit

Credit

Balance

425,000

425,000 78,200 0

Retained Earnings Date Nov. 30 30 30

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Balance Closing entry Closing entry

J1 J1 J1

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Credit 78,200

120,000

Balance 339,500 417,700 297,700

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Accounting Principles, Seventh Canadian Edition

PROBLEM 13-6B (Continued)

Taking It Further: The calculation of income tax expense involves the final amounts for the remainder of the income statement, so the calculation must be prepared after all adjustments have been considered. The company also has to calculate the difference between the income tax expense and the instalments remitted earlier in the year. In addition, certain opportunities for tax planning exist and managers need to calculate the profit before income tax before finalizing the income tax expense for the year.

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PROBLEM 13-7B (a)

GENERAL JOURNAL

Date Jan.

Account Titles 2

Mar. 31

Apr. 18

June 30

Sep. 30

Dec. 31

Solutions Manual .

J1 Debit

Credit

Cash (100,000 × $66) ...................... 6,600,000 Preferred Shares ......................... 6,600,000 Cash Dividends—Preferred ........... Cash ............................................. (100,000 × $6  4)

150,000

Cash (250,000 × $1.30) ................... Common Shares .........................

325,000

Cash Dividends—Preferred ........... Cash .............................................

150,000

Cash Dividends—Preferred ........... Cash .............................................

150,000

Cash Dividends—Preferred ........... Cash .............................................

150,000

Income Summary ........................... Retained Earnings ......................

160,000

Retained Earnings .......................... Cash Dividends—Preferred........

600,000

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150,000

325,000

150,000

160,000 600,000

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PROBLEM 13-7B (Continued) (b) Preferred Shares Date Jan.

Ref. 2

Debit

Credit

Balance

6,600,000 6,600,000

Common Shares Date Jan. 1 Apr. 18

Ref. Balance

Debit

 J1

Credit

Balance

325,000

1,650,000 1,975,000

Credit

Balance

Cash Dividends—Preferred Date

Ref.

Mar. 31 June 30 Sep. 30 Dec. 31

J1 150,000 J1 150,000 J1 150,000 J1

Closing entry

Debit

150,000 300,000 450,000 450,000 0

Retained Earnings Date Jan. 1 Balance Dec. 31 Closing entry 31 Closing entry

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Ref.  J1 J1

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Debit

600,000

Credit

Balance 550,000 160,000 560,000 110,000

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PROBLEM 13-7B (Continued) (c) CONWAY LTD. Balance Sheet (Partial) December 31, 2017 Shareholders' equity Share capital* $6 noncumulative preferred shares, 100,000 issued ............................................. Common shares, 1,750,000** issued ............... Total share capital ....................................... Retained earnings................................................. Total shareholders' equity ........................................

$6,600,000 1,975,000 8,575,000 110,000 $8,685,000

* Under ASPE, it is not required to show number of shares authorized. ** 1,500,000 + 250,000 = 1,750,000 shares No disclosure of arrears is required since the preferred shares are noncumulative.

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PROBLEM 13-8B (a)

GENERAL JOURNAL

Date Jan.

Account Titles

J1 Debit

1 Cash ................................................. Preferred Shares ..........................

600,000

14 Cash ................................................. Common Shares ..........................

560,000

June 30 Cash Dividend—Preferred Shares . Cash .............................................. (8,000 + 10,000) × ($4.00 ÷ 2)

36,000

Apr.

600,000

560,000 36,000

Aug. 22 Building .................................................150,000 Common Shares .......................... Dec

31 Income Summary ............................ Retained Earnings........................

582,000

31 Retained Earnings ........................... Cash Dividend—Preferred Shares

36,000

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Credit

150,000

582,000 36,000

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PROBLEM 13-8B (Continued) (b) Preferred Shares Date Jan. Jan.

Ref. 1 1

Balance

Debit

 J1

Credit

Balance

440,000 600,000 1,040,000

Common Shares Date Jan. 1 Apr. 14 Aug. 22

Ref. Balance

Debit

 J1 J1

Credit

Balance

1,050,000 560,000 1,610,000 150,000 1,760,000

Cash Dividends—Preferred Date

Ref.

Debit

June 30 Dec. 31

J1 J1

36,000

Closing entry

Credit

Balance

36,000

36,000 0

Retained Earnings Date Jan. 1 Dec. 31 Dec. 31

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Balance Closing Entry Closing Entry

Ref.

Debit

Credit

Balance

 J1 J1

800,000 582,000 1,382,000 36,000 1,346,000

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PROBLEM 13-8B (Continued) (c)

LARGENT CORPORATION Balance Sheet (Partial) December 31, 2017

Shareholders' equity Share capital* Preferred shares, $4 cumulative, 18,000** issued ............................................... $1,040,000 Common shares, 120,000*** issued .................... 1,760,000 Total share capital .................................................... 2,800,000 Retained earnings..................................................... 1,346,000 Total shareholders' equity ............................................ $4,146,000 * Under ASPE, it is not necessary to show number of authorized shares. ** 8,000 + 10,000 = 18,000 shares *** 70,000 + 40,000 + 10,000 = 120,000 shares Dividends of $36,000 [18,000 × ($4 ÷ 2)] are in arrears.

Taking It Further: Under ASPE, shares issued in exchange for noncash assets are recorded at the fair value of whatever can more reasonably be determined — the fair value of the assets or the fair value of the shares. For a company applying ASPE, the fair value of the shares given in exchange can be particularly difficult to determine if there are no recent share transactions to provide a reliable fair value of the shares. For companies applying ASPE, the fair value of the noncash asset or service received can be used to value the transaction. The remaining challenge is determining how many shares to issue if a fair value per share cannot be determined. This will usually be resolved by negotiation between the company and the supplier of the noncash asset or service.

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PROBLEM 13-9B RUPERT ENGINEERING CORP. Income Statement Year Ended March 31, 2017 Consulting revenue ........................................................ Operating expenses: Depreciation expense ...................................$ 14,800 Rent expense ...................................................36,000 Salaries expense ...........................................140,300 Supplies expense......................................... 15,900 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................

$315,500

207,000 108,500 2,400 106,100 21,200 $ 84,900

RUPERT ENGINEERING CORP. Statement of Retained Earnings Year Ended March 31, 2017 Retained earnings, April 1 ................................... Add: Profit.............................................................

$ 65,000 84,900 149,900

Less: Preferred share dividends .......................... $ 1,875 Common share dividends .......................... 53,125 55,000 Retained earnings, March 31 .............................. $ 94,900

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PROBLEM 13-9B (Continued)

RUPERT ENGINEERING CORP. Balance Sheet March 31, 2017 Assets Current assets Cash ..................................................................... Accounts receivable............................................. Supplies ................................................................ Total current assets....................................... Property, plant, and equipment Equipment .............................................. $148,000 Less: Accumulated depreciation .......... (29,600) Total property, plant, and equipment Total assets.................................................... Liabilities and Shareholders’ Equity Current liabilities Accounts payable................................................. Income tax payable .............................................. Unearned revenue ................................................ Current portion of notes payable ........................ Total current liabilities .................................. Long-term debt Long-term notes payable ..................................... Total liabilities................................................ Shareholders’ equity Share capital* $3.75 cumulative preferred shares, 500 issued Common shares, 35,000 issued ......................... Total share capital ................................................... Retained earnings ...................................................... Total shareholders’ equity ........................................... Total liabilities and shareholders’ equity ..........

$ 65,400 31,150 7,300 103,850

118,400 $222,250

$ 14,200 1,900 2,500 10,000 28,600 30,000 58,600 18,750 50,000 68,750 94,900 163,650 $222,250

* Under ASPE, it is not required to show the number authorized. Solutions Manual .

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PROBLEM 13-9B (Continued)

Taking It Further: The owner’s capital for proprietorships and retained earnings for corporations both track the cumulative profits net of distributions to owners. However, the owner’s capital account also contains investments by owners. This information is contained in the share capital account for corporations. In addition, corporate owners can choose to receive salaries which are expenses on the income statement as well as dividends that are closed directly to retained earnings. In a sole proprietorship, payments to the owner consist only of drawings that are closed directly to the owner’s capital account. The capital account of a sole proprietor or partner is an accumulation of profit that has not been taxed, plus any investments, less any drawings. (The profit is taxed in the hands of the proprietor.) Transactions flowing through the retained earnings account such as dividends and share repurchases must abide by the Business Corporations Act, whereas there is no such legislation for transactions flowing through the owner’s capital account.

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PROBLEM 13-10B CARLOTTA’S CAKES INC. Income Statement Year Ended May 31, 2017 Sales revenue ................................................................. Cost of goods sold ......................................................... Gross profit..................................................................... Operating expenses: Depreciation expense ....................................$42,000 Insurance expense ........................................... 7,500 Rent expense ...................................................24,500 Salaries expense..............................................67,800 Supplies expense........................................... 5,875 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................

$504,500 277,475 227,025

147,675 79,350 4,500 74,850 11,230 $ 63,620

CARLOTTA’S CAKES INC. Statement of Retained Earnings Year Ended May 31, 2017 Retained earnings, April 1 ................................... Add: Profit............................................................. Less: Preferred share dividends ........................ $7,500 Common share dividends ........................ 50,000 Retained earnings, May 31 ..................................

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$ 73,000 63,620 136,620 57,500 $ 79,120

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PROBLEM 13-10B (Continued) CARLOTTA’S CAKES INC. Balance Sheet May 31, 2017 Assets Current assets Cash ......................................................................... $ 20,600 Accounts receivable ................................................ 15,300 Inventory .................................................................. 70,220 Total current assets ............................................ 106,120 Property, plant, and equipment: Equipment .............................................. $420,000 Less: Accumulated depreciation .......... (126,000) Total property, plant, and equipment .. ............. 294,000 Total assets .............................................................. $400,120 Liabilities and Shareholders’ Equity Current liabilities Accounts payable .................................................... Dividend payable ..................................................... Total current liabilities ........................................ Long-term note payable............................................... Total liabilities ..................................................... Shareholders’ equity Share capital* $3 cumulative preferred shares, 5,000 issued .. Common shares, 10,000 issued ......................... Total share capital ................................................... Retained earnings ...................................................... Total shareholders’ equity ........................................... Total liabilities and shareholders’ equity ..........

$ 38,500 7,500 46,000 75,000 121,000 150,000 50,000 200,000 79,120 279,120 $400,120

* Under ASPE, it is not required to show the number authorized.

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PROBLEM 13-10B (Continued)

Taking It Further: Management may feel pressured to report positive financial performance results even though positive financial performance may not reflect the economic reality of a company. This presents an ethical conflict for managers – they may be able to find ways to improve the reported results through the use of adjustments and manipulation but managers must also be aware of their responsibility to report financial information to reflect the economic reality of a company. Managers should also consider both internal and external stakeholders that will be affected by reported results. Managers should always put their responsibility to faithfully represent information above internal pressures.

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PROBLEM 13-11B (a)

2014

2013

Husky Energy Inc. Return on assets Return on equity

3.32% (1) 6.19% (3)

5.08% (2) 9.32% (4)

Suncor Energy Inc. Return on assets Return on equity

3.42% (5) 6.52% (7)

5.06% (6) 9.73% (8)

(1) (2) (3) (4) (5) (6) (7) (8)

3.32% = $1,258 ÷ (($38,848 + $36,904) ÷ 2) 5.08% = $1,829 ÷ (($36,904 + $35,161) ÷ 2) 6.19% = $1,258 ÷ (($20,575 + $20,078) ÷ 2) 9.32% = $1,829 ÷ (($20,078 + $19,161) ÷ 2) 3.42% = $2,699 ÷ (($79,671 + $78,315) ÷ 2) 5.06% = $3,911 ÷ (($78,315 + $76,401) ÷ 2) 6.52% = $2,699 ÷ (($41,603 + $41,180) ÷ 2) 9.73% = $3,911 ÷ (($41,180 + $39,215) ÷ 2)

The return on assets and return on equity ratios of both companies have deteriorated significantly from 2013 to 2014.

(b) Husky Energy`s return on assets and return on equity

ratios both underperformed slightly compared to those of Suncor Energy in 2014. In 2013, return on assets was essentially identical while the return on equity was slightly ahead for Suncor Energy compared to Husky.

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PROBLEM 13-11B (Continued) (c) Both companies underperformed in comparison to the 5-

year industry average for return on equity by a significant margin.

Taking It Further: Comparisons can be made using intracompany (comparing within a company over time), intercompany (comparing with a competing company), and industry averages. In evaluating ratios, different bases of comparison allow the user to extract additional information. Intracompany comparisons allow the user to determine significant trends in financial relationships over time. Intercompany comparisons allow users to evaluate a company`s competitive position. Comparison with industry averages allows users to examine the performance of a company within its industry. Using Husky Energy and Suncor Energy results, the intracompany comparison allows us to examine the change in the relationship of profit to shareholders’ equity and assets from 2013 to 2014 and determine whether an improvement or deterioration is occurring. In this case, the performance of both companies deteriorated significantly. The intercompany comparison allows us to examine each company`s performance by comparison to its competitor. In this case, the comparison allows us to note that Husky’s deterioration is very similar to Suncor’s. Finally, the industry average comparison allows us to compare how each firm is performing within its industry and to note that both companies underperform the industry.

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PROBLEM 13-12B (a) Jan.

Jan.

Dec. 10

Cash ................................................. Common Shares ..........................

60,000

Cash (1,000 × $62.50) ...................... Preferred Shares ..........................

62,500

Cash Dividends—Preferred*........... Cash Dividends—Common ............ Dividends Payable ....................... *(1,000 × $5.00)

5,000 12,000

60,000

62,500

17,000

(b) NYGREN CORPORATION Income Statement Year Ended December 31, 2017 Consulting revenue ($268,000 + $22,000) ..................... Operating expenses: Salaries expense ($164,000 + $4,200) ......... $168,200 Rent expense ...................................................42,000 Office expense .................................................12,000 Depreciation expense .................................. 13,000 Profit from operations before income tax .................... Income tax expense (15% × $54,800) ............................ Profit................................................................................

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$290,000

235,200 54,800 8,220 $ 46,580

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PROBLEM 13-12B (Continued) (b) (Continued) NYGREN CORPORATION Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1.............................. Add: Profit............................................................. Less: Preferred share dividends ........................ $5,000 Common share dividends ........................ 12,000 Retained earnings, December 31 ........................

0 46,580 46,580

17,000 $29,580

NYGREN CORPORATION Balance Sheet (partial) December 31, 2017 Shareholders’ equity Share capital* $5 cumulative preferred shares, 1,000 issued ..... $ 62,500 Common shares, 6,000 issued .............................. 60,000 Total share capital.................................................. 122,500 Retained earnings.................................................... 29,580 Total shareholders’ equity.................................. $152,080 * Under ASPE, it is not required to show the number authorized. Taking It Further: Common shareholders are referred to as “residual owners” because once the claims of the creditors and the preferred shareholders are satisfied, the common shareholders own whatever is left.

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BYP13-1 FINANCIAL REPORTING PROBLEM (a) Per note 15 to the financial statements, Corus Entertainment Inc. has 2 classes of shares. There is an unlimited number of Class A voting shares authorized and 3,428,292 issued; and an unlimited number of Class B nonvoting shares authorized and 82,335,593 issued. (b) Both classes of shares rank equally with respect to the right to receive any remaining property in the event of a liquidation, dissolution, or wind-up. Class A voting shares are convertible at any time into an equivalent number of Class B non-voting shares. Class B non-voting shares are convertible into an equivalent number of Class A voting shares in limited circumstances. (c)

During the 2014 fiscal year, Corus issued 259,500 shares of Class B non-voting shares for $5,465,000 under a stock option plan. Corus also issued 1,024,947 Class B nonvoting shares for $24,682,000 under a dividend reinvestment plan. Finally, 2,000 Class A voting shares were converted to Class B non-voting shares at a carrying amount of $15,000.

(d) The average per share amount for the Class A voting shares is $7.74 ($26,549,000 ÷ 3,428,292). The average per share amount for the Class B non-voting shares is $11.43 ($940,781,000 ÷ 82,335,593). (e)

Corus declared $98,113,000 in dividends during fiscal 2014.

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BYP13-1 (Continued) (f)

Return on equity = Profit ÷ Average shareholders’ equity (figures in thousands) Return on equity 2013 = $165,749 ÷ ($1,220,833 + $1,136,090) 2 = 14.1% The company’s return on equity has deteriorated significantly over the past year from 14.1% in fiscal 2013 to 12.3% in fiscal 2014.

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BYP13-2 INTERPRETING FINANCIAL STATEMENTS (a) Loblaw’s profitability has declined from 2013 to 2014. Its gross profit margin has increased slightly but the ratios of return on assets and return on equity have declined dramatically indicating that profit plummeted in 2014. (b) The fair value of Loblaw’s shares depends on a number of factors, including the company's anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the stock market. Inconsistent with the decline in profitability, the market price of the common shares has increased significantly from 2013 to 2014. This is likely due to the acquisition of Shoppers Drug Mart which occurred during the 2014 fiscal year. (c) The reason so many common shares were issued during 2014 was for the purchase of Shoppers Drug Mart. This is by no means a typical recurring event for any company. While issuing preferred shares does not dilute the voting percentages of existing common shareholders this acquisition could not have been done without doubling the shareholders’ equity through the issuance of common shares. (d) Stock option plans are used to obtain and retain key employees of the company. It is a form of compensation that costs the company less than salaries paid to employees. From the perspective of the employees and directors, who may contribute to or influence the success of the company, these individuals can benefit directly from this success by the exercise of stock options.

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BYP 13-2 (Continued) (e)

The dollar amount of dividend per preferred share is $1.49 ($225,000,000 X .0595 ÷ 9,000,000 = $1.49). Depending on the market value of the preferred shares, this rate is higher than the interest rate on savings in a bank account because the rate has to be sufficiently high to attract investors. An investment in preferred shares is considerably riskier for an investor than a savings account. The payment of the dividends is at the discretion of the board of directors, and is dependent on the financial performance of the company and the company’s ability to pay the dividends. Interest on a savings account is a liability of the bank and is paid on a regular basis.

(f)

Loblaw may choose to redeem the shares in order to stop paying dividends and reduce its cash outflows. The commitment to pay dividends continues as long as the shares are outstanding, so the company may choose to redeem the shares to conserve its cash for the future.

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BYP13-3

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COLLABORATIVE LEARNING ACTIVITY

All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP13-4 COMMUNICATION ACTIVITY Memorandum To: XXX, Shareholder of Ghost River Back Country Limited From: Accountant Re: Purchase of land and building You are currently considering purchasing land and a building and trying to determine whether to pay for the purchase by using debt or shares. You have also indicated that you currently do not have excess cash in your business. A common method of paying for large purchases is to use debt. If you finance the purchase with a lender such as a bank, the seller of the property will not be involved in your business. This is an advantage as you would continue to exercise 100% control over the day-to-day operations of your business. This alternative usually requires that you provide a down payment, and this may not be possible because of your cash situation. You may also be able to finance the purchase directly with the seller. In this case, he may be willing to accept no down payment in exchange for security on the property. You would need to determine if your cash situation would allow for regular payments of interest and/or principal. Interest payments are taxdeductible and would reduce your taxable income. This transaction would increase the assets and the debt on your balance sheet. It would also increase your debt ratio. You are also considering paying for the purchase by issuing shares of your company. Issuing shares does not require any cash to complete the transaction. If you pay by issuing common shares, you will be issuing voting shares. It is unlikely that the seller will want to be a minority shareholder (own less than 50%), since he will exercise little control over the business

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BYP 13-4 (Continued) and dividend decisions. This would be very risky for the seller since you would then own the land and building, he would receive no cash, and have no control over cash payments to himself. You may be required to issue more than 50% of the voting control and would therefore lose control of your company. In addition, it would be difficult for him to sell his shares in your company because it is a private corporation. Alternatively, you may be able to structure the exchange by giving preferred shares. The shares would be subject to a fixed dividend rate. The negotiations with the seller would likely involve various features on the preferred shares to make the exchange more attractive. For example, the seller would likely require that the preferred shares be cumulative and redeemable or retractable. If the shares are redeemable, you can terminate the relationship with the seller at a predetermined point in the future. The dividend payments are not tax-deductible and are paid with after-tax funds. Accepting shares in exchange for his property is riskier for the seller since he is not receiving cash, and is dependent on the profitability of your business to receive dividends. This transaction would increase the assets and the shareholders’ equity on your balance sheet. If you use preferred shares and the features make the shares similar to debt financing, the shares would be reclassified as debt on the balance sheet. In conclusion, I recommend that you carefully consider the advantages and disadvantages outlined above. If the seller is willing to consider financing the purchase with preferred shares, this would be most advantageous to you considering your current cash situation.

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BYP13-5 “ALL ABOUT YOU” ACTIVITY (a)

The benefits of incorporating at the federal level include: 1. Heightened name protection 2. Right to carry on business anywhere in Canada 3. Recognition 4. Excellence in client service 5. Fully bilingual staff to answer your inquiries

(b)

Almost any type of business may incorporate under the Canada Business Corporations Act (CBCA). However, mortgage, banking, insurance, loan and trust companies, and other Financial Institutions, cooperative, Chambers of Commerce as well as not-for-profit corporations are incorporated under different statutes. There are no restrictions, such as minimum company size, on the businesses that may incorporate under the CBCA.

(c)

One or more individuals who are 18 years of age or older, are not of unsound mind and who are not bankrupt may form a corporation under the Canada Business Corporations Act (CBCA). Similarly, one or more companies or "bodies corporate" may incorporate a company.

(d)

Federal corporations are formed when you file articles of incorporation with Corporations Canada and a certificate of incorporation is issued. Form 1 provides in the application the main information concerning the corporation such as its name, the name of the incorporators, the classes of shares, etc. Form 2 provides all of the necessary information about the initial registered office address and the names and addresses of the members of the first board of directors.

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BYP 13-6 (Continued) (e)

Filing online offers the following distinct advantages: 1. Convenience 2. Reduced delivery costs 3. Immediate acknowledgement of filing 4. Prompt articles processing 5. Reduced filing fee

(f) 1. A corporation must prepare financial statements and provide copies of your financial statements to your shareholders at least 21 days before your corporation's annual meeting each year. 2. Generally Accepted Accounting Principles are set out in the Canadian Institute of Chartered Accountants Handbook. 3. Shareholders may decide by a unanimous resolution (voting and non-voting shares) not to appoint an auditor. 4. A corporation must keep certain corporate records at its registered office or at some other location elsewhere in Canada as set out by the directors. Upon request, a corporation's shareholders and creditors (such as suppliers) may examine the following records: 

  

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Articles of Incorporation, by-laws and their amendments and any unanimous shareholder agreements; Minutes of meetings and resolutions of shareholders; Copies of certain forms that have been filed, A share register showing the names and addresses of all shareholders and details of shares held.

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BYP13-6 Santé Smoothie Saga (a) 2018 May 15 Cash Dividends—Common ............ Dividends Payable ....................... May 31 Dividends Payable .......................... Cash..............................................

85,000 85,000 85,000 85,000

Since only Janet and Brian own the common shares at the date the dividend is declared, they would receive the full $85,000 on a pro-rata basis. This means that Janet would receive $42,500 ($85,000 / 2) and Brian would receive $42,500 since they both own 100 common shares. (b) SANTÉ SWEETS LTD. Statement of Retained Earnings Year Ended May 31, 2018

Retained earnings, June 1, 2017 ......................... Add: Profit* ........................................................... Less: Cash dividends .......................................... Retained earnings, May 31, 2018......................... * ($255,823 × [1 – 18%])

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$116,251 209,775 326,026 85,000 $241,026

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BYP13-6 (Continued) (c) SANTÉ SWEETS LTD. Balance Sheet (Partial) May 31, 2018 Shareholders' Equity Share capital Common shares, 200 shares issued................................ $ 200 Retained earnings .............................................................. 241,026 Total shareholders' equity................................... $241,226 Note: Under ASPE, a firm is not required to show the number of authorized shares. Also, it would not include the preferred shares on the balance sheet, as none are issued. (d) June 1 Cash ................................................. Accounts Receivable ...................... Merchandise Inventory ................... Supplies ........................................... Equipment ....................................... Common Shares ..........................

8,050 800 1,200 450 1,500 12,000

(e)

Balance before transaction Shares issued Balance after transaction

Number of shares 200 10 210

Dollar amount $200 $12,000 $12,200

Average $1.00 $1,200.00 $58.10

There is a significant change in value of the common shares because of the relatively low number of shares issued to Natalie for the large fair value of her assets.

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BYP13-6 (Continued) (f) Janet and Brian likely determined the price of $1,200 per share by dividing the shareholders’ equity amount by the number of shares issued ($241,026 ÷ 200 shares = $1,205). By using the value of $1,200 per share to value Natalie’s contribution in assets, they obtained a quantity of 10 common shares. This value is likely not fair to Natalie. The low number of shares given to Natalie means that she will receive only 4.8% (10 / 210 based on her number of shares over the total number of shares issued) of any dividends paid out. Natalie’s parents assume that Natalie will become the fulltime administrator, but she would receive a very low proportion of the profits and have no voting control over the operations of the business.

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CHAPTER 14 Corporations: Additional Topics and IFRS ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

1. Explain how to account for stock dividends and stock splits, and compare their financial impact.

1, 2, 3

1, 2, 7, 8, 9

1, 2, 4, 8

2. Explain how to account for the reacquisition of shares.

4, 5, 6, 7

4, 5

3, 7, 10

2, 3, 4, 6, 7, 8

3. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.

8, 9, 10, 11

6, 7, 8

4, 5, 7, 9, 10

3, 5, 6, 8

4. Explain the different types of accounting changes and account for the correction of a prior period error.

12, 13

9, 10

6, 7, 8

4, 6, 7, 12

4, 5, 6, 7, 12

5. Prepare a statement of changes in shareholders’ equity.

14,15

11, 12

8, 9, 10

7, 8, 9

6. Explain earnings and dividend performance and calculate performance ratios.

16, 17, 18

13, 14, 15

11, 12, 13

10, 11, 12

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Exercises

Problems Set A

Problems Set B

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Compare impact of cash dividend, stock dividend, and stock split.

Simple

20-25

Record and post transactions; prepare shareholders’ equity section.

Moderate

25-30

Determine impact of reacquired shares.

Moderate

25-30

Record stock dividends, splits, and reacquisition of shares. Report balances in shareholders’ equity.

Moderate

30-40

Prepare income statement and statement of comprehensive income.

Moderate

25-30

Correct error from prior period; prepare statement of retained earnings.

Moderate

30-35

Record and post transactions; prepare a statement of changes in shareholders’ equity.

Complex

30-40

Prepare financial statements.

Moderate

60-70

Prepare statement of changes in shareholders’ equity.

Complex

25-35

10A

Calculate earnings per share.

Moderate

30-35

11A

Calculate ratios and comment.

Moderate

25-30

12A

Calculate and evaluate ratios with discontinued operations.

Moderate

30-35

Compare impact of cash dividend, stock dividend, and stock split.

Simple

20-25

Record and post transactions; prepare shareholders’ equity section.

Moderate

25-30

Determine impact of reacquired shares.

Moderate

25-30

Record stock dividends, splits, and reacquisition of shares. Show impact of transactions on accounts.

Moderate

30-40

Prepare income statement and statement of comprehensive income.

Moderate

25-30

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

Correct error from prior period; prepare statement of retained earnings.

Moderate

30-35

Record and post transactions; prepare a statement of changes in shareholders’ equity.

Complex

30-40

Prepare financial statements.

Moderate

60-70

Prepare statement of changes in shareholders’ equity.

Complex

25-35

10B

Calculate earnings per share.

Moderate

30-35

11B

Calculate ratios and comment.

Simple

25-30

12B

Calculate and evaluate ratios with discontinued operations.

Moderate

30-35

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objectives 1. Explain how to account for stock dividends and stock splits, and compare their financial impact.

Knowledge Comprehension Q14-1 Q14-2 Q14-3

2. Explain how to account for the reacquisition of shares.

Q14-4

Q14-5 Q14-6 Q14-7

Application BE14-1 P14-1A BE14-2 P14-2A BE14-3 P14-4A E14-1 P14-8A E14-2 P14-1B E14-7 P14-2B E14-8 P14-4B E14-9 P14-8B BE14-4 P14-6A BE14-5 P14-7A E14-3 P14-8A E14-7 P14-2B E14-10 P14-3B P14-2A P14-4B P14-3A P14-6B P14-4A P14-7B P14-8B BE14-6 P14-5A BE14-7 P14-6A BE14-8 P14-8A BE14-12 P14-5B E14-4 P14-6B E14-5 P14-8B E14-7 E14-9 E14-10

3. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.

Q14-8 Q14-9 Q14-10 Q14-11

4. Explain the different types of accounting changes and account for the correction of a prior period error.

Q14-12 Q14-13

BE14-9 BE14-10 E14-6 E14-7 E14-8

P14-6A P14-7A P14-12A P14-6B P14-7B P14-12B

Q14-14

BE14-11 BE14-12 E14-8 E14-9 E14-10

6. Explain earnings and dividend performance and calculate performance ratios.

Q14-16 Q14-17 Q14-18

BE14-13 BE14-14 E14-11 E14-12

P14-7A P14-8A P14-9A P14-7B P14-8B P14-9B P14-5A P14-10A P14-5B P14-10B

Broadening Your Perspective

BYP14-1

5. Prepare a statement of changes in shareholders’ equity.

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Analysis Synthesis Evaluation

BE14-15 E14-13 P14-11A P14-12A P14-11B P14-12B BYP 14-2 BYP14-3

BYP14-4

BYP14-5 BYP14-6

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ANSWERS TO QUESTIONS 1.

(a) When a stock dividend is declared, at the declaration date, the entry is Dr. Stock Dividend and Cr. Stock Dividend Distributable. (b) There is no entry on the record date and (c) at the date of distribution, the entry is Dr. Stock Dividend Distributable and Cr. Common Shares.

Freddy is not better off after the stock split. A stock split signifies that additional shares are issued in a multiple, such as 2-for-1, in exchange for old shares. The effect of the stock split is to adjust the fair value of the shares. For example, in a 2-for-1 stock split, the fair value normally will decrease by half and the number of shares doubles so that the total value of the investment stays the same.

(a) (b) (c) (d) (e)

Assets Liabilities Share capital Retained earnings Number of shares

Cash Dividend Decrease N/E N/E Decrease N/E

Stock Dividend N/E N/E Increase Decrease Increase

A company would repurchase its shares for the following reasons: 1. To increase trading of the company’s shares in the securities market in the hope of increasing the company’s fair value. 2. To reduce the number of shares issued, which will increase earnings per share. 3. To eliminate hostile shareholders by buying them out. 4. To have additional shares available so that they can be reissued to officers and employees through stock compensation plans, or used to acquire other companies.

This transaction: (a) decreases total assets, (b) has no effect on total liabilities and, (c) decreases total shareholders' equity.

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Questions (Continued) 6.

When the reacquisition price paid is less than the average per share amount of the shares being repurchased, the difference is considered a contribution to the remaining shareholders and is credited to the Contributed Surplus-Reacquisition of Common Shares. When the reacquisition price paid is more than the average per share amount of the shares being repurchased, the difference is debited to Contributed Surplus-Reacquisition of Common Shares from the same class of shares to the extent of any pre-existing balance in the account, and then debited to Retained Earnings. Consequently, the account Contributed SurplusReacquisition of Common Shares can never have a debit balance.

I disagree with Camille. Regardless of the current market value of the common shares being repurchased, the account Common Shares must be reduced by the average per share amount for the shares currently issued. The average per share amount is used because it is impractical and often impossible to determine the dollar amount of each individual share that is being reacquired.

Intraperiod tax allocation is the allocation of income tax within the accounting period, to items or categories that attracted the tax. For example, the tax associated with continuing operations is shown separately from the tax associated with discontinued operations. Allocating the tax to these specific items is important because it allows those items or sub-totals to show the after-tax results, which is more relevant to the financial statement user.

Discontinued operations refer to the disposal or reclassification of the “held for sale” components of an entity. It is important to report discontinued operations separately because they represent atypical items. Investors trying to get a picture of the company’s future growth potential should not include discontinued operations in their analysis of future earnings potential because they will not exist in the future.

10.

Comprehensive income includes all changes to shareholders’ equity during a period except those resulting from the sale or repurchase of shares and from the payment of dividends. This includes not only the profit presented in a traditional income statement, but also other comprehensive income (OCI). OCI includes certain gains and losses that are not included in profit, such as unrealized gains and losses from some long-term strategic equity investments and foreign currency translation. OCI is reported on the comprehensive income statement in an all-inclusive format with the income statement or as a separate financial statement. OCI is closed to Accumulated Other Comprehensive Income, a permanent account that appears in the equity section of the balance sheet, immediately after Retained Earnings.

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Questions (Continued) 11.

Other comprehensive income is reported on the comprehensive income statement in an all-inclusive format with the income statement or as a separate financial statement.

12.

A company is allowed to change an accounting policy when the change is required by generally accepted accounting principles (GAAP) or when the resulting financial statements will provide more reliable and relevant information. When there is a change in accounting policy, companies are required to retroactively apply the new standards except if it is impractical to do so. This means the company must recalculate and restate all of the related accounts as if it had always followed the new policy. But, if significant estimates are required, or if the required information is not available, then it is not possible for prior financial statements to be restated for comparative purposes. Whether or not the prior periods are restated, companies must disclose the details of the change to the new policy in their notes to the financial statements.

13.

A company can make a change in accounting estimate on an as-needed basis, whenever circumstances, conditions, and events change and a better estimate is established. Changes in estimates are common and are not a result of an error. Consequently, the change in estimate is not applied retroactively but implemented prospectively, to the current and future accounting periods.

14. Contributed Capital Profit Loss Issue shares Share reacquisition Other comprehensive gains Other comprehensive losses Dividend declaration Stock dividend Correction of prior period errors Cumulative effect of a change in accounting policy

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Increase Decrease

Contributed Retained Surplus Earnings Increase Decrease Increase or Decrease

Accum. Other Comp. Income

Decrease Increase Decrease

Increase

14-7

Decrease Decrease Increase or Decrease Increase or Decrease

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Questions (Continued) 15.

The two components of comprehensive income are: profit or loss and other comprehensive income.

16.

Earnings per share is calculated by dividing profit less preferred dividends by the weighted average number of common shares outstanding. The fully diluted earnings per share adjusts earnings per share for the maximum possible dilution that would occur if securities were converted into common shares.

17.

(a) When calculating earnings per share, the amount of profit available to common shareholders is not always the same as total profit because preferred shareholders rank ahead of common shareholders for dividends. Preferred shareholders’ dividend entitlement must be satisfied before dividends can be declared on common shares. The preferred share dividends declared will reduce profit available to common shareholders. Also, the annual dividend entitlement of the preferred shares will not be available to common shareholders if the shares are cumulative. (b) Weighted average number of shares is used in the earnings per share calculation and not simply the number of shares at the end of the year because the profit available for common shareholders has been generated over the period of the year. The numbers of shares issued and outstanding during the fiscal year may vary tremendously and affect the company’s ability to generate profit. Using the weighted average number of shares in the calculation provides a less biased and fairer measure of performance.

18.

(a) Unfavourable (b) Favourable (c) Either favourable or unfavourable depending on the interpretation of the investor. That is, a decrease in the PE ratio makes the shares more affordable to purchase. An increase in the PE ratio means the shares will sell at a higher price and there exists more likelihood that the price will increase even further. (d) Favourable from the perspective of a potential investor receiving the dividend.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14-1 Mar. 1 Stock Dividends (400,000 × 5% × $5) ...100,000 Stock Dividends Distributable..........

100,000

14 Date of record – not entry required 31 Stock Dividends Distributable............... 100,000 Common Shares................................

100,000

BRIEF EXERCISE 14-2 (a) (b) (c) (d)

Share capital Retained earnings Total shareholders’ equity Number of shares

Before $2,000,000 600,000 $2,600,000 225,000

After $2,270,000* 330,000* $2,600,000 247,500

* Number of shares issued: 225,000 × 10% = 22,500 shares Stock dividend: 22,500 shares × $12 = $270,000 Retained earnings will decrease and share capital will increase by this amount.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 14-3 Transaction (a) Declared a cash dividend (b) Paid the cash dividend declared in part (a) (c) Declared a stock dividend (d) Distributed the stock dividend declared in part (c) (e) Split stock 2 for 1

Shareholders’ Assets Liabilities Equity

Number of Shares

–

BRIEF EXERCISE 14-4 (a) Apr 5

(b) Apr 5

Common Shares (8,000 × $6.25*)....... 50,000 Contributed Surplus— Reacquisition of Common Shares Cash .............................................

5,000 45,000

Common Shares (8,000 × $6.25*)....... 50,000 Retained Earnings .............................. 10,000 Cash .............................................

60,000

*Average per share amount = $250,000 ÷ 40,000 shares = $6.25

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 14-5 (a) Average per share amount: $12.60 ($315,000 ÷ 25,000) This average is applicable at both dates: Feb. 7, 2017 and Dec. 22, 2017 (b) Feb.

Dec. 22

Common Shares (1,000 × $12.60) ... 12,600 Contributed Surplus— Reacquisition of Common Shares Cash .............................................

2,600 10,000

Common Shares (2,000 × $12.60) ... 25,200 Contributed Surplus— Reacquisition of Common Shares .. 2,600 Retained Earnings............................ 200 Cash .............................................

28,000

BRIEF EXERCISE 14-6 (a)

Income tax expense on continuing operations = Profit before income tax × income tax rate = $320,000 × 20% = $64,000

(b)

Income tax savings on loss from operations = $(85,000) × 20% Income taxes on gain on disposal of assets = $60,000 × 20% Income tax savings on discontinued operations

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$(17,000) 12,000 $ (5,000)

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 14-7 OLIVIER CORPORATION Statement of Income Year Ended August 31, 2017

Revenues ................................................. Operating expenses ................................. Profit before income taxes ...................... Income tax expense ................................. Profit from continuing operations ....... Discontinued operations: Loss from operations of discontinued operations, net of $17,000 income tax savings Gain on disposal of assets of discontinued operations, net of $12,000 income tax expense Profit..........................................................

$500,000 180,000 320,000 64,000 256,000

$68,000

48,000

20,000 $236,000

BRIEF EXERCISE 14-8 JET SET AIRLINES Statement of Comprehensive Income Year Ended December 31, 2017

Profit ............................................................... Other comprehensive income Gain on equity investments, net of $19,8001 income tax expense ........ Comprehensive income ................................ 1 $66,000 × 30% = $19,800

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14-12

$920,000

46,200 $966,200

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 14-9 Mar 1 Income Tax Recoverable ................................ 1,000 Retained Earnings [$5,000 × (1 − 20%)] ......... 4,000 Accumulated Depreciation—Equipment

5,000

BRIEF EXERCISE 14-10 BROADFOOT BAKERIES INC. Statement of Retained Earnings Year Ended December 31, 2017

Balance, January 1, 2017 as previously reported ......... $394,000 Add: Correction for understatement of depreciation 4,000 expense, net of $1,000 income tax saving ......... Balance, January 1, 2017 as restated ............................ 390,000 Add: Profit ..................................................................... 128,000 518,000 Less: Dividends.............................................................. 44,000 Balance, December 31 .................................................... $474,000

BRIEF EXERCISE 14-11 (a) 525,000 = 500,000 beg. balance + 50,000 shares issued − 25,000 shares reacquired (b) $600,000 = balance at December 31, 2016 (c) $(28,750) = $603,750 − $600,000 − $32,500 (d) $23,000 = $15,000 + $8,000 (e) $(21,000) = $181,000 − $179,500 − $22,500 (f) $17,000 = $68,000 − $51,000 (g) $875,750 = $603,750 + $23,000 (from (d) above) + $181,000 + $68,000 (h) Profit of $19,500 = $179,500 − ($190,000 − $30,000) (i) $54,000 = $51,000 + $3,000 (j) $845,500 = $600,000 + $15,000 + $179,500 + $51,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 14-12 (a)

PENINSULA SUPPLY CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2017

Common Shares Balance, January 1 Issued shares for cash Reacquired common shares Cash dividends Comprehensive income Balance, December 31

$600,000 32,500 (28,750)

$603,750

Contributed Surplus– Reacquisition of Common Shares

Retained Earnings

Accumulated Other Comprehensive Income

$15,000

$179,500

51,000

(21,000) 22,500 $181,000

17,000 $68,000

8,000

$23,000

Total $845,500 32,500 (20,750) (21,000) 39,500 $875,750

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 14-12 (Continued) PENINSULA SUPPLY CORPORATION Partial Balance Sheet December 31, 2017

(b)

Shareholders' equity Contributed capital Share capital Common shares, 525,000 shares issued Other contributed capital Contributed surplus—reacquisition of common shares......................................... Total contributed capital ....................................... Retained earnings.................................................. Accumulated other comprehensive income ....... Total shareholders' equity

$603,750 23,000 626,750 181,000 68,000 $875,750

BRIEF EXERCISE 14-13 Weighted average number of shares: Date Jan. 1 Mar. 1 June 1 Sep. 30

Solutions Manual .

Actual Number 20,000 (5,000) 6,000 10,000 31,000

Fraction of Year × 12/12 = × 10/12 = × 7/12 = × 3/12 =

14-15

Weighted Average 20,000 (4,167) 3,500 2,500 21,833

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 14-14 (a) Earnings per share = $1.81 [($454,000 – $55,000*)  220,000] * 22,000 × $2.50 = $55,000 (b) Same as in (a) above $1.81. Since the preferred shares are cumulative, their dividend needs to be paid before any of the earnings become available to the common shareholders. Therefore, cumulative preferred dividends must be deducted from profit in calculating earnings per share, whether they are declared and paid or not. (c)

Same as in (a) above $1.81

(d) Earnings per share = $2.06 ($454,000  220,000)

BRIEF EXERCISE 14-15 Price-earnings ratio = Market price per share ÷ Earnings per share = $24.00 ÷ $4.00 = 6 times Payout ratio

Solutions Manual .

= Cash dividends ÷ profit = $90,000 ÷ $450,000 = .20 or 20%

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 14-1 (1) (2) (3) After Cash After Stock After Stock Dividend Dividend Split

Before Action Total assets

$1,875,000 $1,851,000

$1,875,000 $1,875,000

Total liabilities $ 75,000 $ 75,000 Common shares 1,200,000 1,200,000 Retained earnings 600,000 576,000 Total shareholders' equity 1,800,000 1,776,000 Total liabilities and $1,875,000 $1,851,000 shareholders’ equity

$ 75,000 $ 75,000 1,242,000* 1,200,000 558,000 600,000 1,800,000 1,800,000

Number of common shares

60,000

$1,875,000 $1,875,000

63,000

120,000

* $1,200,000 + (60,000 shares × 5% × $14) = $1,242,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-2 1.

No this is not the correct entry. Transactions with shareholders are never recorded as an expense. The correct entry is:

Dec. 31 Cash Dividends—Preferred (20,000 × $4 ÷ 4) ..................... Dividends Payable ................. 2.

20,000

No, this is not the correct entry. Stock dividends do not give rise to a liability. The correct entry is:

Dec. 31 Stock Dividends (1,000 x $12) ... Common Stock Dividends Distributable ...... 3.

20,000

12,000 12,000

No, this is not the correct entry. Stock splits are not recorded in the accounting records, only the total number of shares outstanding is affected, and the balance in the preferred share account will remain the same as it was before the split. The only requirement is to prepare a memo entry indicating that there are now 40,000 preferred shares issued and outstanding.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-3 (a) Jan.

6 Cash.............................................. 300,000 Common Shares ................. (200,000 shares × $1.50)

300,000

12 Cash ......................................... Common Shares ................. (50,000 shares × $1.75)

87,500

Mar. 17 Cash.............................................. 105,000 Preferred Shares ................. (1,000 shares × $105)

105,000

July 18 Cash........................................... 2,000,000 Common Shares ................. 2,000,000 Nov. 17 Common Shares (200,000 × $1.91*) ................ Retained Earnings ................... Cash (200,000 × $1.95) ........

382,000 8,000

Dec. 30 Common Shares (150,000 × $1.91*) ................ 286,500 Contributed Surplus— Reacquisition of Common Shares Cash (150,000 × $1.80) ........

390,000

16,500 270,000

*Average per share amount for Common Shares: Number of Transaction Proceeds of Common Shares Date Issue Issued January 6 200,000 $ 300,000 January 12 50,000 87,500 July 18 1,000,000 2,000,000 Total 1,250,000 $2,387,500 $2,387,500  1,250,000 = $1.91

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-3 (Continued) (b) There are 900,000 common shares remaining, at an average per share amount of $1.91** **Average per share amount for Common Shares: Transaction Date January 6 January 12 July 18 Nov. 17 Dec. 30 Total

Number of Common Shares Issued 200,000 50,000 1,000,000 (200,000) (150,000) 900,000

Proceeds of Issue $ 300,000 87,500 2,000,000 (382,000) (286,500) $1,719,000

$1,719,000  900,000 = $1.91

EXERCISE 14-4 SHRINK LTD. Partial Statement of Comprehensive Income Year Ended December 31, 2017 Profit from continuing operations........... Discontinued operations Profit on discontinued component operations, net of $27,000* income tax expense $63,000 Loss on disposal of discontinued operations, net of $9,000** income tax savings . 21,000 Profit..........................................................

$320,000

42,000 $362,000

* $90,000 × 30% = $27,000 ** $30,000 × 30% = $9,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-5 TOP BRANDS LIMITED Income Statement Year Ended March 31, 2017 Revenues Fees earned........................................... Rent revenue ......................................... Operating expenses Advertising expense............................. Depreciation expense........................... Telephone expense .............................. Profit from operations.............................. Other revenues Gain on disposal of equipment............ Other expenses Interest expense ................................... Profit before income taxes ...................... Income tax expense ($74,000 × 30%) ...... Profit from continuing operations........... Discontinued operations Loss on discontinued operations, net of $5,400 in income tax savings ..... Profit..........................................................

$62,000 34,000 7,000 3,000 8,000

$96,000

18,000 78,000 1,500 5,500 74,000 22,200 51,800

12,600 $39,200

TOP BRANDS LIMITED Statement of Comprehensive Income Year Ended March 31, 2017

Profit.......................................................... Other comprehensive income (loss) Loss on equity investments, net of $900 in income tax savings ........ Comprehensive income ...........................

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$39,200

2,100 $37,100

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-6 (a) Jan. 1 Land ............................................................... 75,000 Income Tax Payable .............................. 18,750 Retained Earnings [$75,000 × (1 − 25%)] 56,250

(b) SILVER FOX ENTERPRISES INC. Statement of Retained Earnings Year Ended December 31, 2017

Balance, January 1 as previously reported ........ Add: Correction of error in recording purchase of land in 2016, net of $18,750 income tax expense ............................................................. Balance, January 1 as adjusted .......................... Add: Profit............................................................. Less: Cash dividends .......................................... Retained earnings, December 31 ........................

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$ 573,500

56,250 629,750 193,000 822,750 216,000 $606,750

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-7 FYRE LITE CORPORATION Statement of Retained Earnings Year Ended December 31, 2017

Balance, January 1, as previously reported .................... $650,000 Add: Correction for understatement of 2016 profit due to error, net of $21,2501 income tax expense 63,750 Balance, January 1, as adjusted ........................................ 713,750 Add: Profit ...................................................................... 562,5002 1,276,250 Less: Excess cost of reacquired shares ......... $ 50,000 Cash dividends........................................ 245,000 295,000 Balance, December 31....................................................... $981,250 1 2

$85,000 × 25% = $21,250 $750,000 × (1 − 25%) = $562,500

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-8

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

Contributed Capital Share Capital Additional NE NE I NE NE NE I NE NE NE NE NE D I NE NE

Retained Earnings D NE NE D NE I NE I

Accumulated Other Comprehensive Income NE NE NE NE NE NE NE I

Total Shareholders’ Equity D I NE NE NE I D I

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-9 MARCHELLE CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2017

Stock Dividend Distributable

Common Shares Balance, January 1 Issued for cash Stock split 3 for 2 Stock dividends Comprehensive income Balance, December 31

$2,200,000 1,200,000 0

$850,000

$27,000

(495,000) 390,000 $745,000

(28,500) $ (1,500)

$495,000 $3,400,000

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

$495,000

Total $3,077,000 1,200,000 0 0 361,500 $ 4,638,500

($80,000 × $15 = $1,200,000) (220,000 + 80,000) × (3/2-1) = 150,000 (220,000 + 80,000 + 150,000) × 5% × $22 = $495,000 3 $38,000 × (1 − 25%) = $28,500 2

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-10 (a) Feb. 2 Common Shares* ......................................25,000 Contributed Surplus— Reacquisition of Common Shares ...........19,500 Cash ............................................... *($800,000 ÷ 32,000) x 1,000 Apr. 17 Dividend Declared.....................................70,000 Cash ...............................................

44,500

70,000

Oct. 29 Cash ......................................................... 104,000 Common Shares ........................... 104,000

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EXERCISE 14-10 (Continued) (b) RUBY RED RENTAL CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2017

Common Shares Balance, January 1 Issued for cash Reacquired shares Dividends Comprehensive income Balance, December 31

Contributed Surplus– Reacquisition of Common Shares

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

$540,000

$1,500,000

$(25,000)

(70,000) 385,000 $1,815,000

40,000 $15,000

$800,000 104,000 (25,000)

$879,000

(19,500)

$520,500

Total $2,815,000 104,000 (44,500) (70,000) 425,000 $3,229,500

($800,000 ÷ 32,000) × 1,000 = $25,000 $44,500 – $25,000 = $19,500

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-10 (Continued) (c) Number of common shares issued Beginning balance January 1, 2017 ..... Shares repurchased Feb. 2 ................... Shares issued for cash Oct. 29............. Balance Dec. 31, 2017 ...........................

32,000 (1,000) 2,000 33,000

EXERCISE 14-11 (a)

Profit available to common shareholders = Profit − Preferred share dividends = $465,325 − $65,000 = $400,325

(b) Weighted average number of shares December 1, 2016 Feb. 28, 2017 May 31, 2017 Nov. 1, 2017

(c)

60,000 × 12/12 10,000 × 9/12 (5,000) × 6/12 15,000 × 1/12

= = = =

60,000 7,500 (2,500) 1,250 66,250

Earnings per share = Profit available to common shareholders ÷ Weighted average number of common shares = $400,325 ÷ 66,250 = $6.04

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-12 (a)

Weighted average number of shares Jan. 1, 2017 Apr. 1, 2017 Sept. 30, 2017

80,000 × 12/12 10,000 × 9/12 (5,000) × 3/12

= = =

80,000 7,500 (1,250) 86,250

(b) 1. (i) Earnings per share = $5.91 [($520,000 − $10,000*)  86,250] *5,000 × $2 = $10,000 1. (ii) Same as in [(b) 1. (i)] above: $5.91. Since the preferred shares are cumulative, their dividends need to be paid before any of the earnings become available to the common shareholders. Therefore, cumulative preferred dividends must be deducted from profit in calculating earnings per share, whether they are declared and paid or not. 2. (i) Same as in [(b) 1. (i)] above $5.91 2. (ii) Earnings per share = $6.03 ($520,000  86,250)

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-13 (a) Earnings per share Price-earnings ratio Payout ratio

2017

2016

2015

$3.79 11.3 X .660

$4.18 11.9 X .538

$5.26 10.7 X .399

Calculations: Earnings per share (in thousands) 2017: ($1,978 − $73) ÷ 502 = $3.79 2016: ($2,131 − $43) ÷ 500 = $4.18 2015: ($2,663 − $30) ÷ 501 = $5.26 Price-earnings ratio 2017: $43.00 ÷ $3.79 = 11.3 times 2016: $49.75 ÷ $4.18 = 11.9 times 2015: $56.25 ÷ $5.26 = 10.7 times Payout ratio 2017: $2.50 ÷ $3.79 = .660 2016: $2.25 ÷ $4.18 = .538 2015: $2.10 ÷ $5.26 = .399

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Accounting Principles, Seventh Canadian Edition

EXERCISE 14-13 (Continued) (b) Earnings per share have deteriorated substantially over the past three years, moving from $5.26 to $3.79, a 28% decrease. This indicates that the company is earning less profit per common share. This decrease occurred primarily because profit has decreased. The 2017 earnings per share is also lower because preferred share dividends have increased over the three-year period. This leaves less profit for common shareholders. The price-earnings ratio increased in 2016, and then declined in 2017. There are many factors affecting price-earnings ratios but one possible reason for the decline could be that investors are not anticipating as high a level of income in the future. The priceearnings ratio should be compared to other companies in the industry to see if a multiple of around eleven is good for this type of business. The company’s dividends have increased each year and the payout ratio has increased substantially as a percentage of earnings per share over the three-year period. The increase is due to the increase in dividends paid as well as the decrease in earnings per share.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 14-1A (a) Cash Dividend

Stock Dividend

3-for-1 Stock Split

(1)

Assets

$12,000,000 − No effect = $600,000a = $12,000,000 $11,400,000

No effect = $12,000,000

(2)

Liabilities

No effect = $4,000,000

(3)

Common shares

No effect = $2,000,000

$2,000,000 + $600,000b = $2,600,000

No effect = $2,000,000

(4)

Retained earnings

$6,000,000 − $600,000 = $5,400,000

$6,000,000 − $600,000 = $ 5,400,000

No effect = $6,000,000

(5)

Total $8,000,000 − shareholders’ $600,000 = $7,400,000 equity

No effect ($8,000,000 + $600,000 − $600,000 = $8,000,000)

No effect = $8,000,000

(6)

Number of shares

20,000 increase (20,000 + 400,000 = 420,000)

800,000 increase (400,000 × 3 = 1,200,000)

No effect = 400,000

a 400,000 × $1.50 = $600,000 b 400,000 × 5% × $30 = $600,000

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PROBLEM 14-1A (Continued) (b)

1. Cash dividend Cash dividend 1,000 × $1.50 = $1,500 Fair value of shares 1,000 × $28.501 = $28,500 1

Assumed that fair value of the shares would likely drop by the amount of the cash dividend ($30 − $1.50 = $28.50)

2. Stock Dividend Stock dividend 1,000 × 5% = 50 shares Fair value of shares 1,050 × $28.57142 = $30,000 2

Assumed that fair value of the shares would drop accordingly ($30 ÷ 105% = $28.5714), the same amount as the stock dividend.

3. Stock Split Stock split 1,000 × 3 = 3,000 shares Fair value of shares = 3,000 × $103 = $30,000 3

Assumed that fair value of the shares would likely decrease by two-third because of the stock split ($30 × 1/3 = $10)

In terms of final value, the shareholder would be in the same position having received a cash dividend, a stock dividend, or a stock split. However, a stock dividend or split would allow the shareholder to control the receipt of the cash and the related tax payment. Since the shareholder can control when the shares are sold, they can control when the income tax would have to be paid on any gains. Stock dividends and stock splits also provide the shareholder with an increased number of shares on which to generate future gains and dividends. Alternatively, some shareholders may prefer to receive a cash dividend since they do not have to sell the shares to obtain the cash. As well, there are brokerage fees associated with selling shares. Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-1A (Continued)

Taking It Further Advantages:  Increases marketability of a company’s shares by reducing the fair value. This makes it easier for the company to sell additional shares since the fair value per share has been decreased.  Makes it easier for investors to trade their shares since the fair value per share is decreased.  Frequently seen as a good sign to investors and is frequently accompanied by an increase above split value.  A reverse split can increase fair value per share and allow a company to continue trading its shares on a stock exchange; this increases marketability of the shares for investors and allows a company to continue accessing the secondary market. Disadvantages:  A reverse split can be seen as a negative sign to investors and can be accompanied by a further decline in fair value below the split value.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-2A (a)

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Jan. 15 Cash Dividends—Common ......................90,000 Dividends Payable (90,000 × $1) ......

Credit

90,000

Jan. 31 Date of record – No entry required Feb. 15

July

Dividends Payable ................................. 90,000 Cash ...................................................

90,000

1 Memo: 3-for-2 stock split increases the number of shares to 135,000 (90,000 × 3 ÷ 2)

Dec. 15 Common Stock Dividends...................... 135,000 Common Stock Dividends Distributable (135,000 × 10% × $10). 135,000 30 Date of record – No entry required 31 Income Summary.................................... 315,000 Retained Earnings ............................ 315,000 [($450,000 × (1 – 30%)] 31 Retained Earnings .................................. 225,000 Cash Dividends—Common .............. 90,000 Common Stock Dividends................ 135,000

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PROBLEM 14-2A (Continued) (b) Common Shares Date Jan.

Explanation

Ref.

Debit

Credit



1 Balance

Balance 1,100,000

Common Stock Dividends Distributable Date

Explanation

Dec. 15

Ref.

Debit

Credit

Balance

135,000

Credit

Balance

90,000

90,000 0

Credit

Balance

135,000

135,000 0

Cash Dividends—Common Date

Explanation

Jan. 15 Dec. 31 Closing entry

Ref.

Debit

J1 J1

90,000

Ref.

Debit

J1 J1

135,000

Ref.

Debit

Common Stock Dividends Date

Explanation

Dec. 15 31 Closing entry Retained Earnings Date

Explanation

Jan. 1 Balance Dec. 31 Closing entry 31 Closing entry

Solutions Manual .

Credit

Balance

 J1 315,000 J1 225,000

540,000 855,000 630,000

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PROBLEM 14-2A (Continued) (c) LEBLANC CORPORATION Partial Balance Sheet December 31, 2017

Shareholders' equity Share capital Common shares, no par value, unlimited number of shares authorized, 135,000 shares issued... $1,100,000 Common stock dividend distributable ............... 135,000 Total share capital................................................ 1,235,000 Retained earnings..................................................... 630,000 Total shareholders' equity .............................. $1,865,000

Taking It Further: From the perspective of an investor, the advantage of a stock dividend or a stock split is that the shares can become more affordable to another investor who is willing to buy the shares on the stock market. The disadvantage of a stock dividend is that they are taxable when received, but no additional cash is made available to pay the applicable taxes. Some of the additional shares issued on a stock dividend may need to be sold to generate the cash needed to pay the income tax on the stock dividend. For stock splits, there are no disadvantages to the investor.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-3A (a) Shares authorized Shares issued - refer to part (b)

1,000,000 437,000

(b) Common shares Contributed Surplus—reacquisition of Common shares Retained earnings

$1,351,330 $6,750 $719,420

Calculations:

Bal 1. 2. 3. 4. 5.

Common shares (a)

Number of shares (b)

Average per share amount (a) ÷ (b)

Cont. surplus — reacq. of common shares

$1,500,000 147,000 1,647,000 (30,800) 1,616,200 22,500 1,638,700 (55,620) 1,583,080 (231,750) $1,351,330

500,000 35,000 535,000 (10,000) 525,000 5,000 530,000 (18,000) 512,000 (75,000) 437,000

$3.00

$15,000

$720,000

3.08

15,000 (1) 800 15,800

720,000

3.08 3.09 3.09 3.09

Retained earnings

720,000

15,800 720,000 (2) (15,800) (580) 0 719,420 (3) 6,750 $ 6,750 $719,420

(1) (10,000 × $3.08) − (10,000 × $3) = $30,800 − $30,000 = $800 (2) (18,000 × $3.09) − (18,000 × $4) = $55,620 − $72,000 = $(16,380). A maximum of $15,800 is deducted from contributed surplus; the remainder, $580, is deducted from retained earnings. (3) (75,000 × $3.09) – (75,000 × $3) = $231,750 − $225,000 = $6,750

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-3A (Continued)

Taking It Further: Reporting the number of shares authorized and issued allows shareholders to determine how many additional shares can be sold and how much their share ownership can potentially be diluted. If there are a maximum number of shares authorized, this would also determine how many additional shares can be issued to raise capital. Knowing the number of shares issued allows investors to determine their percentage ownership.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-4A Calculations needed for parts (a) and (b) Common Shares (1) (2) Date Jan. 1, Feb. 11 Subtotal Mar. 2 Subtotal June 14 Subtotal Sept. 16 Subtotal Dec. 13 Bal.

No. of Shares 150,000 50,000 200,000 (20,000) 180,000 180,000 360,000 (50,000) 310,000 15,500 325,500

Total Cost $2,400,000 1,000,000 3,400,000 (340,000) 3,060,000

Jan. 1, July 25 Bal.

Solutions Manual .

No. of Shares

17.00 17.00 17.00

3,060,000 (425,000) 2,635,000 294,500 $ 2,929,500

Preferred Shares (1) (2) Date

(3) Average per Share Amount $16.00

Total Cost

5,000 (500) 4,500

14-40

$375,000 (37,500) 337,500

8.50 8.50 9.00

(3) Average per Share Amount $75.00 75.00 75.00

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-4A (Continued) (a) Feb. 11 Cash ................................................... 1,000,000 Common Shares ......................... 1,000,000 (50,000 shares × $20) Mar. 2 Common Shares (20,000 × $17.00) .................................... 340,000 Contributed Surplus— Reacquisition of Common Shares ....... 30,000 Retained Earnings ................................. 70,000 Cash (20,000 × $22)......................... 440,000 July 25 Preferred Shares (500 × $75) ................ Contributed Surplus— Reacquisition of Preferred Shares Cash (500 × $70)..............................

37,500 2,500 35,000

Sept. 16 Common Shares (50,000 × $8.50) .......... 425,000 Retained Earnings .................................. 425,000 850,000 Cash (50,000 × $17)......................... Oct. 27 Stock Dividends (15,500 × $19) .............. 294,500 Stock Dividends Distributable ....... 294,500 Dec. 13 Stock Dividends Distributable................ 294,500 Common Shares ............................. 294,500 (b)

Share capital Preferred shares $4 cumulative, convertible, 100,000 authorized, 4,500 shares issued Common shares, unlimited number of shares authorized, 325,500 shares issued

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$ 337,500 2,929,500

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-4A (Continued) Taking It Further: The Contributed Surplus account is reported in shareholders’ equity because it represents equity contributed by shareholders who are willing to take less money than the average per share amount paid for shares being repurchased.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-5A (a) PORT HOPE CORPORATION Income Statement Year Ended November 30, 2017 Sales............................................................................... Cost of goods sold ........................................................ Gross profit.................................................................... Operating expenses ............................. $1,120,000 Depreciation expense ........................... 355,000 Profit from operations................................................... Other revenues .............................................................. Profit before income taxes ........................................... Income tax expense* ..................................................... Profit from continuing operations................................ Discontinued operations Profit on discontinued operations of communications devices division net of $5,000** income taxes ............. $15,000 Loss on disposal of discontinued communications devices division net of $18,750*** income tax savings 56,250 Profit.......................................................... Earnings per share Profit ....................................................................

$9,124,000 7,280,000 1,844,000 1,475,000 369,000 48,000 417,000 104,250 312,750

41,250 $271,500

$1.23

$271,500 – $25,000 = $1.23 200,000

* ($417,000 × 25%) = $104,250 ** ($20,000 × 25%) = $5,000 *** ($75,000 × 25%) =$18,750

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-5A (Continued) (b) PORT HOPE CORPORATION Statement of Comprehensive Income Year Ended November 30, 2017

Profit.......................................................... Other comprehensive loss Loss on equity investment, net of $20,750* in income tax savings ..................... Comprehensive income ...........................

$271,500

62,250 $209,250

*($83,000 × 25%) = $20,750

Taking It Further: It is important to report gains and losses from discontinued operations separately from continuing operations because they represent atypical items. Investors trying to get a picture of the company’s future growth potential should not include discontinued operations in their analysis of future earnings potential because they will not exist in the future. Profit from continuing operations is a better indication of ongoing performance of the business on a comparative basis.

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PROBLEM 14-6A (a) 2017 Mar. 17 Notes Payable .................................. Income Taxes Payable ................ Retained Earnings ...................... ($57,000 × 25% = $14,250) (b) Apr. 10 Common Shares .............................. Retained Earnings ........................... Cash .............................................

57,000 14,250 42,750

75,000 22,500 97,500

(c)

Profit Year Ended October 31, 2017 Fees earned .....................................................................$1,476,000 Operating expenses ................................ $929,000 Depreciation expense ......................... 87,000 1,016,000 Profit from operations................................................... 460,000 Interest expense ............................................................... 54,000 Profit before income taxes ........................................... 406,000 Income tax expense* ........................................................ 101,500 Profit ................................................................................... 304,500 * ($406,000 × 25%) = $101,500

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-6A (Continued) (d)

ZUG LIMITED Statement of Retained Earnings Year Ended October 31, 2017

Balance, November 1, 2016 as previously reported Add: Correction of error in recording payment on notes payable in 2016, net of $18,750 income tax expense........................................ Balance, November 1 as adjusted....................... Add: Profit............................................................. Less: Reacquired common shares $ 22,500 Cash dividends ................... 120,000 Balance November 30, 2017 ................................

$ 575,000

42,750 617,750 304,500 922,250 142,500 $779,750

Taking It Further: Financial statements are generally presented on a comparative basis to help the user of the financial statements make comparisons and assess trends in performance. In order for the information to be comparable, the financial statement of the prior period must be corrected to rectify the information affected by the prior year error.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-7A (a), (b), and (c) Preferred Shares Date

Explanation

Ref.

Jan.

1 Balance (10,000)



Debit

Credit

Balance 1,100,000

Common Shares Date

Explanation

Ref.

Debit

Credit

 J1

Jan.

1 Balance (320,000) 15 Reacquisition of shares (20,000) Oct. 1 Issue of shares (100,000)

Balance 1,280,000

80,000 J1

1,200,000 800,000 2,000,000

Contributed Surplus—Reacquisition of Common Shares Date

Explanation

Ref.

Jan.

1 Balance 15 Reacquisition of shares

Debit

Credit

 J1 30,000

Balance 30,000 0

Retained Earnings Date Jan.

1 15 July 1 Dec. 31 31

Explanation

Ref.

Balance Reacquisition of shares Prior period error Income Summary Dividends

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14-47

Debit

 J1 30,000 J1 J1 J1 25,000

Credit

Balance

2,443,500 2,413,500 187,500 2,601,000 570,000 3,171,000 3,146,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-7A (Continued) (b) GENERAL JOURNAL Date

Account Titles

J1 Debit

Credit

Jan. 15 Common Shares ($4(1) × 20,000) ........... 80,000 Contributed Surplus—Reacquisition of Common Shares................................ 30,000 Retained Earnings ................................. 30,000 Cash (20,000 × $7)............................. 140,000 (1)

$1,280,000 ÷ 320,000 = $4

Mar. 31

Jun. 30

Cash Dividends—Preferred .................. 12,500 Cash (10,000 × $5 × ¼)......................

12,500

Cash Dividends—Preferred .................. 12,500 Cash (10,000 × $5 × ¼)......................

12,500

Jul. 1 Long-Term Investment ........................... 250,000 Income Tax Payable ($250,000 × 25%) 62,500 Retained Earnings [$250,000 × (1 − 25%)] ....................... 187,500 Oct. 1 Cash (100,000 × $8)................................. 800,000 800,000 Common Shares ............................... (c) Dec. 31 Income Summary [$760,000 × (1 − 25%)] ............................... 570,000 Retained Earnings ......................... 570,000 31 Retained Earnings ...................................25,000 Cash Dividends—Preferred ..........

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PROBLEM 14-7A (Continued) (d)

JAJOO CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017

Balance January 1, as previously reported Correction for understatement of investment, net of $62,500 income tax expense Balance January 1, as adjusted Issued for cash Reacquired shares Cash dividends—preferred Profit Balance, December 31

Preferred Shares

Common Shares

Contributed Surplus– Reacquisition of Common Shares

$1,100,000

$1,280,000

$30,000

1,100,000

$1,100,000

Retained Earnings

Total

$2,443,500

$4,853,500

187,500

187,500 5,041,000 800,000 (140,000) (25,000) 570,000 $ 6,246,000

1,280,000 800,000 (80,000)

30,000

2,631,000

(30,000)

$2,000,000

(30,000) (25,000) 570,000 $3,146,000

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-7A (Continued)

Taking It Further: Corrections of prior period errors are recorded in the retained earnings account because they relate to revenues and expenses of prior periods. These revenues and expenses have been transferred to the retained earnings account through the closing entries of prior periods. To record them in current year accounts would misstate current year results. In addition, comparative figures are restated to adjust for the error. This enhances comparability and usefulness of the information.

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PROBLEM 14-8A (a) PANSY PAINTS LTD. Statement of Comprehensive Income Year Ended December 31, 2017 Sales............................................................................... Cost of goods sold ........................................................ Gross profit.................................................................... Operating expenses Depreciation expense ......................... $29,000 Office expense .................................... 11,000 Advertising expense ........................... 7,860 Profit from operations................................................... Other revenues Gain on sale of equipment .....................................

$780,000 412,000 368,000

47,860 320,140 850 320,990

Other expenses Interest expense 4,650 Profit before income taxes ........................................... 316,340 Income tax expense* ..................................................... 79,085 Profit............................................................................... 237,255 Other comprehensive income Loss on equity investment, net of $1,350 income tax savings** ............................. 4,050 Comprehensive income .................................................... $233,205 *$316,340 × 25% = $79,085 **[$5,400 × (1 − 25%)] = $4,050

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PROBLEM 14-8A (Continued) (b) PANSY PAINTS LTD. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017

Balance, January 1 Cash dividends Comprehensive income Balance, December 31

Common Shares

Contributed Surplus– Reacquisition of Common Shares

$255,000

$7,500

$255,000

$7,500

Retained Earnings $35,030 (15,000) 237,255 $257,285

Accumulated Other Comprehensive Income (Loss) (4,050) $(4,050)

Total $297,530 (15,000) 233,205 $ 515,735

_ Solutions Manual

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PROBLEM 14-8A (Continued) (c) PANSY PAINTS LTD. Partial Balance Sheet December 31, 2017 Shareholders' equity Contributed capital Share capital Common shares, 18,000 shares issued Other contributed capital Contributed surplus—reacquisition of common shares......................................... Total contributed capital ....................................... Retained earnings.................................................. Accumulated other comprehensive income (loss) Total shareholders' equity ....................................

$255,000 7,500 262,500 257,285 (4,050) $515,735

Taking It Further: The first of two methods of preparing the statement of comprehensive income is to combine the income statement with the comprehensive income statement on an all-inclusive basis. The second method is to prepare the statement of comprehensive income on its own, starting with profit, taken from the income statement. Neither format is better. The choice of which format to use depends on the nature and amount of information that a company needs to present on its statement for its users. For example, if a company has several material transactions to disclose in other comprehensive income, it may choose the separate statement format. A company may also choose a separate statement format if it wants to emphasize the profit amount rather than comprehensive income.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-9A TMAO INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017

Balance, January 1 Reacquired common shares Stock split 2 for 1 Cash dividends– preferred Stock dividends– common Comprehensive income Balance, December 31

Preferred Shares

Common Shares

$400,000

$800,000 (50,000)

Contributed Surplus– Reacquisition of Common Shares

Stock Dividend Distributable

$10,000

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

$450,000

$(50,000)

$400,000

$750,000

$180,000

$10,000

$1,600,000 (40,000) 0

$180,000

Total

(12,000) 5

(12,000)

(180,000) 227,500 4 $485,500

0 292,500 $1,840,500

65,000 $15,000

(10,000 ÷ 160,000) X $800,000 = $50,000 $50,000 - $40,000 3 150,000 × 10% × $12 = 15,000 × $12 = $180,000 4 $350,000 × (1 − 35%) = $227,500 5 4,000 × 2 from split × ($3 ÷ 2) = $12,000 2

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-9A (Continued)

Taking It Further: Comprehensive income is closed at the end of the year to accumulated other comprehensive income. In turn, accumulated other comprehensive income is an element of shareholders’ equity in the balance sheet. For companies following ASPE, there is no comprehensive income and consequently no accumulated other comprehensive income either.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-10A (a)

Weighted Average Number of Shares

Date Apr. 1 June 1 July 1 Sept. 30 Jan. 31 Mar. 31

Beginning balance Reacquired shares Issued 50,000 shares Reacquired shares Issued 60,000 shares Ending balance

Actual Fraction number of Year 500,000 12/12 (12,000) 10/12 50,000 9/12 (8,000) 6/12 60,000 2/12 590,000

Weighted Average 500,000 (10,000) 37,500 (4,000) 10,000 533,500

(b) Earnings per Share = Income available to common shareholders ÷ Weighted average number of common shares = [$973,600 – (20,000 × $6)] ÷ 533,500 = $1.60 Note: The current year’s annual preferred dividend must be subtracted from profit whether or not it is declared. Dividend arrears are not relevant in the calculation. (c)

The number of common shares issued at March 31, 2017 is 590,000 as calculated in part (a) above.

Taking It Further: Preferred shareholders usually have the return (or dividend rate) on their investment fixed by the terms of the share issue. They do not share in additional income. The concept of “earnings per share” for preferred shareholders; therefore, has no meaning. Common shareholders; however, do not have a dividend rate and “own” all of the company’s profit after the preferred shareholders receive their dividend.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-11A (a) ($ in millions except for market price per share) Canadian Pacific Railway Limited Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio

2013 $875 − $0 = $5.00 174.9 $160.65 = 32.13 times $5.00 $246 = .281 $875

2014 $1,476 − $0 = $8.54 172.8 $223.75 = 26.20 times $8.54 $241 = .163 $1,476

2012 $484 − $0 = $2.82 171.8 $100.90 = 35.78 times $2.82 $232 = .479 $484

Canadian National Railway Company Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio

2014 $3,167 − $0 = $3.86 819.9 $80.02 = 20.73 times $3.86 $818 = .258 $3,167

2013 $2,612 − $0 = $3.10 843.1 $60.56 = 19.54 times $3.10 $724 = .277 $2,612

2012 $2,680 − $0 = $3.08 871.1 $90.33 = 29.33 times $3.08 $652 = .243 $2,680

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

Problem 14-11A (Continued) (a) (Continued) In order to comment on whether a particular ratio has improved or deteriorated, one must take on the role of a user of that ratio. If the user is management, in the case of CP, earnings and earnings per share improved dramatically and continuously from 2012 to 2014. On the other hand, for Canadian National, earnings per share improved slightly in 2013, in spite of a drop in earnings, and had a large improvement in 2014. From a potential investor’s point of view, a lower priceearnings ratio is an indicator of lower risk. From that perspective, Canadian Pacific’s price-earnings ratio keeps decreasing because of the large and continuous increase in earnings per share. While this may be perceived as a deteriorating ratio, one must keep in mind that the pace of the increase in the market price of the shares is being outpaced by the increase in earnings. This might not necessarily be a negative trend to a potential investor. On the other hand, Canadian National’s price-earnings ratio deteriorated in 2013 and then improved in 2014. Finally, for the dividend payout ratio, if one takes the perspective of a current shareholder who receives dividends, Canadian Pacific’s ratio is deteriorating over the years, but in absolute terms, the dividend amounts have remained the same. Canadian National’s payout ratio has remained fairly constant.

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Problem 14-11A (Continued) (b) Canadian Pacific’s earnings per share are higher than Canadian National’s earning per share in 2013 and 2014, but it is imperative to compare earnings per share while also considering the market price of each share. Therefore, it is more useful to compare the price-earnings ratios. The price-earnings ratio of Canadian National is lower than Canadian Pacific, which may indicate that the market considers Canadian Pacific to be a superior investment. The trend of Canadian Pacific’s PE ratio is not good however. If a current shareholder is interested in receiving regular dividends, Canadian National’s dividend payout ratio would be considered more favourably as it pays out a higher proportion of its profits compared to Canadian Pacific. If a shareholder has purchased the shares for capital appreciation they would most certainly prefer Canadian Pacific’s dramatic increase in market price per share.

Taking It Further: The presentation of earnings per share and fully diluted earnings per share is required. The fully diluted earnings per share shows the “worst-case” scenario if all possible convertible securities are converted into common shares. This allows users to assess the impact of management decisions on their share holding and its potential dilution.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 14-12A (a) Before Discontinued Operations Ratio 2017 $1,160 − $20 = 33.53% 1. Return on equity $3,400 $1,160 − $20 = $3.80 2. Earnings per share 300 $45.50 3. Price-earnings = 11.97 ratio times $3.80

2016 $810 − $20 = 32.92% $2,400 $810 − $20 = $2.72 290 $33.65 = 12.37 times $2.72

2015 $570 − $15 = 30.83% $1,800 $570 − $15 = $1.98 280 $44.80 = 22.63 times $1.98

After Discontinued Operations Ratio 2017 $710 − $20 = 20.29% 1. Return on equity $3,400 $710 − $20 2. Earnings per = $2.30 share 300 $45.50 3. Price-earnings = 19.78 ratio times $2.30

2016 $730 − $20 = 29.58% $2,400 $730 − $20 = $2.45 290 $33.65 = 13.73 times $2.45

2015 $500 − $15 = 26.94% $1,800 $500 − $15 = $1.73 280 $44.80 = 25.90 times $1.73

_ Solutions Manual

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PROBLEM 14-12A (Continued) (b)

Before Discontinued Operations: Highlander’s return on equity increased slightly from 2015 to 2017 because the increase in profit from continuing operations was larger than the increase in shareholders’ equity. The earnings per share from continuing operations increased substantially due to a large increase in profit from continuing operations. The price-earnings ratio showed a substantial decrease due to the large increase in earnings per share from continuing operations. After Discontinued Operations: The return on equity shows an increase from 2015 to 2016, followed by a substantial decrease in 2017 from 2016 because the losses from discontinued operations offset all of the increase in profit from continuing operations, so profit is down while there is a substantial increase in shareholders’ equity. Earnings per share increased from 2015 to 2017 due to increased profit, but not as substantially as the earnings per share from continuing operations. The price-earnings ratio decreased due to the increase in earnings per share from continuing operations. Again, the decrease was not as substantial as the amount calculated before discontinued operations.

Taking It Further: Performing the analysis on results before discontinued operations reflects financial results as if the discontinued operations were not there. This is a better indication of ongoing performance and will lead to better comparability with years after 2017. The results before discontinued operations show substantial increases for return on equity and earnings per share caused by a substantial increase in profits from continuing operations. The losses from the discontinued operations in 2017 affected this trend for all three ratios. Solutions Manual .

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PROBLEM 14-1B (a) Cash Dividend

Stock Dividend

2-for-1 Stock Split

(1)

Assets

$9,000,000 − $750,000a = $8,250,000

No effect = $9,000,000

(2)

Liabilities

No effect = $2,500,000

(3)

Common shares No effect = $3,000,000

$3,000,000 + $750,000b = $3,750,000

No effect = $3,000,000

(4)

Retained earnings

$3,500,000 − $750,000 = $2,750,000

$3,500,000 − $750,000 = $ 2,750,000

No effect = $3,500,000

(5)

Total shareholders’ equity

$6,500,000 − $750,000 = $5,750,000

No effect ($6,500,000 + $750,000 − $750,000 = $6,500,000)

No effect = $6,500,000

(6)

Number of shares

No effect = 500,000

25,000 increase (25,000 + 500,000 = 525,000)

500,000 increase (500,000 × 2 = 1,000,000)

a b

500,000 × $1.50 = $750,000 500,000 × 5% × $30 = 25,000 × $30 = $750,000

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PROBLEM 14-1B (Continued) (b)

1. Cash Dividend Cash dividend 2,000 × $1.50 = $3,000 Fair value of shares 2,000 × $28.501 = $57,000 1

Assumed that fair value of the shares would likely drop by the amount of the cash dividend ($30 − $1.50 = $28.50)

2. Stock Dividend Stock dividend 2,000 × 5% = 100 shares Fair value of shares 2,100 × $28.57142 = $60,000 2

Assumed that fair value of the shares would drop accordingly ($30 ÷ 105% = $28.5714), the same amount as the stock dividend

3. Stock Split Stock split 2,000 × 2 = 4,000 shares Fair value of shares 4,000 × $153 = $60,000 3

Assumed that fair value of the shares would likely drop by half because of the stock split ($30 × ½ = $15)

In terms of final value, the shareholder would be in the same position having received either a cash or a stock dividend. However, a stock dividend would allow the shareholder to control the receipt of the cash and the related tax payment. Since shareholders can control when the shares are sold, they can control when the income tax would have to be paid on any gains. Alternatively, some shareholders may prefer to receive a cash dividend since they do not have to sell the shares to obtain the cash. As well, there are often brokerage fees associated with selling shares.

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PROBLEM 14-1B (Continued) (b) (Continued) The decision as to whether a cash or stock dividend would be more beneficial really depends on the preferences of the shareholder and their tax situation. A stock split would leave the investor in exactly the same position before and after the split. The investor would own twice as many shares, but each share should be worth about half as much. Therefore, on an overall basis, the shareholder’s financial position should not have changed.

Taking It Further The purpose of a reverse stock split is to increase market value per share and allow a company to continue trading its shares on a stock exchange; this increases marketability of the shares for investors and allows a company to continue accessing the secondary market. A public company in financial difficulty may experience a decline in the market value of the common shares to pennies per share. With a reverse stock split of 20 for 1 for example, the market value of the common shares should increase as much as 20 times that of the pre-stock split market price.

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PROBLEM 14-2B (a)

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Feb. 1 Cash Dividends—Common (75,000 × $1) .............................................. 75,000 Dividends Payable—Common .........

Credit

75,000

15 Date of record – no entry required Mar. 1 Dividends Payable—Common .............. 75,000 Cash ...................................................

75,000

April 1 No entry required—Memo only to increase the number of common shares to 150,000 (75,000 × 2) Dec. 1 Stock Dividends—Common (150,000 × 5% × $16) ............................... 120,000 Common Stock Dividends Distributable 120,000 20 Date of record – no entry required 31 Income Summary [$400,000 × (1 − 25%)] ............................. 300,000 Retained Earnings ............................ 300,000 31 Retained Earnings .................................. 195,000 Cash Dividends—Common .............. 75,000 Stock Dividends—Common ............. 120,000

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PROBLEM 14-2B (Continued) (b) Common Shares Date Jan.

Explanation 1 Balance

Ref.

Debit

Credit



Balance 1,700,000

Common Stock Dividends Distributable Date Dec.

Explanation 1

Ref.

Debit

Credit

Balance

120,000

Credit

Balance

75,000

75,000 0

Credit

Balance

120,000

120,000 0

Cash Dividends—Common Date

Explanation

Feb. 1 Dec. 31 Closing entry

Ref.

Debit

J1 J1

75,000

Ref.

Debit

J1 J1

120,000

Ref.

Debit

Stock Dividends—Common Date Dec.

Explanation 1 31 Closing entry

Retained Earnings Date

Explanation

Jan. 1 Balance Dec. 31 Closing entry 31 Closing entry

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Credit

Balance

 J1 300,000 J1 195,000

600,000 900,000 705,000

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PROBLEM 14-2B (Continued) (c) ASAAD CORPORATION Partial Balance Sheet December 31, 2017

Shareholders' equity Share capital Common shares, no par value, unlimited number of shares authorized, 157,500 shares issued ............................................. $1,700,000 Stock dividends distributable ..................... 120,000 Total share capital ..................................... 1,820,000 Retained earnings............................................. 705,000 Total shareholders' equity......................... $2,525,000

Taking It Further: The share price will usually change in inverse proportion to the split or dividend so that the total fair value of the shares in circulation remains the same. For example, with a two-for-one stock split, the fair value of an individual share will reduce by half, but there are twice as many shares after the split as before. The total fair value of all shares outstanding remains the same. This reflects the lack of change in the company’s total assets. In practice, the share price will usually rise above the split value, or the decreased value due to the stock dividend, because of investor interest.

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PROBLEM 14-3B (a) Shares authorized Shares issued

150,000 15,300

(b) Common shares Contributed surplus—reacquisition of Common shares Retained earnings

$597,292 $4,560 $203,848

Calculations:

Bal 1. 2. 3. 4. 5.

Common shares (a)

Number of shares (b)

$490,000 (21,000) 469,000 169,200 638,200 64,500 702,700 (46,848) 655,852 (58,560) $597,292

14,000 (600) 13,400 3,600 17,000 1,000 18,000 (1,200) 16,800 (1,500) 15,300

Average Cont.surplus per share —reacq. of amount common (a) ÷ (b) shares $35.00 35.00

Retained earnings

$12,000 (1) (5,400) 6,600

$220,000

(2) (6,600) 0 (3) 4,560 $ 4,560

(16,152) 203,848

37.54 39.04 39.04 39.04

$203,848

(1) (600 × $35) − (600 × $44) = $21,000 − $26,400 = $5,400 (2) (1,200 × $39.04) − (1,200 × $58) = $46,848 − $69,600 = $(22,752). A maximum of $6,600 is deducted from contributed surplus; the remainder, $16,152, is deducted from retained earnings. (3) (1,500 × $39.04) – (1,500 × $36) = $58,560 − $54,000 = $4,560

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PROBLEM 14-3B (Continued)

Taking It Further: Stock compensation plans are used by companies to attract, retain, and remunerate key employees. When issuing shares to fulfill employee stock compensation plans, a company wants to prevent the additional share issue from causing a reduction of earnings per share for existing shareholders. To achieve this goal and avoid dilution, the company buys back its own shares. Part of the benefit to employees from receiving shares as remuneration or compensation comes from the future increase in the market value of the common shares obtained. Employees should; therefore, be motivated to act in the best interest of the company to ensure profits increase which will in turn lead to increases in the market value of the shares received as compensation. Cash bonuses, on the other hand, do not necessarily motivate the future behaviour of employees as they are often based on the performance in the past. Paying bonuses also has the disadvantage of draining cash out of the business. For these reasons, companies reacquire common shares for employee compensation plans.

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PROBLEM 14-4B Calculations needed for parts (a) and (b) Common Shares (1) (2) Date Jan. 1, Jan. 17 Sub. Feb. 27 Sub. Apr. 14 Sub. Aug. 16 Sub. Dec. 3 Bal.

No. of Shares 500,000 50,000 550,000 (20,000) 530,000 530,000 1,060,000 (100,000) 960,000 48,000 1,008,000

(3) Average per Total Cost Share Amount $4,000,000 $8.00 500,000 4,500,000 8.18 (163,600) 8.18 4,336,400 8.18 4,336,400 (409,000) 3,927,400 480,000 4,407,400

4.09 4.09 4.37

Preferred Shares (1) (2)

Date Jan. 1, June 25 Bal.

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(3) Average per No. of Shares Total Cost Share Amount 4,000 $600,000 $150.00 (500) (75,000) 150.00 3,500 525,000 150.00

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PROBLEM 14-4B (Continued) (a) Jan. 17 Cash ................................................. Common Shares ......................... (50,000 shares × $10)

500,000 500,000

Feb. 27 Common Shares (20,000 × $8.18) .......... 163,600 Contributed Surplus— Reacquisition of Common Shares ....... 2,000 Retained Earnings .................................... 74,400 Cash (20,000 × $12)......................... 240,000 June 25 Preferred Shares (500 × $150) .................. 75,000 Contributed Surplus— Reacquisition of Preferred Shares Cash (500 × $145)............................

2,500 72,500

Aug. 16 Common Shares (100,000 × $4.09) ........ 409,000 Retained Earnings .................................. 691,000 Cash (100,000 × $11)....................... 1,100,000 Oct. 17 Stock Dividends (48,000 × $10) .............. 480,000 Stock Dividends Distributable ....... 480,000 Dec. 3

Stock Dividends Distributable ............... 480,000 Common Shares ............................. 480,000

(b) Share capital Preferred shares $9 noncumulative, convertible, 100,000 authorized, 3,500 issued $ 525,000 Common shares, unlimited number of shares authorized, 1,008,000 issued 4,407,400

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PROBLEM 14-4B (Continued) Taking It Further: Talty may have split the common shares to make the price more affordable. As for the stock dividend, it might have been declared to provide a return to shareholders but without having to reduce cash. Another reason for the stock dividend may be to permanently increase share capital and make the market value of the shares distributed unavailable for cash dividends.

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PROBLEM 14-5B (a) COQUITLAM CORPORATION Income Statement Year Ended December 31, 2017 Net sales ........................................................................ Cost of goods sold ........................................................ Gross profit.................................................................... Operating expenses ..................................................... Profit from operations................................................... Other expenses ............................................................. Profit before income taxes ........................................... Income tax expense* ..................................................... Profit from continuing operations................................ Discontinued operations Loss on discontinued operations of ceramics division net of $37,500** income taxes...................... $112,500 Gain on disposal of discontinued ceramics division net of $17,500*** income tax savings 52,500 Profit.......................................................... Earnings per share Profit ....................................................................

$1,750,000 888,000 862,000 451,000 411,000 18,000 393,000 98,250 294,750

60,000 $234,750

$ 0.90

$234,750 – $55,000 = $0.90 200,000 * ($393,000 × 25%) = $98,250 ** ($150,000 × 25%) = $37,500 *** ($70,000 × 25%) = $17,500

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PROBLEM 14-5B (Continued) (b) COQUITLAM CORPORATION Statement of Comprehensive Income Year Ended December 31, 2017

Profit.......................................................... Other comprehensive income Gain, net of $11,750* in income tax .................................................... Comprehensive income ...........................

$234,750

35,250 $270,000

*($47,000 × 25%) = $11,750

Taking It Further: A component of an entity is a separate major line of business or geographic area of operations that is clearly distinguishable from the rest of the entity and has its own separate cash flows and operations. Investors use profit (loss) from continuing operations to get a picture of the company’s future growth potential. Profit (loss) from continuing operations is a better indication of ongoing performance of the business on a comparative basis. Discontinued operations represent atypical items. Investors trying to get a picture of the company’s future growth potential should not include discontinued operations in their analysis of future earnings potential because they will not exist in the future.

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PROBLEM 14-6B (a) 2017 Jul. 9 Notes Payable .................................. Income Taxes Payable................ Retained Earnings ...................... ($61,500 × 25% = $14,250) (b) Aug. 7 Common Shares .............................. Retained Earnings ........................... Cash .............................................

61,500 15,375 46,125

57,500 32,500 90,000

(c) Comprehensive Income Year Ended September 30, 2017 Fees earned .....................................................................$1,647,000 Operating expenses ................................ $971,000 Depreciation expense ......................... 74,000 1,045,000 Profit from operations................................................... 602,000 Other revenue .................................................................... 65,000 Profit before income taxes ........................................... 667,000 Income tax expense* ......................................................... 166,750 Profit ...................................................................................$ 500,250 * ($667,000 × 25%) = $166,750

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PROBLEM 14-6B (Continued) (d) WEATHER VANE LIMITED Statement of Retained Earnings Year Ended September 30, 2017

Balance, October 1, 2016 as previously reported Add: Correction of error in recording payment on notes payable in 2016, net of $15,375 income tax expense........................................ Balance, October 1 as adjusted .......................... Add: Profit............................................................. Less: Reacquired common shares $ 32,500 Cash dividends ................... 150,000 Retained earnings, September 30, 2017 .............

$ 845,000

46,125 891,125 500,250 1,391,375 182,500 $1,208,875

Taking It Further: Other comprehensive income (OCI) includes certain gains and losses that are not included in profit, such as unrealized gains and losses from some long-term strategic equity investments and foreign currency translation. OCI is reported on the comprehensive income statement in an all-inclusive format with the income statement or as a separate financial statement. OCI is reported separately on the statement of comprehensive income because it is not closed to retained earnings. OCI is closed to Accumulated Other Comprehensive Income (AOCI), which appears in the equity section of the balance sheet, immediately after Retained Earnings.

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PROBLEM 14-7B (a), (b), and (c) Preferred Shares Date

Explanation

Ref.

Jan.

1 Balance (15,000)



Debit

Credit

Balance 850,000

Common Shares Date

Explanation

Ref.

Jan. Mar. July

1 Balance (255,000) 1 Issue of shares (20,000) 1 Reacquisition of shares (25,000)

 J1 J1

Debit

Credit

Balance

3,210,000 310,000 3,520,000 3,200,000

320,000

Contributed Surplus—Reacquisition of Common Shares Date

Explanation

Ref.

Jan. July

1 Balance 1 Reacquisition of shares

 J1

Debit

Credit

Balance

20,000

0 20,000

Credit

Balance

Retained Earnings Date Jan. 1 Sept. 1 Dec. 31 31

Explanation

Ref.

980,000  J1 42,000 938,000 J1 525,000 1,463,000 1,418,000 J1 45,000

Balance Correction of error Income Summary Dividends

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PROBLEM 14-7B (Continued) (b)

GENERAL JOURNAL

Date Mar.

Account Titles

J1 Debit

1 Cash (20,000 × $15.50) .......................... 310,000 310,000 Common Shares ...............................

Mar. 31 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... Cash ...................................................

15,000

Jun. 30 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... Cash ...................................................

15,000

July

Credit

15,000

1 Common Shares (25,000 × $12.801) ....... 320,000 Contributed Surplus—Reacquisition 20,000 of Common Shares ........................... Cash (25,000 × $12) ........................... 300,000 ($3,210,000 + $310,000) ÷ (255,000 + 20,000) = $12.80

Sep. 1 Retained Earnings [$60,000 × (1 − 30%)] ............................. Income Tax Payable (Recoverable) ($60,000 × 30%)...................................... Accounts Receivable ........................

42,000 18,000 60,000

Sep. 30 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... 15,000 Cash ................................................... 15,000 (c) Dec. 31 Income Summary [$750,000 × (1 − 30%)] ............................. 525,000 Retained Earnings ............................ 525,000 31 Retained Earnings .................................... 45,000 Cash Dividends—Preferred.............. Solutions Manual .

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PROBLEM 14-7B (Continued) (d)

MICHAUD CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017

Balance January 1, as previously reported

Preferred Shares

Common Shares

Contributed Surplus– Reacquisition of Common Shares

$850,000

$3,210,000

Correction for overstatement of 2016 sales, net of $18,000 income tax savings Balance January 1, as adjusted 850,000 Issued for cash Reacquired shares Cash dividends—preferred Profit Balance, December 31 $850,000

3,210,000 310,000 (320,000)

$3,200,000

Retained Earnings

Total

$980,000

$5,040,000

(42,000)

938,000

4,998,000 310,000 (300,000) (45,000) 525,000 $ 5,488,000

20,000

$20,000

(45,000) 525,000 $1,418,000

Note X: $15,000 of preferred dividends are in arrears. _ Solutions Manual

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PROBLEM 14-7B (Continued)

Taking It Further: The amount recorded, net of tax, for the effect of the retroactive changes in accounting policy for revenue recognition would appear as an adjustment to the opening balance of retained earnings, in the same way as the correction of the prior year’s sales error. To record the effect in current year accounts would misstate current year results. In addition, comparative figures are restated to adjust for the retroactive change that has been implemented. This treatment enhances comparability and usefulness of the information. A change in accounting policy can be given prospective treatment, the same way as a change in estimate. When new standards are adopted, companies are often given the option to apply the changes required by the new accounting standards on a prospective basis. The other exception to this type of application is when it is impractical to do a retroactive application. This would be the case when significant estimates are required, if the required information is not available, or if the amounts involved are not material

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PROBLEM 14-8B (a) ASTER AUTOMOBILES INC. Statement of Comprehensive Income Year Ended December 31, 2017 Sales .............................................................................. Cost of goods sold ....................................................... Gross profit ................................................................... Operating expenses Depreciation expense ......................... $19,000 Office expense ..................................... 9,000 Advertising expense ........................... 5,860 Profit from operations .................................................. Other revenues Gain on sale of equipment ..................................... Other expenses Interest expense Profit before income taxes ........................................... Income tax expense* .................................................... Profit .............................................................................. Other comprehensive income Loss on equity investment, net of $850 income tax savings** ............................... Comprehensive income................................................

$670,000 356,000 314,000

33,860 280,140 800 280,940 2,650 278,290 69,573 208,717

2,550 $206,167

*$278,290 × 25% = $69,573 **[$3,400 × (1 − 25%)] = $2,550

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PROBLEM 14-8B (Continued) (b) ASTER AUTOMOBILES INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017

Balance, January 1 Dividends Comprehensive income Balance, December 31

Common Shares

Contributed Surplus– Reacquisition of Common Shares

$245,000

$5,500

$245,000

$5,500

Retained Earnings $53,180 (5,000) 208,717 $256,897

Accumulated Other Comprehensive Income (Loss) (2,550) $(2,550)

Total $303,680 (5,000) 206,167 $504,847

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PROBLEM 14-8B (Continued) (c) ASTER AUTOMOBILES INC. Partial Balance Sheet December 31, 2017 Shareholders' equity Contributed capital Share capital Common shares, 10,000 shares issued Other contributed capital Contributed surplus—reacquisition of common shares......................................... Total contributed capital ....................................... Retained earnings.................................................. Accumulated other comprehensive income (loss) Total shareholders' equity ....................................

$245,000 5,500 250,500 256,897 (2,550) $504,847

Taking It Further: From the perspective of a shareholder, it is important to find out everything that has occurred in the fiscal year to the different accounts representing the company’s wealth. Issuance of shares for example may be very dilutive to the earnings for each shareholder. A creditor will be looking at other types of transactions during the fiscal year. Repurchases of shares may be draining cash out of the business, for example. Knowing balances is important, and this can be obtained from the balance sheet. Knowing and understanding the transactions that have occurred gives better information to assess trends and make decisions.

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PROBLEM 14-9B KANADA INC. Statement of Changes in Shareholders’ Equity Year Ended September 30, 2017

Balance, October 1, 2016 Cash dividends–preferred Stock dividends Reacquired common shares Comprehensive income Balance, September 30, 2017

Preferred Shares

Common Shares

Retained Earnings

$465,000

$900,000

$540,000 (30,000) 1 (35,000) (8,080) 227,500 4 $694,420

35,000 2 (71,920) 3 $465,000

$863,080

Accumulated Other Comprehensive Income

Total

$95,000

18,900 $113,900

$2,000,000 (30,000) 0 (80,000) 246,400 $2,136,400

6,000 × $5 = $30,000 25,000 × 4% × $35 = 1,000 × $35 = $35,000 3 ($900,000+ $35,000) ÷ (25,000 + 1,000) = $35.96, then $35.96 x 2,000 = $71,920, then $80,000 $71,920 = $8,080 4 $325,000 × (1 − 30%) = $227,500 5 $27,000 × (1 − 30%) = $18,900 2

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PROBLEM 14-9B (Continued)

Taking It Further: Other comprehensive income is closed at the end of the year to accumulated other comprehensive income. In turn, accumulated other comprehensive income is an element of shareholders’ equity in the balance sheet. For companies following ASPE, there is no other comprehensive income and consequently no accumulated other comprehensive income either.

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PROBLEM 14-10B (a)

Weighted Average Number of Shares

Date Aug. 1 Nov. 30 Feb. 1 Mar. 1 July 31

Beginning balance Issued 37,500 shares Reacquired shares Issued 30,000 shares Ending balance

Actual Fraction number of Year 350,000 12/12 37,500 8/12 (6,000) 6/12 30,000 5/12 411,500

Weighted Average 350,000 25,000 (3,000) 12,500 384,500

(b) Earnings per Share Preferred dividend not cumulative or declared = Income available to common shareholders ÷ Weighted average number of common shares = $1,022,800 ÷ 384,500 = $2.66 (c)

Preferred dividend noncumulative with partial ($60,000) dividend paid to preferred shareholders = Income available to common shareholders ÷ Weighted average number of common shares = ($1,022,800 − $60,000) ÷ 384,500 = $2.50

(d)

The number of common shares issued at July 31, 2017 is 411,500 as calculated in part (a) above.

Taking It Further: A weighted average number of shares is used in the earnings per share calculation because the issue of shares and other activity affecting the number of shares issued during the period changes the amount of net assets upon which income can be earned. . Solutions Manual .

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PROBLEM 14-11B (a)

($in millions except for market price per share)

Husky Energy Inc. Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio

2014 $1,258 − $13 = $1.27 983.6 $27.50 = 21.65 times $1.27 $1,180 = .94 $1,258

2013 $1,829 − $13 = $1.85 983.0 $33.70 = 18.22 times $1.85 $1,180 = .65 $1,829

2014 $2,699 −$0 = $1.85 1,462 $36.90 = 19.9 times $1.85 $1,490 = .552 $2,699

2013 $3,911 − $0 = $2.61 1,501 $37.24 = 14.3 times $2.61 $1,095 = .280 $3,911

Suncor Energy Inc. Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio

In order to comment on whether a particular ratio has improved or deteriorated, one must take on the role of a user of that ratio. One must also consider the impact of the drop in oil prices during the time period being analyzed. Instead of looking for improvements, a user would look at which company weathered the drop in oil prices better. Both companies experienced a similar percentage drop in profit from 2013 to 2014. Suncor did a better job because its market price per share decreased by a smaller percentage than did Husky’s.

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PROBLEM 14-11B (Continued) (a)

(Continued) From a potential investor’s point of view, the lower the price-earnings ratio, the lower the risk. From that perspective, Husky’s price-earnings ratio has been higher than Suncor’s. This could indicate a better market conception of Husky. In terms of the dividend payout ratio, Husky’s ratio shows a commitment in paying out the same amount of dividends in spite of the reduced earnings. The payout ratio was very high in 2014 as a consequence of this decision. In this case, maintaining the constant dividend would be considered a positive sign even though the ratio looks worse. Suncor’s dividend payout ratio also increased, but by a lower percentage than that of Husky. The absolute amount of the dividend increased in spite of a reduction in the number of shares issued.

(b) Based on earnings and payout ratios, Suncor would be considered the more favourable of the two companies. Suncor demonstrates less volatility between the two years and therefore may be considered more favourable by investors looking for a less risky investment.

Taking It Further: The presentation of earnings per share and fully diluted earnings per share is required. The fully diluted earnings per share ratio shows the “worst-case” scenario if all possible securities are converted into common shares. This allows users to assess the impact of management decisions on their share holding and its potential dilution.

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PROBLEM 14-12B (a)

Before Discontinued Operations Ratio 2017 $1,250 − $80 = 34.41% 1. Return on equity $3,400 $1,250 − $80 = $2.60 2. Earnings per share 450 $24.40 3. Price-earnings = 9.38 ratio times $2.60

2016 $1,130 − $80 = 43.75% $2,400 $1,130 − $80 = $2.23 470 $19.88 = 8.91 times $2.23

2015 $990 − $60 = 48.95% $1,900 $990 − $60 = $2.02 460 $21.60 = 10.69 times $2.02

After Discontinued Operations Ratio 2017 $430 − $80 = 10.29% 1. Return on equity $3,400 $430 − $80 2. Earnings per = $0.78 share 450 $24.40 3. Price-earnings = 31.28 ratio times $0.78

2016 $980 − $80 = 37.50% $2,400 $980 − $80 = $1.91 470 $19.88 = 10.41 times $1.91

2015 $810 − $60 = 39.47% $1,900 $810 − $60 = $1.63 460 $21.60 = 13.25 times $1.63

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PROBLEM 14-12B (Continued) (b)

Before Discontinued Operations: All Care’s return on equity decreased from 2015 to 2017 due to a larger increase in shareholders’ equity than profit from continuing operations. The earnings per share increased due to larger profit from continuing operations and a decrease in the number of common shares outstanding. The priceearnings ratio showed a slight decrease; an increase in share price was offset by an increase in earnings per share from continuing operations. After Discontinued Operations: The return on equity shows a sharp decrease in 2017 due to losses from discontinued operations. The same loss also causes a large decrease in earnings per share for 2017. This shows a different trend than earnings per share before discontinued operations. The sharp decrease in earnings per share caused a large increase in the price-earnings ratio in 2017. This is also a different trend than the price-earnings ratio from continuing operations.

Taking It Further: If I were a shareholder, I would likely focus my attention on the results before discontinued operations that show substantial increases in return on equity and earnings per share caused by a substantial increase in profits from continuing operations. The price-earnings ratio also remains modest in spite of the increase in the market price of the shares. If I were a creditor, I would likely want to find out more about the circumstances that lead to the discontinuance of the operations at an overall loss. These losses would have brought a large drain on cash. I would want to know that management has taken the necessary measures for this type of event not recurring.

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BYP14-1 FINANCIAL REPORTING PROBLEM (a)

For the 2014 fiscal year of Corus: (1) There were no stock dividends or stock splits. (2) Other comprehensive income in 2014 was an overall loss of $74,000 (3) There were no corrections of prior period errors.

(b) For the 2014 fiscal year, Corus did not repurchase any shares. They did repurchase shares in 2013. The Consolidated Statements of Changes in Shareholders’ Equity reports a reduction in Share Capital of $708,000 and a reduction in Retained Earnings of $756,000 attributed to the repurchase of shares. The two amounts make up the total paid in cash to repurchase the shares of $1,464,000. (c) The basic earnings per share ratio for 2013 was $1.91. The earnings per share weakened in 2014. (d) Fully diluted earnings per share were reported in both years. In 2014, the fully diluted amount was one cent lower than the basic amount, at $1.76 per share. For the 2013 fiscal year, the fully diluted figure was also one cent lower than the basic earnings per share ratio, at $1.90. (e) The price-earnings ratio increased from 13.2 times in 2013 to 13.8 times in 2014. The price-earnings ratio increased from 2013 to 2014 indicating that investors believe the current income levels will continue or increase. This is inconsistent with the answer from part (c) because the basic earnings per share decreased from 2013 to 2014. However, the decrease does not appear to be affecting the market price per share nor the price-earnings ratio. (f)

Corus’ payout ratio for 2013 was 0.53 ($84,452 ÷ $159,895). The causes for the increased payout ratio from 2013 to 2014 is the increase in dividends and decline in profit.

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BYP14-2 INTERPRETING FINANCIAL STATEMENTS (a)

A cash dividend would cause assets (cash) and shareholders’ equity (retained earnings) to decease by the amount of the dividend. There would be no impact on liabilities or on the number of shares issued. Stock dividends have no effect on assets or liabilities. What does change are elements of equity. Retained earnings are reduced and the common shares account increases by the amount of the stock dividend. A stock split would have no impact on assets, liabilities, or shareholders’ equity. All that would change is that the number of shares issued would increase by a multiple.

(b) The reason PotashCorp repurchased shares is likely because management concluded that the stock price was undervalued and the company had excess cash available. (c)

The market reacted favourably to the reacquisition as evidenced by the fact that the stock’s market price post stock repurchase was higher and so was the increase in the dividends per share.

(d) PotashCorp paid more than the average book value per share (average share amount) on the shares repurchased as evidenced by the decrease in the account Contributed Surplus and its corresponding footnote.

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BYP14-2 (Continued) (e) (in millions of US dollars, except per share data): 2014

Ratio Return on shareholders' equity

Earnings per share

Payout ratio

$1,536 $8,792 + $9,628 2

2013

= 16.7%

$1,785 $9,628 + $9,912 2

18.3%

$1,536 838.1

= $1.83

$1,785 864.6

= $2.06

$1,164 $1,536

$1,146 $1,785

= 0.64

0.76

Potash’s profit decreased 14% [($1,785 – $1,536) / $1,785] in 2014. This deterioration in profit for the year led to a corresponding decrease in the earnings per share ratio and return on shareholders’ equity.

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BYP14-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP14-4 COMMUNICATION ACTIVITY MEMORANDUM To: From: Re:

Student Earnings per Share and Price-Earnings Ratio

Earnings per share is an important ratio for shareholders because it provides investors with a measure of the income earned by each common share. Earnings per share is calculated as earnings available to common shareholders (profit – preferred dividends) divided by the weighted average number of common shares outstanding during the period. The price-earnings ratio is important to investors as it provides investors with a meaningful way of comparing different companies when there are wide variations in the number of shares issued and the share prices. The price-earnings ratio is calculated as the market price divided by the earnings per share. Therefore, the earnings per share must be calculated before the price-earnings ratio can be determined. The price-earnings ratio will vary according to changes in earnings per share. For example, increases in earnings per share without a corresponding increase in the market price of the share will cause the priceearnings ratio to decrease. A high price-earnings ratio indicates that investors are willing to pay a higher price for the company’s shares given its level of earnings per share. A high price-earnings ratio may occur because investors are confident about the company’s potential to earn profit in the future. However, a high price-earnings ratio may also indicate that the company’s shares are currently overpriced. While a low price-earnings ratio may indicate the investors are not confident about the company’s future performance, it may also indicate the company’s shares are undervalued and signal that the shares may currently be a good investment opportunity.

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BYP14-4 (Continued) For companies using ASPE, there is no requirement to present earnings per share. Since private companies do not have their shares traded on the stock market, the share values are not often tested for their market value. Consequently, shareholders are not able to compare earnings per share to the shares’ market value. This means that the usefulness of the earnings per share ratio is substantially diminished. As well, in the case of private enterprises, shareholders are usually limited in number and have more hands-on access to the company’s financial information and are more familiar with its operations. They are; therefore, better equipped to assess profit performance, even though they might not have this ratio for reference.

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BYP14-5 “ALL ABOUT YOU” ACTIVITY (a)

Canadian Tire’s distinct sources of revenue include: 1. Retail: including: a. Canadian Tire b. Petroleum c. Mark’s d. FGL Sports 2. CT REIT segment which holds 273 properties 3. Financial services 4. Foreign operations Knowledge of these distinct sources of revenue will help investors interpret the financial statement information.

(b)

The management’s discussion and analysis includes: 1. A preface 2. Company and industry overview 3. Core capabilities 4. Historical performance highlights 5. Financial aspirations and strategic objectives 6. Financial performance 7. Liquidity, capital resources and contractual obligations 8. Tax matters 9. Accounting policies and estimates 10. Enterprise risk management 11. Controls and procedures 12. Social and environmental responsibility 13. Transactions between related parties 14. Forward-looking statements and other investor communication The information contained in the “Management’s Discussion and Analysis” (MD&A), although delivered from management’s perspective, gives information that is not strictly financial reporting as is the case with the financial statements. The topics covered give a more in-depth understanding of the company’s business model, its history, and aspirations, which might affect your opinion concerning an investment decision.

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BYP14-5 (Continued) (c)

Cash dividends per share in 2014 were $1.9625 and $1.4875 for 2013. This demonstrates an increasing dividend return on your investment. This increase may be an important consideration in your investment decision if the dividend is a substantial component of what the investment is expected to yield.

(d)

The basic earnings per share for 2014 was $7.65.

(e)

The web page under Investors includes links to the following: 1. Overview 2. Financial Reporting 3. Financial News 4. Events & Presentations 5. Shareholders 6. Debtholders 7. Corporate Governance 8. Investor Resources Canadian Tire’s share price at December 31, 2014 was $122.74.

(f)

The price-earnings ratio is $122.74 ÷ $7.65 = 16

(g)

Canadian Tire is listed on the TSX stock exchange under the symbol CTC.A and its auditors are Deloitte LLP.

(h)

Included on SEDAR are documents including: 1. Code of conduct 2. Interim financial statements 3. MD&A 4. News releases 5. Annual reports 6. Proxy forms and 7. Notices of meetings

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BYP14-5 (Continued) (i)

Solutions will vary depending on date retrieved: As of Nov. 25, 2015, the price-earnings ratio was 15.29 and industry 28.36. At that date, from the perspective of a potential investor, Canadian Tire’s price earnings ratio is better (lower) than the industry average.

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BYP14-6 Santé Smoothie Saga (a) 1.

Because Santé Smoothies & Sweets Ltd. is not a public company with its shares traded on a stock exchange, the fair value of the common shares is not easily established. On the other hand, arriving at the fair value can be done the same way someone outside the business might go about coming up with the purchase price of a business. It would be advisable for a business valuation to be done by an expert valuator to arrive at a fair value per share that everyone involved can agree on.

Natalie’s purchase price paid for the shares will not necessarily correspond to the current fair value of the shares at the date of repurchase. Natalie’s investment in the business goes beyond the amount of cash invested in return for the 10 common shares she purchased.

If you assume that $1,200 will be paid for each share repurchased, and since the total number of shares to be repurchased is 180 shares (210 less 30), the amount of cash needed to repurchase the shares will be $216,000 (180 × $1,200).

The difference between the average per share amount of the shares held and the price paid for the reacquisition of the shares will reduce retained earnings. In this case the average per share amount is $58.10 ($12,200 ÷ 210). Since 180 shares will be repurchased, $10,458 will be debited to the Common Shares account, and the remaining $205,542, will be debited to the Retained Earnings account. Since the current balance of retained earnings is $241,026, the balance in retained earnings, after the shares repurchase would be $35,484 ($241,026 – $205,542).

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BYP14-6 (Continued) (a) 4. (Continued) Although there is a sufficient balance of retained earnings to allow the share repurchase, with such a substantial reduction in its balance, it is unlikely that dividends of $85,000 could be paid after the share repurchase. When dividends are declared subsequent to the share repurchase, the amount of dividends received by each of the three shareholders would be equal, as they each would own 10 common shares of the company. 5.

Janet and Brian must consider that the option for the business to repurchase the majority of their shares is limited to the amount of cash available to execute the transaction. Taking out significant amounts of cash from the business cannot be done without borrowing more funds and consequently crippling the operations of the business. It is very unlikely that a bank would lend money to Santé Smoothies & Sweets Ltd. and let it use that cash to repurchase the common shares. The cash borrowed would be leaving the business and not be available to sustain and grow the operations, which would be needed in order to be able to repay the loan principal and interest. The share reacquisition might not be possible under the current set of circumstances, nor would it be wise to do so while trying to ensure the future success of the business. An alternative available to reach the objective of an equal number of voting shares owned by each shareholder is for Janet and Brian to convert their excess common shares (90 shares each) into non-voting preferred shares. These new preferred shares could have a high dividend rate, giving Janet and Brian a continued return on their investment in the form of dividends. While Natalie would not be receiving these preferred share dividends, she would remain a one-third owner of the business and would consequently be motivated to stay on with the business.

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BYP14-6 (Continued) (b) Common Shares (180 × $58.10) ..................... 10,458 Retained Earnings .......................................... 205,542 Cash (180 × $1,200)........................... 216,000

Common shares, 30 shares × $58.10 = $1,742 ($1 rounding) alternately $12,200 - $10,458 = $1,742

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CHAPTER 15 Non-Current Liabilities ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Describe the characteristics of bonds. 2. Calculate the price of a bond. 3. Account for bond transactions.

1, 2, 3

1, 3, 4

4, 5, 6

2, 3

1,2, 3, 4

7, 8

4, 5, 6, 7, 8, 9, 10, 11, 12

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

4. Account for the retirement of bonds. 5. Account for instalment notes payable.

9, 10

13, 14

2, 4, 5, 6, 7, 8, 9, 10, 11, 12, 14 13, 14

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

5, 6, 7, 8

11, 12, 13

15, 16, 17, 18

15, 16, 17, 18, 19

9, 10, 11

6. Account for leases.

14, 15, 16

7. Explain and illustrate the methods for the presentation and analysis of non-current liabilities.

17, 18, 19, 20

19, 20, 21 22, 23

21, 22

1, 2, 7, 8, 9, 13, 14

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare entries to record issuance of bonds at par, and interest accrual.

Simple

20-30

Fill in missing amounts in amortization schedule, record bond transactions, and show balance sheet presentation.

Complex

20-30

Describe the features of a bond, calculate the price of a bond, record bond transactions.

Moderate

25-30

Describe the features of a bond, calculate the price of a bond, record bond transactions.

Moderate

20-30

Calculate effective rate using excel or a financial calculator and record bond transactions.

Complex

30-40

Record bond transactions.

Moderate

30-35

Record note transactions, show balance sheet presentation.

Moderate

30-35

Prepare entries to record issuance of bonds, balance sheet presentation, and bond redemption.

Simple

15-20

Prepare instalment payment schedule, record note transactions and show balance sheet presentation.

Moderate

25-30

10A

Record note transactions.

Moderate

25-30

11A

Prepare instalment payment schedule and record note transactions. Show balance sheet presentation.

Moderate

25-30

12A

Analyze lease situations. Discuss financial statement presentation.

Moderate

20-25

13A

Calculate and analyze solvency ratios.

Simple

15-20

14A

Prepare liability section of balance sheet and analyze leverage.

Moderate

25-35

Prepare entries to record issuance of bonds at par, and interest accrual.

Simple

20-30

Fill in missing amounts in amortization schedule, record bond transactions, and show balance sheet presentation.

Complex

20-30

Describe the features of a bond, calculate the price of a bond, record bond transactions.

Moderate

25-30

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

Describe the features of a bond, calculate the price of a bond, record bond transactions.

Moderate

20-30

Calculate effective rate using excel or a financial calculator and record bond transactions.

Complex

30-40

Record bond transactions.

Moderate

30-35

Record note transactions, show balance sheet presentation.

Moderate

30-35

Prepare entries to record issuance of bonds, balance sheet presentation, and bond redemption.

Simple

15-20

Prepare instalment payment schedule, record note transactions and show balance sheet presentation.

Moderate

25-30

10B

Record note transactions.

Moderate

25-30

11B

Prepare instalment payment schedule and record note transactions. Show balance sheet presentation.

Moderate

25-30

12B

Analyze lease situations. Discuss financial statement presentation.

Moderate

20-25

13B

Calculate and analyze solvency ratios.

Simple

15-20

14B

Prepare liability section of balance sheet and analyze leverage.

Moderate

25-35

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Objectives

Knowledge Q15-3 E15-1

Comprehension Q15-1 Q15-2 BE15-1

Application P15-1A P15-1B P15-3A P15-3B P15-4A P15-4B

2. Calculate the price of a bond.

Q15-4 Q15-5 E15-1

Q15-6

BE15-2 BE15-3 E15-2 E15-3 E15-4 E15-6 E15-7 E15-8 P15-1A P15-2A P15-3A

P15-4A P15-5A P15-6A P15-7A P15-1B P15-2B P15-3B P15-4B P15-5B P15-6B P15-7B

3. Account for bond transactions.

Q15-7

Q15-8

BE15-4 BE15-5 BE15-6 BE15-7 BE15-8 BE15-9 BE15-10 BE15-11 BE15-12 E15-2 E15-4 E15-5 E15-6 E15-7 E15-8 E15-9 E15-10 E15-11

E15-12 E15-14 P15-1A P15-2A P15-3A P15-4A P15-5A P15-6A P15-7A P15-8A P15-1B P15-2B P15-3B P15-4B P15-5B P15-6B P15-7B P15-8B

Q15-10

Q15-9 BE15-13 BE15-14 E15-13 E15-14 P15-5A

P15-6A P15-7A P15-8A P15-5B P15-6B P15-7B P15-8B

1. Describe the characteristics of bonds.

4. Account for the retirement of bonds.

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Evaluation

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Learning Objectives

Knowledge

Comprehension

5. Account for instalment notes payable.

Q15-10 Q15-11

6. Account for leases.

Q15-14 Q15-15 Q15-16

7. Explain and illustrate the methods for the presentation and analysis of non-current liabilities. Broadening Your Perspective

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Accounting Principles, Seventh Canadian Edition

Application Q15-11 Q15-12 Q15-13 BE15-15 BE15-16 BE15-17 BE15-18 E15-15 E15-16 E15-17 E15-18 E15-19 BE15-19 BE15-20 BE15-21

P15-6A P15-7A P15-8A P15-9A P15-10A P15-11A P15-6B P15-7B P15-8B P15-9B P15-10B P15-11B E15-20 P15-12A P15-12B

Q15-20

BE15-22 BE15-23 E15-21 E15-22 P15-1A P15-2A P15-7A P15-8A

P15-9A P15-14A P15-1B P15-2B P15-7B P15-8B P15-9B P15-14B

BYP15-5

BYP15-1 BYP15-4

15-5

Analysis

Synthesis

P15-13A P15-13B

BYP15-2 BYP15-3 BYP15-6

Chapter 15

Evaluation

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Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

Current liabilities are obligations that are expected to be settled within one year from the balance sheet date, or the company’s normal cycle, whichever is longer. Examples include accounts payable and interest payable. Non-current liabilities are obligations that are expected to be settled later than one year from the balance sheet date. Examples include non-current mortgage payable and bonds payable.

2. (a) Secured bonds have specific assets pledged as collateral by the bond issuer while unsecured bonds do not. (b) Convertible bonds have a conversion feature allowing the bondholder to exchange the bond, usually to common shares while callable bonds (also known as redeemable bonds) are bonds that the issuing company can redeem (buy back) at a stated dollar amount, prior to maturity. 3. (a) Face value of a bond: the amount of principal that the issuer must pay at the bond’s maturity date. (also known as the maturity value or par value). (b) Contractual interest rate: the rate that determines the amount of interest the borrower pays and the investor receives. (also known as the coupon interest rate or stated interest rate). (c) Bond certificate: a legal document indicating the name of the issuer, the face value of the bond, and other data such as the contractual interest rate and maturity date of the bond. 4. The two major obligations incurred by a company when bonds are issued are the interest payments due on a periodic basis and the principal repayment at maturity. Both of these cash flows are used to determine the market price of a bond. 5. The issue price at par is determined before the bond is made available for sale. By the time company is ready to issue the bond and bondholders are ready to invest in the bond, the market rate of interest may have changed and be different than the contractual rate of interest offered in the bond. Changes in interest rates will cause the price of the bond at issue to be higher or lower than the face value in order to meet the market’s needs. 6.

Investors paid $2,000 ($102,000 – $100,000) more than the face value. The market interest rate must have been lower than the contractual interest rate. These bonds are said to have been sold at a premium.

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QUESTIONS (Continued) 7.

When bonds are issued at a discount, the proceeds from the issuance of the bonds are lower than the face value of the bonds. The difference in these two amounts represents additional interest expense to the business over the term of the bonds. When using the effective-interest method, the carrying value of the bonds is multiplied by the periodic market rate of interest to determine the interest expense. The difference between the interest expense and the cash paid to the bondholders is the amount of the discount amortized for the period.

Because the bond has been issued at a premium, the annual interest expense will decrease over the life of the bond since the carrying amount of the bond decreases with each payment due to the amortization of the bond premium.

When bonds sold at a premium are redeemed at 97 immediately following the payment of interest, the Bonds Payable account will be debited for the carrying amount of the bond. On the credit side, cash will be credited for 97% of the face value of the bond and a Gain on Bond Redemption will be credited for the difference between the cash paid and the bonds’ carrying amount.

10.

When a bond reaches maturity, any premium or discount will have been fully amortized, so the carrying value of the bond will be equal to its face value. This will result in no gain or loss when the principal is repaid at maturity. When bonds are retired prior to maturity however, the amount paid will rarely equal the amortized cost of the bonds, which will cause a gain or loss to occur.

11.

For notes payable with fixed principal payments, each payment will reduce the principal by the same amount, and interest is added to that amount. Since the periodic interest will drop as the loan principal is repaid, the periodic payment will get smaller each time a payment is made. For notes payable with blended principal and interest payments, the periodic payments are the same each period. Since the periodic interest will drop as the loan principal is repaid, the amount of the principal repayment each period will increase.

12.

In order to calculate the annual fixed principal payment, the principal amount of the note of $15,000 must be divided by 3. The annual principal repayment is therefore $5,000.

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QUESTIONS (Continued) 13.

I disagree. Each payment made by Bob consists of (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest portion of the payment decreases each period (as the principal owing is reduced) while the portion applied to the loan principal increases each period.

14.

A lease agreement is a contract in which the lessor gives the lessee the right to use an asset for a specified period, in return for one or more periodic rental payments. The lessor is the owner of the property and the lessee is the renter or tenant. The two major types of leases are operating leases and finance leases. In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A finance lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so that the lease effectively results in a purchase of the property.

15.

Off-balance sheet financing refers to situations where a company has liabilities or obligations that are not recorded on the balance sheet. Offbalance sheet transactions arise when a company is able to structure its financing so that it does not meet the criteria under IFRS or ASPE that would require the transaction to be recorded as debt. For operating leases, no asset or liability is recorded on the balance sheet. Lease payments are recorded as expenses. Thus, even though the company may have a contractual obligation, no liability appears on the balance sheet.

16.

While assets are not legally owned by a business, the substance of the lease contract is equivalent to the purchase of an asset. The accounting guidelines require that the substance of the transaction is the determining factor in accounting for the lease. If the asset is essentially being purchased by the lessee, the lease must be accounted as a finance lease and the asset must be included on the lessee’s balance sheet.

17.

The notes to the financial statements provide the user of the financial statements with additional relevant information concerning non-current liabilities such as the amount of the payments that will be due in each of the next five fiscal years and beyond. Other information such as interest rate, maturity date, redemption price, convertibility, and any assets pledged as collateral is also provided in the notes to the financial statements.

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QUESTIONS (Continued) 18.

Current liabilities include those principal payments on the mortgage note payable that are going to be due for payment within one year of the balance sheet date. The principal payments appearing under non-current debt are those amounts to be paid beyond one year of the balance sheet date. When looking at the balance owing on a mortgage note, care must be taken to disaggregate the balance to ensure that the current portion of the debt is properly classified as a current liability as this affects the liquidity position of the business.

19.

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. Solvency ratios measure the ability of a company to repay its non-current 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.

20.

The debt to total assets and interest coverage ratios help assess solvency by providing insight into the ability of a company to repay its non-current debt. Debt to total assets measures the percentage of total assets provided by creditors. The higher this is, the greater the risk that the company may be unable to meet its maturing obligations. The ability of the company to meet its interest obligations as they come due is measured by the interest coverage ratio. A company may have a high debt to total assets ratio and still be able to pay its interest payments. Alternatively, a company may have a low debt to total assets ratio and struggle to cover its interest payments. Therefore, the debt to total assets ratio should always be interpreted with reference to the interest coverage ratio.

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 15-1 1.

2. 3. 4.

False. Lenders do not have voting rights. By issuing bonds, there is no change to the voting rights of an entity and therefore there is no change to the ownership structure. This is an advantage of issuing bonds over shares. True. True. False. Convertible bonds can be converted into common shares at the bondholder’s option. Callable bonds are bonds that the issuing company can redeem (buy back) at a stated amount before the bonds reach maturity. True.

BRIEF EXERCISE 15-2 (a) Face value of the bond: $900,000 When will it be paid: January 1, 2027 (b) Interest rate for pricing the bond: Will be the yield rate of 6%. (c) Number of interest payments: 10 years semi-annual 10 x 2 = 20 (d) Interest payments each six months: Face value x coupon rate x 6/12 $900,000 x 5% x 6/12 = $22,500

Solutions Manual .

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Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-3 (a)

($500,000 × 0.67297) + ($500,000 × 2.5% × 16.35143) = $540,878 Using a financial calculator: Yields $540,879 PV $? I 2% N 20 PMT $ (12,500) FV $ (500,000) Type 0

(b) ($500,000 × 0.61027) + ($500,000 × 2.5% × 15.58916) = $500,000 (rounded) Using a financial calculator: Yields $500,000 PV $? I 2.5% N 20 PMT $ (12,500) FV $ (500,000) Type 0

(c)

($500,000 × 0.55368) + ($500,000 × 2.5% × 14.87747) = $462,808 Using a financial calculator: Yields $462,806 PV $? I 3% N 20 PMT $ (12,500) FV $ (500,000) Type 0

Solutions Manual .

15-11

Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-4 (a)

Jan.

Cash .......................................... 2,000,000 2,000,000 Bonds Payable ....................

(b)

July

1 Interest Expense ....................... Cash ..................................... ($2,000,000 × 3% × 6/12)

30,000

BRIEF EXERCISE 15-5 Mar. 1 Cash ($300,000 × 98%)................. 294,000 Bonds Payable .....................

294,000

BRIEF EXERCISE 15-6 June 1 Cash ($400,000 × 101%) ............... 404,000 Bonds Payable .....................

Solutions Manual .

15-12

404,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-7 (a)

Jan.

(b) July

(c)

1 Cash (1,000 x $1,000) ............... 1,000,000 1,000,000 Bonds Payable ..................... 1 Cash ($900,000 × 102%) ........... Bonds Payable .....................

918,000

Sept. 1 Cash ($400,000 × 98%) ............. Bonds Payable .....................

392,000

918,000

392,000

BRIEF EXERCISE 15-8 (a)

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

3,256 744

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

3,234 766

4,000

(b) Because the bonds were issued at a premium, the premium amortization must be deducted from the amount paid on the bonds to arrive at the interest expense. (c)

The effective interest expense decreases each period as the amortization of the bond premium is deducted from the carrying amount (amortized cost) of the bond, which then draws a lower amount of interest expense.

Solutions Manual .

15-13

Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-9 (a) 1.

Discount

Payment

Expense

Interest expense = $47,812 ($40,000 + $7,812)

Discount amortization = $8,007 ($48,007 – $40,000)

Bond amortized cost = $1,928,298 ($1,920,291 + $8,007)

(b) Face value = $2,000,000 (c) Contractual interest rate: ($40,000 × 2) ÷ face value $2,000,000 = 4% Market interest rate = 5.0% [($47,812 ÷ $1,912,479) × 2] (d) Apr. 30 Interest Expense ............................ 47,812 Bonds Payable ........................ Cash .........................................

7,812 40,000

Oct. 31 Interest Expense ............................ 48,007 Bonds Payable ........................ Cash .........................................

8,007 40,000

Solutions Manual .

15-14

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-10 (a)

The bond was issued at a discount. The amortization for each period is added to the bond’s amortized cost.

(b) 2017 July 1 Interest Expense .............................. 7,172 Bonds Payable ........................ Cash ......................................... (c) 2017 Dec. 31 Interest Expense .............................. 7,201 Bonds Payable ........................ Interest Payable ...................... (d) 2018 Jan. 1 Interest Payable ............................... 6,000 Cash .........................................

1,172 6,000

1,201 6,000

6,000

BRIEF EXERCISE 15-11 ELSWORTH LTD. Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 3%

Date

May 1, 2017 Nov. 1, 2017 May 1, 2018 Nov. 1, 2018

Solutions Manual .

(A) (B) (C) Interest Interest Premium Payment Expense $1,000,000 × (D) × 3% × Amortization (A) – (B) 4% × 6/12 6/12 $20,000 20,000 20,000

$15,692 15,627 15,561

15-15

$4,308 4,373 4,439

(D) Bond Amortized Cost (D) – (C) $1,046,110 1,041,802 1,037,429 1,032,990

Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-12 (a)

VILLA CORPORATION Bond Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 6%

Date

Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018

(A) (B) (C) Interest Interest Discount Payment Expense $3,000,000 × (D) × 6% × Amortization (B) – (A) 4% × 6/12 6/12 $60,000 60,000 60,000

$79,834 80,429 81,041

$19,834 20,429 21,041

2017 July 1 Interest Expense ............................ 79,834 Bonds Payable ........................ Cash ......................................... (c) 2017 Dec. 31 Interest Expense ............................ 80,429 Bonds Payable ........................ Interest Payable ...................... (d) 2018 Jan. 1 Interest Payable ............................. 60,000 Cash .........................................

(D) Bond Amortized Cost (D) + (C) $2,661,118 2,680,952 2,701,381 2,722,422

(b)

Solutions Manual .

15-16

19,834 60,000

20,429 60,000

60,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-13 July 1

Bonds Payable ............................. 940,000 Loss on Bond Redemption* .......... 70,000 Cash ($1,000,000 × 101%)....... 1,010,000 * ($1,010,000 – $940,000)

BRIEF EXERCISE 15-14 Bonds Payable ............................. 390,000 Gain on Bond Redemption *... Cash ($400,000 × 97%)............ * ($390,000 - $388,000)

2,000 388,000

BRIEF EXERCISE 15-15

Monthly Interest Period Issue Date 1 2 3 4

Solutions Manual .

(A) Cash Payment $105.09 105.09 105.09 105.09

(B) Interest (C) (D) Expense Reduction Principal (D) × 4.8% × of Principal Balance 1/12 (A) – (B) (D) – (C) $10,000.00 $40.00 $65.09 9,934.91 39.74 65.35 9,869.56 39.48 65.61 9,803.95 39.22 65.87 9,738.08

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Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-16 (a) Monthly Interest Period Nov. 30, 2017 Dec. 31, 2017 Jan. 31, 2018

(B) Interest Expense (D) × 6% × 1/12

$4,800 4,785

$1,800 1,785

(D) (A) Principal Reduction Balance of Principal (D) – (A) $360,000 $3,000 357,000 3,000 354,000

2017 Nov. 30 Cash..................................................... 360,000 Mortgage Note Payable .................

360,000

Dec. 31 Interest Expense ..................................... 1,800 Mortgage Note Payable .......................... 3,000 Cash................................................

4,800

2018 Jan. 31 Interest Expense ..................................... 1,785 Mortgage Note Payable .......................... 3,000 Cash................................................

4,785

Solutions Manual .

15-18

Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-16 (Continued) (b) Monthly (A) Interest Cash Period Payment Nov. 30, 2017 Dec. 31, 2017 $3,997 Jan. 31, 2018 3,997

(B) Interest (C) Expense Reduction (D) × 6% × of Principal 1/12 (A) – (B) $1,800 1,789

2017 Nov. 30 Cash .......................................... Mortgage Note Payable ....... Dec. 31 Interest Expense....................... Mortgage Note Payable ............ Cash...................................... 2018 Jan. 31 Interest Expense....................... Mortgage Note Payable ............ Cash......................................

$2,197 2,208

(D) Principal Balance (D) – (C) $360,000 357,803 355,595

360,000 360,000 1,800 2,197 3,997 1,789 2,208 3,997

BRIEF EXERCISE 15-17 (a) December 31, 2017 Current liabilities Interest payable .......................................................... Current portion of notes payable ..............................

$2,000 10,000

Non-current liabilities Note payable, 5%, due 2021, net of current portion .

$30,000

(b) December 31, 2020 Current liabilities Interest payable .......................................................... Current portion of notes payable ..............................

$500 10,000

There is no non-current portion on December 31, 2020. Solutions Manual .

15-19

Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-18 (a) 2017 Mar. 31 Cash .......................................... Note Payable ........................ 2018 Mar. 31 Note Payable............................. Interest Expense* ..................... Cash...................................... *($600,000 × 4%)

600,000 600,000

150,000 24,000 174,000

(b) ELBOW LAKE CORP. Balance Sheet (Partial) March 31, 2018 Current liabilities Current portion of note payable ................................... $150,000 Non-current liabilities Note payable, net of current portion .............................. 300,000

BRIEF EXERCISE 15-19 (a)

Equipment Rental Expense.......................... 80,000 Cash........................................................

80,000

(b) Leased Asset—Equipment......................... 700,000 Lease Liability ........................................

700,000

BRIEF EXERCISE 15-20 Rent Expense .................................................. 2,500 Cash........................................................ Solutions Manual .

15-20

2,500 Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-21 (a)

Lessor: Lessee:

Bracer Construction Inc. Chang Corp.

(b) Leased Asset—Equipment......................... 300,000 Lease Liability ........................................

300,000

BRIEF EXERCISE 15-22 WAUGH CORPORATION Balance Sheet (Partial) December 31, 2017 Current liabilities Accounts payable ..................................................... $ Income tax payable..................................................... Interest payable .......................................................... Current portion of lease liability ................................ Current portion of notes payable .............................. Total current liabilities ...........................................

48,000 8,000 26,000 25,000 25,000 132,000

Non-current liabilities Bonds payable, due 2028 .............................................1,035,000 Notes payable, net of current portion ............................ 145,000 Lease liability, net of current portion* ........................ 50,000 Total non-current liabilities ......................................1,230,000 Total liabilities ..................................................$1,362,000 * ($75,000 - $25,000) = $50,000

Solutions Manual .

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Chapter 15

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 15-23 ($ in U.S. millions) (a)

Debt to total assets = Total debt ÷ Total assets $6,110.2 $13,996.3

43.7%

(b) Interest coverage = EBIT ÷ Interest expense ($513.5 + $145.0 + $69.0) $145.0

Solutions Manual .

15-22

5.02 times

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 15-1 1. 2. 3.

True True False

4. 5.

True False

6. 7.

True True

Unsecured bonds are also known as debenture bonds. The stated rate is the rate used to determine the amount of cash interest the borrower pays.

EXERCISE 15-2 (a) 3 years quarterly = 3 years x 4 payments/year = 12 payments (b) $500,000 × 4% × 3/12 = $5,000 (c)

Market interest rate 8% ($500,000 × 0.78849) + ($5,000 × 10.57534) = $447,121.70 Using a financial calculator: PV $ ? Yields $447,123.29 I 2.0% N 12 PMT $ (5,000) FV $ (500,000) Type 0

(d) 2017 May 1

Solutions Manual .

Cash.............................................. 447,123 Bonds Payable ........................

15-23

447,123

Chapter 15

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-3 (a) (1)

Market interest rate 5% ($1,000,000 × 0.61027) + ($1,000,000 × 3% × 15.58916) = $1,077,945 Using a financial calculator: PV $ ? Yields $1,077,946 I 2.5% N 20 PMT $ (30,000) FV $ (1,000,000) Type 0

(2)

Market interest rate 6% Since the market rate is the same as the contractual rate of interest, the issue price will be the same as the face value of $1,000,000.

(3)

Market interest rate 7% ($1,000,000 × 0.50257) + ($1,000,000 × 3% × 14.21240) = $928,942 Using a financial calculator: Yields $928,938 PV $? I 3.5% N 20 PMT $ (30,000) FV $ (1,000,000) Type 0

Solutions Manual .

15-24

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 15-4 (a)

Market interest rate 4% ($400,000 × 0.82035) + ($400,000 × 2.5% × 8.98259) = $417,966 Using a financial calculator: PV $ ? Yields $417,965.17 I 2% N 10 PMT $ (10,000) FV $ (400,000) Type 0 Cash.............................................. 417,965 Bonds Payable ........................

(b)

Market interest rate 5% Since the market rate is the same as the contractual rate of interest, the issue price will be the same as the face value of $400,000. Cash ......................................... 400,000 Bonds Payable ........................

(c)

417,965

400,000

Market interest rate 6% ($400,000 × 0.74409) + ($400,000 × 2.5% × 8.53020) = $382,938 Using a financial calculator: PV $ ? Yields $382,939.59 I 3% N 10 PMT $ (10,000) FV $ (400,000) Type 0

Solutions Manual .

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Chapter 15

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-4 (Continued) (c) (Continued) Cash.............................................. 382,940 Bonds Payable ........................

382,940

EXERCISE 15-5 (a)

2017 Jan. 1

(b) 2017 Dec. 31

(c)

2018 Jan. 1

Cash.............................................. 400,000 Bonds Payable ........................

Interest Expense .......................... 32,000 Interest Payable ...................... ($400,000 × 8%) Interest Payable .......................... 32,000 Cash .........................................

(d) 2017 Sept. 30 Interest Expense .......................... Interest Payable ..................... ($400,000 × 8% × 9/12) 2018 Jan. 1

Solutions Manual .

32,000

24,000

Interest Expense* ........................ 8,000 Interest Payable ........................... 24,000 Cash ......................................... *($400,000 × 8% × 3/12)

15-26

400,000

24,000

32,000

Chapter 15

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-6 (a)

The market rate of interest is higher than the contract rate of 3% interest, which explains why the bonds were sold at a discount.

(b) 2017 Sept. 1 Cash ($600,000 × 96%)................. 576,000 Bonds Payable ........................ 2018 Feb. 28 Interest Expense ............................ 10,014 Bonds Payable ........................ Interest Payable ...................... ($600,000 × 3% × 6/12) (d) 2018 Mar. 1 Interest Payable ............................... 9,000 Cash .........................................

576,000

(c)

1,014 9,000

9,000

EXERCISE 15-7 (a)

The market rate of interest is lower than the contract rate of 4% interest, which explains why the bonds were sold at a premium.

(b) 2017 July 31 Cash ($500,000 × 102%) ............... 510,000 Bonds Payable ........................ (c)

2018 Jan. 31 Interest Expense .............................. 9,077 Bonds Payable............................. 923 Cash ($500,000 × 4% × 6/12)...

Solutions Manual .

15-27

510,000

10,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 15-8 (a)

The bonds were issued at a premium. Note that the bond amortized cost is decreasing from periods 1 through 6, and will continue to decrease until the maturity date in five years. At that time, the carrying amount will equal the face value of the bond.

(b) $400,000, as given in the description of the bonds. (c)

The bond amortized cost will be $400,000 at the maturity date.

(d) Total interest payment = $80,000 $400,000 × 4% × 5 years = $80,000 or $8,000 × 10 semi-annual periods = $80,000 Total interest expense = $61,556 $80,000 (interest payment) – $18,444 (premium) = $61,556 (e)

2016 Apr. 1 Cash.............................................. 418,444 Bonds Payable ........................ 2016 (f) Oct. 1 Interest Expense ........................ 6,277 Bonds Payable ........................... 1,723 Cash ....................................... (g) 2016 Dec. 31 Interest Expense ($4,000 - $875) 3,125 Bonds Payable ($1,749 × 3/6) ... 875 Interest Payable..................... (h) 2017 Apr. 1 Interest Expense ........................ 3,126 Bonds Payable ........................... 874 Interest Payable ......................... 4,000 Cash .......................................

Solutions Manual .

15-28

418,444

8,000

4,000

8,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 15-9 (a) Market interest rate 7% ($600,000 × 0.62275) + ($600,000 × 8% × 5.38929) = $632,336 Using a financial calculator: PV $ ? Yields $632,335.74 I 7% N 7 PMT $ (48,000) FV $ (600,000) Type 0 (b) MESSER COMPANY Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 8% Bonds Issued at market rate of 7%

Date

Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024

(A) Interest Payment $600,000 × 8%

(B)

(C)

Interest Expense (D) × 7%

Premium Amortization (A) – (B)

$48,000 48,000 48,000 48,000 48,000 48,000 48,000

$44,264 44,002 43,722 43,423 43,102 42,759 42,393

$3,736 3,998 4,278 4,577 4,898 5,241 5,607

(D) Bond Amortized Cost (D) - (C) $632,336 628,599* 624,601 620,323 615,746 610,848 605,607 600,000

*Due to rounding

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-10 (a) Market interest rate 8% ($800,000 × 0.58349) + ($800,000 × 7% × 5.20637) = $758,349 Using a financial calculator: PV $ ? Yields $758,349.04 I 8% N 7 PMT $ (56,000) FV $ (800,000) Type 0 (b) KORMAN COMPANY Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 7% Bonds Issued at market rate of 8%

Date

Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024

Solutions Manual .

(A) Interest Payment $800,000 × 7%

(B)

(C)

Interest Expense (D) × 8%

Discount Amortization (B) – (A)

$56,000 56,000 56,000 56,000 56,000 56,000 56,000

$60,668 61,041 61,445 61,880 62,351 62,859 63,407

$4,668 5,041 5,445 5,880 6,351 6,859 7,407

15-30

(D) Bond Amortized Cost (D) + (C) $758,349 763,017 768,058 773,503 779,383 785,734 792,593 800,000

Chapter 15

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-11 (a)

Market interest rate 5% ($800,000 × 0.78353) + ($800,000 × 6% × 4.32948) = $834,639 Using a financial calculator: PV $ ? Yields $834,635.81 I 5% N 5 PMT $ (48,000) FV $ (800,000) Type 0 2017 Jan.

1 Cash.............................................. 834,636 Bonds Payable ........................

834,636

(b)

WESTERN INC. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 6% Bonds Issued at market rate of 5%

Date

Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022

Solutions Manual .

(A) Interest Payment $800,000 × 6%

(B)

(C)

Interest Expense (D) × 5%

Premium Amortization (A) – (B)

$48,000 48,000 48,000 48,000 48,000

$41,732 41,418 41,089 40,744 40,381

$6,268 6,582 6,911 7,256 7,619

15-31

(D) Bond Amortized Cost (D) - (C) $834,636 828,368 821,786 814,875 807,619 800,000

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Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash .......................................

41,732 6,268 48,000 41,418 6,582 48,000 41,089 6,911 48,000

(d) 2017

Oct. 31 Interest Expense *...................... Bonds Payable ** ....................... Interest Payable *** ............... * ($41,732 x 10/12) **($6,268 x 10/12) *** ($48,000 x 10/12)

Solutions Manual .

15-32

34,777 5,223 40,000

Chapter 15

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-12 (a) Market interest rate 9% ($500,000 × 0.64993) + ($500,000 × 7% × 3.88965) = $461,103 Using a financial calculator: PV $ ? Yields $461,103.49 I 9% N 5 PMT $ (35,000) FV $ (500,000) Type 0 2017 Jan.

1 Cash.............................................. 461,103 Bonds Payable ........................

461,103

(b) AMLANI COMPANY Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 7% Bonds Issued at market rate of 9%

Date

Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 * Rounded Solutions Manual .

(A) Interest Payment $500,000 × 7%

(B)

(C)

Interest Expense (D) × 9%

Discount Amortization (B) – (A)

$35,000 35,000 35,000 35,000 35,000

$41,499 42,084 42,722 43,417 44,175*

$6,499 7,084 7,722 8,417 9,175

15-33

(D) Bond Amortized Cost (D) + (C) $461,103 467,602 474,686 482,408 490,825 500,000

Chapter 15

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-12 (Continued) (c) 2018 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... (d) 2017 Oct. 31 Interest Expense *...................... Bonds Payable **................... Interest Payable *** ............... * ($41,499 x 10/12) ** ($6,499 x 10/12) *** ($35,000 x 10/12)

41,499 6,499 35,000 42,084 7,084 35,000 42,722 7,722 35,000

34,583 5,416 29,167

EXERCISE 15-13 (1) 2017

June 30 Bonds Payable .............................. 117,500 Loss on Bond Redemption ....... 15,100 Cash ($130,000 x 102%) ..........

132,600

(2) 2017

June 30 Bonds Payable .............................. 151,000 Gain on Bond Redemption ... Cash ($150,000 x 98%) ..........

Solutions Manual .

15-34

4,000 147,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 15-14 (a)

2017 July 1

(b) 2017 Dec. 31

(c)

2018 Jan. 1

(d) 2019 Jan. 1

(e)

2019 Jan. 1

Solutions Manual .

Interest Expense .......................... 14,360 Bonds Payable ........................ Cash .........................................

1,860 12,500

Interest Expense .......................... 14,416 Bonds Payable ........................ Interest Payable ......................

1,916 12,500

Interest Payable ........................... 12,500 Cash .........................................

12,500

Bonds Payable............................. 486,457 Loss on Bond Redemption *....... 13,543 Cash ($500,000 × 100%).......... * ($500,000 – $486,457) Bonds Payable............................. 486,457 Gain on Bond Redemption *... Cash ($500,000 × 96%)............ * ($486,457 – $480,000)

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500,000

6,457 480,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-15 (a)

Semi-annual (A) Interest Cash Period Payment Dec. 31, 2017 June 30, 2018 $14,400 Dec. 31, 2018 14,190

(B) Interest (C) (D) Expense Reduction Principal (D) × 7% × of Principal Balance 1/2 (A) – (B) (D) – (C) $240,000 $8,400 $6,000 234,000 8,190 6,000 228,000 Issue of Note

2017 Dec. 31

Cash ................................................... 240,000 Mortgage Note Payable ............

240,000

First Instalment Payment 2018 June 30

Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................

8,400 6,000 14,400

Second Instalment Payment Dec. 31

Solutions Manual .

Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................

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8,190 6,000 14,190

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-15 (Continued) (b)

Semi-annual (A) Interest Cash Period Payment Dec. 31, 2017 June 30, 2018 $11,239 Dec. 31, 2018 11,239

(B) Interest (C) (D) Expense Reduction Principal (D) × 7% × of Principal Balance 1/2 (A) – (B) (D) – (C) $240,000 $8,400 $2,839 237,161 8,301 2,938 234,223 Issue of Note

2017 Dec. 31

Cash ................................................... 240,000 Mortgage Note Payable .................

240,000

First Instalment Payment 2018 June 30

Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................

8,400 2,839 11,239

Second Instalment Payment Dec. 31

Solutions Manual .

Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................

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8,301 2,938 11,239

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-16 (a)

This is a blended payment loan as the payments are constant at $23,097 per year.

(b) The interest rate is 5% ($5,000 ÷ $100,000). (c)

Interest Expense ............................................. 5,000 Notes Payable ............................................... 18,097 Cash........................................................

23,097

(d) Current portion = $19,952 Non-current portion = $62,901 – $19,952 = $42,949

EXERCISE 15-17 (a)

This is a fixed principal loan as principal is being reduced by $21,750 each six-month period.

(b) The annual interest rate is 8% ($6,960 ÷ $174,000) x 2. (c)

The number of semi-annual payments for the instalment note will be ($174,000 ÷ $21,750 = 8) and so the maturity date of the note will be January 1, 2021.

(d) Interest Expense ............................................. 6,960 Notes Payable ............................................... 21,750 Cash........................................................

28,710

(e) Current portion = $21,750 x 2 = $43,500 Non-current portion = $130,500 – $43,500 = $87,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-18 (a)

Period Jan. 1, 2017 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019

Cash Payment

Interest Expense 7%

Reduction of Principal

$6,859 6,859 6,859

$ 1,260 868 449

$5,599 5,991 6,410

Principal Balance $18,000 12,401 6,410 0

(b) 2017 Jan. 1 Cash .......................................... Notes Payable ......................

(c)

18,000 18,000

Dec. 31 Interest Expense ....................... Notes Payable ........................... Cash ......................................

1,260 5,599

Current liability ........................................ Non-current liability ................................

$5,991 6,410

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-19 (a)

The amount of the annual principal payments will be $2,800 ($8,400 ÷ 3 years).

(b)

Period Jan. 1, 2017 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019

Cash Payment

Interest Expense 3%

Reduction of Principal

$3,052 2,968 2,884

$ 252 168 84

$2,800 2,800 2,800

Principal Balance $8,400 5,600 2,800 0

(d)

8,400 8,400

Dec. 31 Interest Expense ....................... Notes Payable ........................... Cash ......................................

252 2,800

Current liability ........................................ Non-current liability ................................

$2,800 2,800

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-20 (a)

Dumfries has an operating lease. In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A one-year lease does not meet any of the criteria for a finance lease. InSynch Ltd. has a finance lease. A finance lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so the lease effectively results in a purchase of the property. In this case, the present value of the lease payments is very near the fair value of the computers. This criteria having been met, the treatment of the lease is to record the computers as assets.

(b) 1.

There is no journal entry to record the lease. However, the first rental payment would be recorded as follows:

May 21 Equipment Rental Expense .......... Cash ........................................... 2. Jan.

Solutions Manual .

750 750

1 Leased Asset—Equipment ............ 118,000 Lease Liability ........................... 118,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-21 (a)

[dollar figures in millions] 2015 Debt to total assets =

Interest coverage = 2014 Debt to total assets = Interest coverage =

$960.3 $1,700.8

56.5%

($295.4 + $19.9 + $107.1) $19.9 $702.6 $1,566.8

21.2 times

30.5 times

44.8%

($250.0 + $11.6 + $92.7) $11.6

The debt to total asset ratio has increased significantly indicating solvency deterioration for the year. The interest coverage has also decreased, also indicating that Dollarama’s solvency deteriorated. (b) The use of the operating leases improves the company’s solvency ratios. If the operating leases were treated as finance leases, the debt to total assets ratio would be much worse. Since operating leases are accounted for as rent expense, Dollarama can avoid reporting the lease obligations on its balance sheet. As well, because the company has less debt, its interest expense is lower, which causes its interest coverage ratio to be higher than it would have been had the leases been accounted for as finance leases.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 15-22 (a)

RAY CORPORATION Balance Sheet (Partial) July 31, 2017 Non-current liabilities Bonds payable, due 2021 ......................................... $205,000 Note payable, net of current portion* ........................ 120,000 Lease liability, net of current portion**.................... 48,750 Total non-current liabilities ............................. $373,750 * ($140,000 – $20,000) = $120,000 ** ($65,000 – $16,250) = $48,750 (b)

Accounts payable and interest payable should be classified as current liabilities. Unearned revenue should likely be classified as a current liability depending on when the revenue will be earned. Similarly, the portion of the lease liability due within one year and the note payable due within one year should be classified as current liabilities. Accounts receivable, and note receivable should be classified as current assets.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 15-1A (a) Because it is unsecured, the bond would be considered a debenture bond. 2017 (b) May 1 Cash ............................................... 600,000 Bonds Payable ...................... (c) Dec. 31 Interest Expense ........................ Interest Payable..................... ($600,000 x 9% x 8/12) = $36,000

600,000

36,000 36,000

(d) HERRON CORP. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................

$36,000

Non-current liabilities Bonds payable, due 2022 ........................................

$600,000

2018 (e) May 1 Interest Expense ........................ Interest Payable ......................... Cash .......................................

18,000 36,000

(f)

36,000

Dec. 31 Interest Expense ........................ Interest Payable..................... ($600,000 x 9% x 8/12) = $36,000

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54,000

36,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-1A (Continued) Taking It Further: The major advantages of issuing debt instead of issuing shares include: 1. Interest is tax deductible. 2. Issuing debt does not affect the percentage ownership of existing shareholders. 3. Issuing bonds may have a positive effect on the earnings per share ratio. 4. The return on equity ratio may be higher, as a result of financial leverage. The major disadvantages of issuing debt instead of issuing shares include: 1. The debt to total assets will be adversely affected. 2. The principal amount is due at maturity. 3. The corporation is not required to pay dividends on issued shares but interest on bonds cannot be avoided.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-2A (a)

The bonds were issued at a discount. Note that the bond amortized cost is increasing and will continue to increase until the maturity date in ten years’ time, when the carrying amount will equal the face value of the bond of $1,400,000.

(b) The face value of the bond is $1,400,000. (c)

Contractual interest rate = 6% $42,000 ÷ $1,400,000 = 3% semi-annually × 2 = 6 % annually

(d) [1] [2] [3] [4] [5] (e)

(f)

$42,000 $42,000 + $3,518 = $45,518 $45,769 – $42,000 = $3,769 $45,900 – $42,000 = $3,900 $1,311,442 + $3,900 = $1,315,342

Market interest rate = 7% [2] $45,518 ÷ $1,300,514 = 3.5% semi-annually × 2 = 7% annually 2017 Jan 1 Cash ............................................ 1,300,514 Bonds Payable ...................... 1,300,514

2017 (g) July 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2017 (h) Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable.....................

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45,518 3,518 42,000 45,641 3,641 42,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-2A (Continued) (i) GLOBAL SATELLITES Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................

$42,000

Non-current liabilities Bonds payable, due 2027 ........................................... $1,307,673

Taking It Further: The legal documents, which state the contractual interest rate, are often prepared well in advance of the actual bond issue and the market rate of interest fluctuates on a daily basis. It is nearly impossible to predict, weeks or months in advance, what the market interest rate will be on the date of issue. In this case, the market rate of interest increased after the contractual rate was set.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-3A (a)

The bonds are unsecured debenture bonds that are redeemable (callable).

(b)

Market interest rate 6% ($3,000,000 × 0.74726) + ($3,000,000 × 5% × 4.21236) = $2,873,634 Using a financial calculator: PV $ ? Yields $2,873,629.09 I 6% N 5 PMT $ (150,000) FV $ (3,000,000) Type 0

2017 Jan. 1 Cash ............................................ 2,873,629 Bonds Payable ...................... 2,873,629 (c) PARIS PRODUCTS LTD. Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 6% Date

(A) Interest Payment $3,000,000 × 5%

Jan. 1, 2017 Jan. 1, 2018 $150,000 Jan. 1, 2019 150,000 Jan. 1, 2020 150,000 Jan. 1, 2021 150,000 Jan. 1, 2022 150,000 * Rounded Solutions Manual .

(B)

(C)

Interest Expense (D) × 6%

Discount Amortization (B) – (A)

$172,418 173,763 175,189 176,700 178,301*

$22,418 23,763 25,189 26,700 28,301*

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(D) Bond Amortized Cost (D) + (C) $2,873,629 2,896,047 2,919,810 2,944,999 2,971,699 3,000,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-3A (Continued) (d) 2017 Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2018 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2019 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2020 Jan. 1 Interest Payable ......................... Cash .......................................

172,418 22,418 150,000 150,000 150,000 173,763 23,763 150,000 150,000 150,000 175,189 25,189 150,000 150,000 150,000

Taking It Further: The contractual interest rate (also called the coupon rate) is set before the bonds are issued. It is used to determine the cash interest that will be paid on the bonds, and it does not vary during the time the bond is outstanding. The market rate of interest is the rate that investors demand for lending their money and it can vary during the term of the bond. The contractual rate does not vary because it is the rate that was agreed to when the bond contract was drawn up. The market rate will vary due to such things as changes in the creditworthiness of the issuer, inflation, or the state of the economy.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-4A (a)

The bonds are secured bonds that are convertible into common shares.

(b)

Market interest rate 4% ($1,800,000 × 0.82193) + ($1,800,000 × 5% × 4.45182) = $1,880,138 Using a financial calculator: PV $ ? Yields $1,880,132.80 I 4% N 5 PMT $ (90,000) FV $ (1,800,000) Type 0

2017 Jan. 1 Cash ............................................ 1,880,133 Bonds Payable ...................... 1,880,133 (c) COLTON CARS CO. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 4% (A) (B) (C) (D) Date Interest Bond Interest Premium Amortized Payment $1,800,000 Expense Amortization Cost × 5% (D) × 4% (A) – (B) (D) - (C) Jan. 1, 2017 $1,880,133 Jan. 1, 2018 $90,000 $75,205 $14,795 1,865,338 Jan. 1, 2019 90,000 74,614 15,386 1,849,952 Jan. 1, 2020 90,000 73,998 16,002 1,833,950 Jan. 1, 2021 90,000 73,358 16,642 1,817,308 Jan. 1, 2022 90,000 72,692 17,308 1,800,000 Solutions Manual .

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PROBLEM 15-4A (Continued) (d) 2018 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash .......................................

75,205 14,795 90,000 74,614 15,386 90,000 73,998 16,002 90,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-5A 2017 (a) May 1 Cash ($900,000 × 98%) .................. 882,000 Bonds Payable ......................

882,000

(b) The market rate of interest on May 1, 2017 was 7.4943%. Using Excel or a financial calculator: PV $ 882,000 I ? Yields 7.4943% N 5 PMT $(63,000) FV $(900,000) Type 0 (c) MEM CORP. Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 7% Bonds Issued at market rate of 7.4943%

Date

May 1, 2017 May 1, 2018 May 1, 2019 May 1, 2020 May 1, 2021 May 1, 2022

(A) Interest Payment $500,000 × 7%

(B) Interest Expense (D) × 7.4943%

$63,000 63,000 63,000 63,000 63,000

$66,100 66,332 66,582 66,850 67,136*

$3,100 3,332 3,582 3,850 4,136

(D) Bond Amortized Cost (D) + (C) $882,000 885,100 888,432 892,014 895,864 900,000

*Rounded $3

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PROBLEM 15-5A (Continued) 2018 (d) Apr. 30

(e)

(f)

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

66,100

May 1 Interest Payable ......................... Cash .......................................

63,000

Dec. 31

Interest Expense*....................... Bonds Payable**.................... Interest Payable*** ................ *($66,100 x 8/12) ** ($3,100 x 8/12) ***($900,000 × 7% x 8/12)

44,067

May 1 Interest Expense*....................... Interest Payable ......................... Bonds Payable**.................... Cash ....................................... *($66,100 x 4/12) ** ($3,100 x 4/12)

22,033 42,000

3,100 63,000

63,000 2,067 42,000

(g) May 1 Bonds Payable .............................. 885,100 Loss on Bond Redemption* ...... 50,900 Cash ($900,000 × 104%) ........ *($936,000 – $885,099)

1,033 63,000

936,000

Taking It Further: A company may elect to redeem outstanding bonds early if there is a decrease in the market interest rates. It may be to their advantage to redeem the bonds and issue new bonds at a lower interest rate.

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PROBLEM 15-6A (a) 2017 1. July

1 Cash ....................................... Bonds Payable ..................

4,327,029 4,327,029

(b) WEBHANCER CORP. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 4%

Date

July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019 July 1, 2019 Jan. 1, 2020

(A) Interest Payment $800,000 × 5% X 6/12

(B) Interest Expense (D) × 4% x 6/12

$100,000 100,000 100,000 100,000 100,000

$86,541 86,271 85,997 85,717 85,431

$13,459 13,729 14,003 14,283 14,569

(D) Bond Amortized Cost (D) - (C) $4,327,029 4,313,570 4,299,841 4,285,838 4,271,555 4,256,986

Solutions Manual .

86,541 13,459 100,000

1 Interest Payable .............................. 100,000 Cash....................................... 100,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-6A (Continued) (d) 2017 Aug. 31 Interest Expense*....................... Bonds Payable** ........................ Interest Payable*** ................ *($86,541 x 2/6) ** ($13,459 x 2/6) ***($4,000,000 × 2.5% x 2/6) 2018 Jan.1 Interest Expense*....................... Interest Payable ......................... Bonds Payable** ........................ Cash ....................................... *($86,541 x 4/6) ** ($13,459 x 4/6)

28,847 4,486 33,333

57,694 33,333 8,973 100,000

Taking It Further: $4,000,000 × 0.55368 = $4,000,000 × 2.5% × 14.87747 = (n = 20, I = 3%)

$ 2,214,720 1,487,747 $3,702,467

Using a financial calculator: PV $ ? Yields $3,702,450.50 I 3% N 20 PMT $ (100,000) FV $ (4,000,000) Type 0

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PROBLEM 15-7A (a) ($8,000,000 × 0.67297) + ($8,000,000 × 2.5% × 16.35143) = $8,654,046 (n = 20, i = 2%) Using a financial calculator: PV $ ? Yields $8,654,057 I 2% N 20 PMT $ (200,000) FV $ (8,000,000) Type 0 (b) ALBERTA HYDRO LTD. Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 4% (c) Date

Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019

Solutions Manual .

(A) (B) (C) Interest Interest Payment Expense Premium $8,000,000 × (D) × 4% × Amortization (A) – (B) 5% × 6/12 6/12 $200,000 200,000 200,000 200,000

$173,081 172,543 171,994 171,434

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$26,919 27,457 28,006 28,566

(D) Bond Amortized Cost (D) – (C) $8,654,057 8,627,138 8,599,681 8,571,675 8,543,109

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PROBLEM 15-7A (Continued) (c) 2017 Jan. 1 Cash ............................................ 8,654,057 Bonds Payable ................... 8,654,057 July 1 Interest Expense .................... Bonds Payable ....................... Cash ....................................

173,081 26,919

Dec. 31 Interest Expense .................... Bonds Payable ....................... Interest Payable..................

172,543 27,457

200,000

(d) ALBERTA HYDRO LTD. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable ................................... Non-current liabilities Bonds payable, due 2027 ....................

2018 (e) Jan. 1 Interest Payable ............................ 200,000 Cash .......................................

(f)

2019 Jan. 1

2027 (g) Jan. 1

Solutions Manual .

$200,000 8,599,681

200,000

Bonds Payable .............................8,543,109 Gain on Bond Redemption*.... 383,109 Cash ($8,000,000 × 102%)....... 8,160,000 * ($8,543,109 – $8,160,000) Bonds Payable .............................8,000,000 Cash ......................................... 8,000,000

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PROBLEM 15-7A (Continued) (h) The total amount of interest payment: Contractual rate (5% × $8,000,000 × 10 years)

$4,000,000

Total interest expense: Interest paid ............................................. Less: premium ($8,654,057 – $8,000,000) Total interest expense ............................

$4,000,000 654,057 $3,345,943

Taking It Further: Because the bonds were issued at a premium, the additional proceeds from the issuance of the bond served to effectively reduce the amount of interest expense incurred by Alberta Hydro Ltd. over the term of the bond. The total amount of the interest payments is fixed to the contractual rate. The total interest expense is only the same as the contractual amount of interest paid if the bonds are issued at par.

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PROBLEM 15-8A 2017 (a) Jan. 1 Cash ($6,000,000 x .98) .............. 5,880,000 Bonds Payable ................... 5,880,000 (b) KERSHAW ELECTRIC Balance Sheet (Partial) December 31, 2017 Non-current liabilities Bonds payable, due 2027 ...........................................$5,888,000 (c) 2019 Jan. 1 Bonds Payable ........................... 5,896,000 Loss on Bond Redemption .... 224,000 Cash*................................... 6,120,000 *($6,000,000 x 1.02) Taking It Further: (a) When bonds are sold at a discount, the overall cost of borrowing is increased by the amount of the discount. (b) When bonds are sold at a premium, the overall cost of borrowing is reduced by the amount of the premium.

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PROBLEM 15-9A (a) 2017 April 1 Cash........................................... 1,000,000 Notes Payable .................... 1,000,000 (b) Annual fixed principal payment is $250,000. ($1,000,000 ÷ 4) (c) (A) Cash Payment (B) + (C)

Period Apr. 1, 2017 Mar. 31, 2018 $300,000 Mar. 31, 2019 287,500 Mar. 31, 2020 275,000 Mar. 31, 2021 262,500 Total $1,125,000

(B) Interest Expense (D) × 5% $50,000 37,500 25,000 12,500 $125,000

(C)

(D)

Principal Reduction

Balance (D) – (C) $1,000,000 $ 250,000 750,000 250,000 500,000 250,000 250,000 250,000 0 $1,000,000

(d) 2017 Dec. 31 Interest Expense ..................... Interest Payable ................. ($1,000,000 × 5% × 9/12) 2018 Mar. 31 Notes Payable ......................... Interest Expense ..................... Interest Payable ...................... Cash .................................... (e)

37,500 37,500

250,000 12,500 37,500 300,000

Current liabilities Interest payable .......................................................... $37,500 Current portion of instalment note payable .............. 250,000 Non-current liabilities Instalment note payable, net of current portion ....... 750,000

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PROBLEM 15-9A (Continued) (f) 2018 Dec. 31 Interest Expense ..................... Interest Payable ................. ($750,000 × 5% × 9/12) 2019 Mar. 31 Notes Payable ......................... Interest Expense ..................... Interest Payable ...................... Cash ....................................

28,125 28,125 250,000 9,375 28,125 287,500

Taking It Further: (A)

Date Apr. 1, 2017 Mar. 31, 2018 Mar. 31, 2019 Mar. 31, 2020 Mar. 31, 2021

Payment

(B) Interest Portion (D) × 5%

$ 282,012 282,012 282,012 282,012 $1,128,048

$50,000 38,399 26,219 * 13,430 *$128,048

(D) Note Payable Balance (D) – (C) $1,000,000 $ 232,012 767,988 243,613 524,375 255,793 268,582 * 268,582 0 $1,000,000

* rounded Where the note is repaid in fixed principal payments, the reduction of the principal is the same ($250,000) each period. Where the note is repaid in blended principal and interest payments, the reduction of the principal increases each period. Because the principal balance changes each period, the amount of interest expense changes each period. In both situations, the interest expense declines each period. In total, the payment is higher with blended payments, as the total interest cost is higher ($128,048 versus $125,000).

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-10A (a) 2017 Sept. 30 Equipment ................................. Mortgage Note Payable ....... Cash ......................................

905,000 768,000 137,000

(b) (A) Monthly Interest Period

Cash Payment

Oct. 31 Nov. 30

$14,006 14,006

(B) (C) (D) Interest Reduction Principal Expense (D) × 3.6% × of Principal Balance 1/12 (A) – (B) (D) – (C) $768,000 $2,304 $11,702 756,298 2,269 11,737 744,561

2017 Oct. 31 Interest Expense ........................ Mortgage Note Payable ............. Cash ....................................... Nov. 30 Interest Expense ........................ Mortgage Note Payable ............. Cash .......................................

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2,304 11,702 14,006 2,269 11,737 14,006

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 15-10A (Continued) (c) (A) Monthly Interest Period

Cash Payment (B) + (C)

Oct. 31 Nov. 30

$15,104 15,066

(B) (C) (D) Interest Expense Principal (D) × 3.6% × Reduction Balance 1/12 of Principal (D) – (C) $768,000 $2,304 $12,800 755,200 2,266 12,800 742,400

Oct. 31 Interest Expense ........................ Mortgage Note Payable ............. Cash .......................................

2,304 12,800

Nov. 30 Interest Expense ........................ Mortgage Note Payable ............. Cash .......................................

2,266 12,800

15,104

15,066

Taking It Further: With the fixed payment of principal, a larger amount of principal is paid in the earlier portion of the loan, and so the principal balance reduces more quickly. As a result, the interest paid will be less if the instalments are fixed principal payments of $12,800.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-11A (a) (A) Semi-annual Interest Period Dec. 31, 2017 June 30, 2018 Dec. 31, 2018 June 30, 2019 Dec. 31, 2019

(b)

Cash Payment

(B) Interest Expense (D) × 4.5%

$46,126 46,126 46,126 46,126

$27,000 26,139 25,240 24,300

$19,126 19,987 20,886 21,826

(D) Principal Balance (D) – (C) $600,000 580,874 560,887 540,001 518,175

2017 Dec. 31 Cash .............................................. 600,000 Mortgage Note Payable .......

600,000

Current liabilities Current portion of mortgage note payable*.................. $ 39,113 Non-current liabilities Mortgage note payable, net of current portion** ........... 560,887 * $19,126 + $19,987 = $39,113 ** $600,000 – $19,126 – $19,987 = $560,887 or see Dec. 31, 2018 balance.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-11A (Continued) (d) 2018 June 30 Interest Expense .......................... 27,000 Mortgage Note Payable .............. 19,126 Cash .....................................

46,126

Dec. 31 Interest Expense .......................... 26,139 Mortgage Note Payable .............. 19,987 Cash .....................................

46,126

Taking It Further: The advantage in making fixed principal payments is that over the term of the loan, the total amount of interest paid is reduced. The disadvantage of the fixed principal payment is that the amount of the payment at the beginning of the term of the loan is larger than with the blended payments, reducing available cash when the business likely needs it most. A benefit of blended payments is that the amount of the payment is constant which helps with cash budgeting.

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Chapter 15

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-12A (a)

In order for Manitoba Enterprises, a public company, to record a lease as a finance lease, one of the following criteria needs to be met. (1) there will be a transfer of ownership, (2) there is a bargain purchase option, (3) the lease term is for the major part of the economic life, (4) the present value of the lease payments amounts to substantially all of the fair value of the leased property, or (5) the asset is a specialized asset. Criteria 1, 2, and 5 are not present on any of the three leases. Criteria 3 and 4 are present in the case of the vehicle lease and so it should be treated as a finance lease. Both the manufacturing and office equipment leases should be reported as operating leases, because none of the criteria are met to require treatment as a finance lease. It should be noted that only one condition needs to be met to require capitalization.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-12A (Continued) (b) Equipment Rental Expense .......................... 14,000 Cash .....................................................

14,000

Equipment Rental Expense ............................ 3,900 Cash .....................................................

3,900

The vehicle lease is a finance lease. The entry to record the finance lease on January 1, 2017 is as follows: Leased Asset—Vehicles ............................... 74,800 Lease Liability .....................................

74,800

Lease Liability ............................................... 14,981 Cash ....................................................................... 14,981 (c)

Since the manufacturing and office equipment leases do not qualify as finance leases, nothing would appear on Manitoba’s balance sheet regarding either one. The annual rental fees would be charged to expense when they are paid each year and reported on the income statement as: Equipment Rental Expense $17,900 ($14,000 + $3,900), or possibly expensed monthly. The vehicle lease is a finance lease. Therefore, the vehicles would be recorded as assets on Manitoba’s balance sheet, along with other assets in property, plant, and equipment. The amount recorded would be the present value of the lease rental payments of $74,800, reduced by any accumulated depreciation recorded in 2017. The amount of the depreciation would be reported on the income statement. A corresponding liability for leased assets would also be recorded in the amount $74,800. This amount would be reduced by the principal portion of the annual lease payment. Interest expense accrued for 2017 would also appear on the income statement.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-12A (Continued)

Taking It Further: The adjusting journal entry on December 31, 2017 for the accrual of interest on the lease liability would be as follows: Interest Expense ............................................. 4,786 Interest Payable................................... [($74,800 – $14,981) × 8% = $4,786]

4,786

Since the rental cost of the manufacturing and office equipment has been paid and expensed during the year, no accruals need be recorded for the two remaining leases.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-13A (a)

($ in millions) Debt to total assets = Total debt ÷ Total assets 2014 2013

$20,897 ÷ $33,684 = 62.0% $13,741 ÷ $20,741 = 66.3%

Interest coverage = EBIT ÷ Interest expense 2014 2013

($53 + $466 + $25) ÷ $466 = 1.2 times ($627 + $287 + $226) ÷ $287 = 4.0 times

(b) With the acquisition of Shoppers Drug Mart, Loblaw increased its assets and debts considerably. The debt to total assets ratio improved somewhat. On the other hand, due to minimal profit in 2014, Loblaw’s interest coverage ratio dropped dramatically. Assuming the profit performance of 2014 is a one-time event, Loblaw’s solvency improved overall.

Taking It Further: The use of operating leases improves the company’s solvency ratios. Since operating leases are accounted for as rent expense, Loblaw Companies Limited can avoid reporting the lease obligations on its balance sheet. In terms of assessing solvency, the use of operating leases causes the debt to total assets ratio to be lower because of the off-balance sheet financing (keeping liabilities off the balance sheet). As well, because the company has less debt, its interest expense is lower than it would be if the leases were considered to be finance leases. This causes its interest coverage ratio to be higher than it would have been if the leases had been accounted for as finance leases. However, it would still appear that Loblaw does not have concerns about solvency.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-14A (a) SYKES LTD. Balance Sheet (Partial) October 31, 2017 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income tax payable............................................. Unearned revenue .............................................. Current portion of lease liability ........................ Current portion of note payable ........................ Total current liabilities ............................................

$57,000 15,000 5,900 10,000 26,430 9,675 1 124,005

Non-current liabilities Bonds payable, due 2020 ................................... Note payable, net of current portion ................. Lease liability, net of current portion ................ Total non-current liabilities .................................... Total liabilities .........................................................

500,000 220,536 2 13,813 3 734,349 858,354

$20,800 – $11,125 = $9,675 $230,211 – $9,675 = $220,536 3 $40,243 – $26,430 = $13,813 2

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-14A (Continued) (b) Debt to total assets = Total debt ÷ Total assets Total debt = $57,000 + $500,000 + $15,000 + $5,900 + $230,211 + $40,243 + $10,000 = $858,354. $858,354 ÷ $2,044,147 = 42% Interest coverage = EBIT ÷ Interest expense ($36,000 + $53,330 + $11,800) ÷ $53,330 = 1.9 times

(c)

Sykes’s debt to total assets shows reasonable solvency, but Sykes’s interest coverage is somewhat low. The number of times interest can be paid is likely low due to low profitability.

Taking It Further: It would be useful to know the amount and details of Sykes’s assets. If the majority of the assets owned are non-current, one could conclude that although the debt to total assets ratio appears strong, Sykes’s ability to pay debt when due may be poor. It would be useful to determine any off-balance sheet financing obtained through operating leases. As well, details of the income statement would be useful in determining the cause of the low interest coverage ratio. Finally, comparative financial information would be useful to assess any trends in Sykes’s liquidity position and ability to pay interest.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-1B (a) Because it is unsecured, the bond would be considered a debenture bond. 2017 (b) Mar.

1 Cash ............................................... 200,000 Bonds Payable ......................

(c) June 30 Interest Expense ........................ Interest Payable..................... ($200,000 x 7% x 4/12) = $4,667

200,000

4,667 4,667

(d) JADE CORP. Balance Sheet (Partial) June 30, 2017 Current liabilities Interest payable .......................................................

$4,667

Non-current liabilities Bonds payable, due 2022 ........................................

$200,000

(e) 2017 Sept. 1 Interest Expense ........................ Interest Payable ......................... Cash ....................................... (f) 2018 Mar.

Solutions Manual .

1 Interest Expense ........................ Cash ...................................... ($200,000 x 7% x 6/12) = $7,000

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2,333 4,667 7,000

7,000 7,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 15-1B (Continued) Taking It Further: The major advantages of issuing debt instead of issuing shares include: 1. Interest is tax deductible. 2. Issuing debt does not affect the percentage ownership of existing shareholders. 3. Issuing bonds may have a positive effect on the earnings per share ratio. 4. The return on equity ratio may be higher, as a result of financial leverage. The major disadvantages of issuing debt instead of issuing shares include: 1. The debt to total assets will be adversely affected. 2. The principal amount is due at maturity. 3. The corporation is not required to pay dividends on shares but interest on bonds cannot be avoided.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-2B (a)

The bonds were issued at a premium. Note that the bond amortized cost is decreasing and will continue to decrease until the maturity date in ten years’ time at which time the carrying amount will equal the face value of the bond of $2,500,000.

(b) The face value of the bond is $2,500,000. (c)

Contractual interest rate = 5% $62,500 ÷ $2,500,000 = 2.5% semi-annually × 2 = annually

(d) [1] [2]

$2,695,981 + $8,412 = $2,704,393. $62,500 – $8,412 = $54,088

[3] [4] [5]

$62,500 $62,500 – $53,573 = $8,927 $2,678,649 – $8,927 = $2,669,722

(e)

Market interest rate = 4% [2] $54,088 ÷ $2,704,393 = 2% semi-annually × 2 = 4% annually

(f) 2017 Jan 1 Cash ............................................ 2,704,393 Bonds Payable ...................... 2,704,393 (g) 2017 July 1 Interest Expense ........................ Bonds Payable ........................... Cash .......................................

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54,088 8,412 62,500

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 15-2B (Continued) (h) 2017 Dec. 31 Interest Expense ........................ Bonds Payable ........................... Interest Payable.....................

53,920 8,580 62,500

(i) PONASIS CORPORATION Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................

$62,500

Non-current liabilities Bonds payable, due 2027 ........................................... $2,687,401 Taking It Further: The legal documents, which state the contractual interest rate, are often prepared well in advance of the actual bond issue and the market rate of interest fluctuates on a daily basis. It is nearly impossible to predict, weeks or months in advance, what the market interest rate will be on the date of issue. In this case, the market rate of interest decreased after the contractual rate was set.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-3B (a)

The bonds are unsecured debenture bonds that are redeemable (callable).

(b)

Market interest rate 4% ($2,000,000 × 0.67556) + ($2,000,000 × 5% × 8.11090) = $2,162,210 Using a financial calculator: PV $ ? Yields $2,162,217.92 I 4% N 10 PMT $ (100,000) FV $ (2,000,000) Type 0

2017 Jan. 1 Cash ............................................ 2,162,218 Bonds Payable ...................... 2,162,218 (c) UNIVERSAL CORPORATION Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 4%

Date

Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2020 Jan. 1, 2021

Solutions Manual .

(A) Interest Payment $2,000,000 × 5%

(B)

(C)

Interest Expense (D) × 4%

Premium Amortization (A) – (B)

$100,000 100,000 100,000 100,000 100,000

$86,489 85,948 85,386 84,802 84,194

$13,511 14,052 14,614 15,198 15,806

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(D) Bond Amortized Cost (D) - (C) $2,162,218 2,148,707 2,134,655 2,120,041 2,104,843 2,089,037

Chapter 15

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-3B (Continued) (d) 2017 Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2018 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2019 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2020 Jan. 1 Interest Payable ......................... Cash .......................................

86,489 13,511 100,000 100,000 100,000 85,948 14,052 100,000 100,000 100,000 85,386 14,614 100,000 100,000 100,000

Taking It Further: When bonds are issued at a discount, the proceeds from the issuance of the bonds are lower than the face value and corresponding maturity amount of the bonds. The difference in these two amounts has to be absorbed as interest expense to the business over the term of the bonds, using the effectiveinterest method. When bonds are issued at a premium, the proceeds of the bonds are higher than the face value and corresponding maturity amounts. The difference in these two amounts reduces the amount of interest expense recognized over the life of the bond.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-4B (a)

The bonds are secured bonds that are convertible into common shares.

(b)

Market interest rate 7% ($3,500,000 × 0.71299) + ($3,500,000 × 6% × 4.10020) = $3,356,507 Using a financial calculator: PV $ ? Yields $3,356,493.09 I 7% N 5 PMT $ (210,000) FV $ (3,500,000) Type 0

2017 Jan. 1 Cash ............................................ 3,356,493 Bonds Payable ...................... 3,356,493 (c) GLOVER CORPORATION Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 6% Bonds Issued at market rate of 7% Date

(A) Interest Payment $3,500,000 × 6%

Jan. 1, 2017 Jan. 1, 2018 $210,000 Jan. 1, 2019 210,000 Jan. 1, 2020 210,000 Jan. 1, 2020 210,000 Jan. 1, 2021 210,000 * Rounded by $1 Solutions Manual .

(B)

(C)

Interest Expense (D) × 7%

Discount Amortization (B) – (A)

$234,955 236,701 238,570 240,570 242,710

$24,955 26,701 28,570 30,570 32,710

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(D) Bond Amortized Cost (D) + (C) $3,356,493 3,381,448 3,408,149 3,436,719 3,467,289 3,500,000*

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 15-4B (Continued) (d) 2018 Jan. 1 Interest Expense ........................... 234,955 Bonds Payable ...................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................... 236,701 Bonds Payable ...................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................... 238,570 Bonds Payable ...................... Cash .......................................

24,955 210,000

26,701 210,000

28,570 210,000

Taking It Further: A bondholder would request to have bonds held converted to common shares if, after conversion, the market price of the shares obtained exceeds the market price of the bonds given up in exchange for the shares.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-5B (a) 2017 Oct. 1 Cash ($800,000 × 98%)................. 784,000 Bonds Payable ..................... (b) The market rate of interest on Oct 1, 2017 was 5.26%.

784,000

Using Excel or a financial calculator: PV $ 784,000 I ? Yields 5.2623% N 10 PMT $(40,000) FV $(800,000) Type 0 (c) PFQ CORP. Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 5.2623%

Date

Oct. 1, 2017 Oct. 1, 2018 Oct. 1, 2019 Oct. 1, 2020

(A) Interest Payment $800,000 × 5%

(B) Interest Expense (D) × 5.2623%

$40,000 40,000 40,000

$41,256 41,323 41,392

$1,256 1,323 1,392

(d) 2018 Sep. 30 Interest Expense ....................... Bonds Payable ..................... Interest Payable * ................. *($800,000 × 5%)

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(D) Bond Amortized Cost (D) + (C) $784,000 785,256 786,579 787,971

41,256 1,256 40,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-5B (Continued) (e)

(f)

2018 Oct. 1 Interest Payable ........................ Cash ...................................... 2017 Dec. 31

2018 Oct. 1

(g) 2018 Oct. 1

40,000 40,000

Interest Expense*....................... Bonds Payable**.................... Interest Payable*** ................ *($41,256 x 3/12) **($1,256 x 3/12) ***($800,000 × 5% x 3/12)

10,314

Interest Expense*....................... Interest Payable ......................... Bonds Payable**.................... Cash ....................................... *($41,256 x 9/12) **($1,256 x 9/12)

30,942 10,000

Bonds Payable.......................... Gain on Bond Redemption*. Cash ($800,000 × 97%)......... *($785,256 – $776,000)

785,256

314 10,000

942 40,000

9,256 776,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-6B (a)

2017 July 1 Cash............................................... 3,449,427 Bonds Payable ..................... 3,449,427

(b) WAUBONSEE LTD. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 6% Bonds Issued at market rate of 5% (A) (B) Interest Interest Payment Expense $3,200,000 (D) × 5% x × 6% X 6/12 6/12

Date

July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019 July 1, 2019 Jan. 1, 2020 (c)

$96,000 96,000 96,000 96,000 96,000

$86,236 85,992 85,741 85,485 85,222

Dec. 31 Interest Expense ...................... Bonds Payable.......................... Interest Payable .................. 2018 Jan 1 Interest Payable ........................ Cash ......................................

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$9,764 10,008 10,259 10,515 10,778

(D) Bond Amortized Cost (D) - (C) $3,449,427 3,439,663 3,429,655 3,419,396 3,408,881 3,398,103

86,236 9,764 96,000 96,000 96,000

Chapter 15

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-6B (Continued) (d) 2017 Oct. 31 Interest Expense*....................... Bonds Payable** ........................ Interest Payable*** ................ *($86,236 x 4/6) ** ($9,764 x 4/6) ***($3,200,000 × 6% x 4/12) 2018 Jan. 1 Interest Expense*....................... Interest Payable ......................... Bonds Payable** ........................ Cash ....................................... *($86,236 x 2/6) ** ($9,764 x 2/6) (e)

57,491 6,509 64,000

28,745 64,000 3,255 96,000

Jan 1 Bonds Payable ........................... 3,439,663 Gain on Bond Redemption*.. 175,663 Cash ($3,200,000 × 102%) ..... 3,264,000 *($3,439,663 – $3,264,000)

Taking It Further: $3,200,000 × 0.45639 = $3,200,000 × 3.0% × 13.59033 = (n = 20, i = 4.0%)

$1,460,448 1,304,672 $2,765,120

Using a financial calculator: PV $ ? Yields $2,765,109.56 I 4.0% N 20 PMT $ (96,000) FV $ (3,200,000) Type 0

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-7B (a) ($5,000,000 × 0.78120) + ($5,000,000 × 2% × 8.75206) = $4,781,206 (n = 10, i = 2.5%) Using a financial calculator: PV $ ? Yields $4,781,198 I 2.5% N 10 PMT $ (100,000) FV $ (5,000,000) Type 0 (b) VISION INC. Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 5%

Date

Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019

Solutions Manual .

(A) (B) (C) Interest Interest Payment Expense Discount $5,000,000 (D) × 5% × Amortization × 4% × 6/12 (B) – (A) 6/12 $100,000 100,000 100,000 100,000

$119,530 120,018 120,519 121,032

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$19,530 20,018 20,519 21,032

(D) Bond Amortized Cost (D) + (C) $4,781,198 4,800,728 4,820,746 4,841,265 4,862,297

Chapter 15

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-7B (Continued)

(c) 2017 Jan. 1 Cash ............................................ 4,781,198 Bonds Payable ................... 4,781,198 July 1 Interest Expense .................... Bonds Payable .................. Cash ....................................

119,530

Dec. 31 Interest Expense .................... Bonds Payable .................. Interest Payable..................

120,018

19,530 100,000

20,018 100,000

(d) VISION INC. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable ................................... Non-current liabilities Bonds payable, due 2022 ....................

$100,000 4,820,746

(e) 2018 Jan. 1 Interest Payable ............................ 100,000 Cash ......................................

100,000

(f) 2019 Jan. 1 Bonds Payable ........................... 4,862,297 Loss on Bond Redemption* ..... 37,703 Cash ($5,000,000 × 98%) ...... 4,900,000 *($4,900,000 – $4,862,297)

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-7B (Continued) (g) 2022 Jan. 1 Bonds Payable ........................... 5,000,000 Cash ...................................... 5,000,000 (h) The total amount of interest payment: Contract rate (4% × $5,000,000 × 5 years)

$1,000,000

Total interest expense: Interest paid ............................................ Add: discount ($5,000,000 – $4,781,198) Total interest expense ............................

$1,000,000 218,802 $1,218,802

Taking It Further: Because the bonds were issued at a discount, the reduction in the proceeds from the issuance of the bond served to effectively increase the amount of interest expense incurred by Vision Inc. over the term of the bond. The total amount of the interest payments is fixed to the contractual rate. The total interest expense is only the same as the contractual amount of interest paid if the bonds are issued at par.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-8B (a)

2017 Jan. 1 Cash ($600,000 x 1.05)............ Bonds Payable ...................

630,000 630,000

(b)

LOPEZ CO. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................

$27,000

Non-current liabilities Bonds payable, due 2027 ........................................

$628,000

(c)

2019 Jan. 1 Bonds Payable ........................ Loss on Bond Redemption .... Bonds Payable* .................. *($600,000 x 1.05)

624,000 6,000 630,000

Taking It Further: The bond redemption would result in a gain or a loss for Lopez Co. because the face value of the bonds times the redemption price stated in the bond contract will be different than the amortized cost of the bond at the date of redemption.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 15-9B (a) 2017 May

1 Cash ........................................... 120,000 Note Payable .......................

120,000

(b) (A) Cash Payment

Period May 1, 2017 Oct. 31, 2017 $22,520 Apr. 30, 2018 22,520 Oct. 31, 2018 22,520 Apr. 30, 2019 22,520 Oct. 31, 2019 22,520 Apr. 30, 2020 22,520 Total $135,120 *rounded

(B) (C) (D) Interest Principal Expense Reduction Balance (D) × 7% × 6/12 (A) – (B) (D) – (C) $120,000 $4,200 $18,320 101,680 3,559 18,961 82,719 2,895 19,625 63,094 2,208 20,312 42,782 1,497 21,023 21,759 761* 21,759 0 $15,120 $120,000

2018 Apr. 30

(d)

Note Payable ................................ 18,320 Interest Expense ..................... 4,200 Cash.....................................

22,520

Note Payable ................................ 18,961 Interest Expense ..................... 3,559 Cash.....................................

22,520

Current liabilities Current portion of instalment note payable .............. $39,937 ($19,625 + $20,312 = $39,937) Non-current liabilities Instalment note payable, net of current portion... 42,782

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PROBLEM 15-9B (Continued) (e) Principal portion = $120,000 ÷ (3 × 2) = $20,000 each

payment period. Oct. 31:

$20,000 + [$120,000 × 7% × 6/12] = $24,200

Apr. 30:

$20,000 + [($120,000 – $20,000) × 7% × 6/12] = $23,500

Taking It Further: Where the note is repaid in fixed principal payments, the reduction of the principal is the same ($20,000) each period. With the fixed payment of principal each payment, a larger amount of principal is paid in the earlier portion of the loan, and so the principal balance reduces more quickly. Where the note is repaid in blended principal plus interest payments, the reduction of the principal balance increases each period and the principal component in the final blended payment will be larger than the fixed principal payment.

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PROBLEM 15-10B (a) 2017 Sep. 30 Equipment .................................... 900,000 Cash ...................................... Mortgage Note Payable ....... (A) Quarterly Interest Period Sep. 30, 2017 Dec. 31, 2017 Mar. 31, 2018

Cash Payment $66,216 66,216

(B) (C) (D) Interest Expense Reduction Principal (D) × 3.6% of Principal Balance × 3/12 (A) – (B) (D) – (C) $750,000 $6,750 $59,466 690,534 6,215 60,001 630,533

(b) Dec. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ...................................... 2018 Mar. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ......................................

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150,000 750,000

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6,750 59,466 66,216

6,215 60,001 66,216

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PROBLEM 15-10B (Continued) (c) (A) Monthly Interest Period

Cash Payment (B) + (C)

Dec. 31 Mar. 31

$69,250 68,688

(B) (C) (D) Interest Expense Principal (D) × 3.6% × Reduction Balance 3/12 of Principal (D) – (C) $750,000 $6,750 $62,500 687,500 6,188 62,500 625,000

2017 Dec. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ......................................

6,750 62,500

2018 Mar. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ......................................

6,188 62,500

69,250

68,688

Taking It Further: Total payments ($66,216 × 4 × 3) Less: Principal repayment Total interest expense of note

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PROBLEM 15-11B (a) (A) Semi-annual Interest Period Dec. 31, 2017 June 30, 2018 Dec. 31, 2018 June 30, 2019 Dec. 31, 2019 (b)

Cash Payment (B) + (C) $39,375 38,531 37,688 36,844

(B) (C) (D) Interest Expense Principal (D) × 7.5% Reduction Balance × 6/12 of Principal (D) – (C) $450,000 $16,875 $22,500 427,500 16,031 22,500 405,000 15,188 22,500 382,500 14,344 22,500 360,000

2017 Dec. 31 Cash.............................................. 450,000 Mortgage Note Payable ..........

450,000

Current liabilities Current portion of mortgage note payable ................... $ 45,000 ($22,500 + $22,500 = $45,000) Non-current liabilities Mortgage notes payable, 7.5% ...................................... *360,000 * $405,000 – $45,000 = $360,000 or see Dec. 31, 2019 balance (d)

2018 June 30 Interest Expense .......................... 16,875 Mortgage Note Payable ............... 22,500 Cash .........................................

39,375

Dec. 31 Interest Expense .......................... 16,031 Mortgage Note Payable ............... 22,500 Cash .........................................

38,531

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PROBLEM 15-11B (Continued)

Taking It Further: If the semi-annual payments were blended, (calculated to be $32,382.94) the amount of the payment for the first two instalments would be smaller than the amounts using the fixed principal payment in (a) above. The trend reverses to the end of the term of the note and so the last instalment payment is greater with the blended payments.

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PROBLEM 15-12B (a)

In order for Klippert Inc., a public company, to record a lease as a finance lease, one of the following criteria needs to be met: (1) there will be a transfer of ownership, (2) there is a bargain purchase option, (3) the lease term is for the major part of the economic life, (4) the present value of the lease payments amounts to substantially all of the fair value of the leased property, or (5) the asset is a specialized asset. Criteria 1, 2, and 5 are not present on any of the three leases. Criteria 3 and 4 are present in the case of the vehicles lease and so it should be treated as a finance lease. Both the manufacturing and office equipment leases should be reported as operating leases, because none of the criteria are met to require treatment as a finance lease. It should be noted that only one condition needs to be met to require capitalization.

(b) Equipment Rental Expense........................ Cash .....................................................

13,260

Equipment Rental Expense........................ Cash .....................................................

4,092

13,260

4,092

The vehicles lease is a finance lease. The entry to record the finance lease on January 1, 2017 is as follows: Leased Asset—Vehicles............................. Lease Liability .....................................

75,379

Lease Liability ............................................. Cash .....................................................

13,929

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PROBLEM 15-12B (Continued) (c)

Since the manufacturing and office equipment leases do not qualify as finance leases, nothing would appear on Klippert Inc.’s balance sheet for either one. The annual rental fees would be charged to expense when they are paid each year and reported on the income statement as: Equipment Rental Expense $17,352 ($13,260 + $4,092), or expensed monthly. The vehicles lease is a finance lease. Therefore, the vehicles would be recorded as an asset on Klippert’s balance sheet, along with other assets, in property, plant, and equipment. The amount recorded would be the present value of the lease rental payments of $75,379, reduced by any accumulated depreciation recorded in 2017. The amount of the depreciation would be reported on the income statement. A corresponding liability for leased assets of $75,379 would be recorded on January 1, 2017. This would be reduced by the principal portion of the annual lease payment. Interest expense accrued for 2017 would also appear on the income statement.

Taking It Further: The adjusting journal entry on December 31, 2017 for the accrual of interest on the lease liability would be as follows: Interest Expense on Finance Leases ............. 4,302 Interest Payable................................... (($75,379 – $13,929) × 7% = $4,032)

4,302

Since the rental cost of the manufacturing and office equipment have been paid and expensed during the year, no accruals need be recorded for the two remaining leases.

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PROBLEM 15-13B (a)

($ in millions) Debt to total assets = Total debt ÷ Total assets 2014 2013

$38,068 ÷ $79,671 = 47.8% $37,135 ÷ $78,315 = 47.4%

Interest coverage = EBIT ÷ Interest expense 2014 2013

($2,699 + $1,429 + $1,891) ÷ $1,429 = 4.2 times ($3,911 + $1,162 + $2,465) ÷ $1,162 = 6.5 times

(b) With the substantial decline in profit in 2014, Suncor experienced a corresponding decline in its ability to pay interest. On the other hand, the debt to total assets ratio worsened only slightly. Taking It Further: The use of operating leases improves the company’s solvency ratios. Since operating leases are accounted for as rent expense, Suncor can avoid reporting the lease obligations on its balance sheet. In terms of assessing solvency, the use of operating leases causes the debt to total assets ratio to be lower because of the off-balance sheet financing (keeping liabilities off the balance sheet). As well, because the company has less debt, its interest expense is lower than it would be if the leases were considered to be finance leases. This causes its interest coverage ratio to be higher than it would have been had the leases been accounted for as finance leases. The company’s worsening ability to pay interest in 2014, as revealed by the ratios, could be even worse.

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PROBLEM 15-14B (a)

CAREY CORPORATION Balance Sheet (Partial) December 31, 2017 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income tax payable............................................. Unearned revenue .............................................. Current portion of lease liability ........................ Current portion of note payable ........................ Total current liabilities ............................................

$76,000 30,000 37,176 25,000 22,800 16,920 1 207,896

Non-current liabilities Bonds payable, due 2022 ................................... Note payable, net of current portion ................. Lease liability, net of current portion ................ Total non-current liabilities .................................... Total liabilities .........................................................

1,000,000 141,746 2 77,069 3 1,218,815 1,426,711

$24,400 – $7,480 = $16,920 $158,666 – $16,920 = $141,746 3 $99,869 – $22,800 = $77,069 2

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PROBLEM 15-14B (Continued) (b)

Debt to total assets = Total debt ÷ Total assets Total debt = $76,000 + $1,000,000 + $30,000 + $37,176 + $158,666 + $99,869 + $25,000 = $1,426,711 $1,426,711 ÷ $2,594,031 = 55% Interest coverage = EBIT ÷ Interest expense ($173,500 + $49,568 + $74,353) ÷ $49,568 = 6 times

(c)

Carey’s debt to total assets and interest coverage show excellent solvency.

Taking It Further: Long-term creditors and investors are more interested in solvency ratios, which measure a company’s ability to repay its non-current liabilities and survive over a long period of time. They are particularly interested in a company’s ability to pay interest when it is due and to repay its debt at maturity.

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BYP15-1 FINANCIAL REPORTING PROBLEM * dollar amounts are in thousands (a)

Corus’ long-term debt

Aug. 31, 2014 $874,251

Aug. 31, 2013 $538,966

Total long-term debt increased by $335,285 or 62.2 %. (b) Corus’ statement of cash flows indicates that notes were redeemed at an amount of $500,000,000 in the 2013 fiscal year but there were no redemptions in 2014. (c) 2013 Debt to total assets = Total debt ÷ Total assets Debt to total assets

$946,304 $2,167,137

43.7%

Interest coverage = EBIT ÷ Interest expense =

($165,749 + $44,795 + $34,462) $44,795

5.5

times

Corus took on a higher proportion of debt in 2014. Debt to total assets went from 43.7% in 2013 to 53% in 2014. Its interest coverage stayed about the same, decreasing from 5.5 times in 2013 to 5.3 times in 2014, while interest expense slightly increased. This would suggest solvency deteriorated slightly in 2014.

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BYP15-2 INTERPRETING FINANCIAL STATEMENTS (a)

($ in millions) U.S. Gap Inc.

Debt to total assets Times interest earned

$2,473 $7,690

= 32.2%

($1,262 + $75 + $751) $75

= 27.8 times

lululemon athletica inc. $207

Debt to total assets

$1,296

Times interest earned

($239 + $14 + 114) $14

= 16.0%

= 26.2 times

(b) Gap Inc. relied more heavily on debt financing; 32.2% of every dollar of assets was financed with debt versus only 16.0% by lululemon. In spite of having a higher debt to total asset ratio, Gap Inc. has a slight edge for its interest coverage ratio compared to lululemon. Both companies appear to be very solvent. (c)

Operating leases give the appearance that a company’s solvency is better than it really is. Even though they are not shown on the balance sheet or used in the standard ratio calculations, they are a commitment the company must meet.

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BYP15-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

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BYP15-4 COMMUNICATION ACTIVITY To:

Mr. Sam Masasi, President Masasi Corporation

From: Accounting student Re:

Financing of expansion

As you have requested, I have prepared the following list of considerations concerning your expansion financing plans. (1)

The major advantages of bonds over common share financing are: a) Shareholder control is not affected—bondholders (lenders) do not have voting rights, so current shareholders retain full control over the company. b) Income tax savings result—interest is deductible for tax purposes; dividends on shares are not. c) Earnings per share may be higher—although interest expense will reduce profit, earnings per share will often be higher under debt financing, because no additional common shares are issued. d) Return on equity may be higher—although profit is lower, return on equity is often higher because of financial leverage.

(2) The major disadvantages of bonds over common share financing are: a) b) c) d) e)

Using bonds is riskier. Interest must be paid on a periodic basis. The principal (face value) of the bond must be repaid. These are binding legal obligations. Bonds may negatively affect the debt to total assets ratio.

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BYP15-4 (Continued) (3) The types of bonds that Masasi Corporation may issue include: a) Secured bonds have specific assets pledged as collateral secured by the bond issuer. b) Unsecured bonds which are more risky to the bondholder as there is no collateral provided by the bond issuer. c) Convertible bonds, which have a conversion feature allowing the bondholder to exchange the bond usually to common shares. d) Callable bonds (also known as redeemable bonds) are bonds that the issuing company can redeem (buy back) at a stated dollar amount, prior to maturity. (4) In the case of a corporation, the board of directors must approve the bond issue. In authorizing the bond issue, the board of directors must state the number of bonds to be authorized (the total number of bonds the company is allowed to sell), the total face value, the contractual interest rate, and the maturity date. The total number of bonds authorized is often more than the number of bonds the company plans to issue immediately.

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BYP15-5 “ALL ABOUT YOU” ACTIVITY (a)

Answers will vary by student, depending on the interest rate assumed. The following answers assume a prime interest rate of 3%: 1. 2.

(b)

Monthly payment = $261.07 Interest payable = $8,962 (rounded) (114 × $261.07 – $20,800 including grace period interest)

Answers will vary by student, depending on the interest rate assumed. The following answers assume a prime interest rate of 3%: 1. 2.

Monthly payment = $202.34 Interest payable = $14,408 (rounded) (174 × $202.34 – $20,800 including grace period interest)

choice of the better option is dependent on the personal situation of the student making the choice.

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BYP15-6 Santé Smoothie Saga (a) Alternative 1

Interest Period

(A)

(B)

Cash Payment

Interest Expense

(B) + (C)

(D) × 4% × 6/12

Reduction of Principal

$3,920 3,850 3,780 3,710 3,640 3,570 $22,470

$420 350 280 210 140 70 $1,470

$3,500 3,500 3,500 3,500 3,500 3,500 $21,000

May 1, 2018 Nov. 1, 2018 May 1, 2019 Nov. 1, 2019 May 1, 2020 Nov. 1, 2020 May 1, 2021 Totals

(C)

(D) Principal Balance (D) – (C) $21,000 17,500 14,000 10,500 7,000 3,500 0

Alternative 2

Interest Period

(A) Cash Payment

May 1, 2018 Nov. 1, 2018 $3,749 May 1, 2019 3,749 Nov. 1, 2019 3,749 May 1, 2020 3,749 Nov. 1, 2020 3,749 May 1, 2021 3,749 Totals $22,494 *$1 rounding difference

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(B) Interest Expense

(D) Principal Balance

(D) × 4% × 6/12

(A) – (B)

(D) – (C) $21,000 17,671 14,275 10,812 7,279 3,676 0

$420 353 286 216 146 73* $1,494

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$3,329 3,396 3,463 3,533 3,603 3,676 $21,000

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BYP15-6 (Continued) (b) 2018 May 1 Equipment ................................. Cash ...................................... Notes Payable ...................... (c)

25,000 4,000 21,000

Alternative 1 2018 Nov. 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... 2019 May 1 Notes Payable ........................... Interest Expense ....................... Cash ......................................

3,500 420 3,920 3,500 350 3,850

Alternative 2 2018 Nov. 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... 2019 May 1 Notes Payable ........................... Interest Expense ....................... Cash ......................................

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BYP15-6 (Continued) (d) 1

Current Portion Non-current Portion 1

(e)

Alternative 1 $7,000 7,000 $14,000

Alternative 2 $6,996 7,279 $14,275

$3,500 + $3,500 = $7,000 $3,463 + $3,533 = $6,996

Alternative 1 2019 May 31 Interest Expense ....................... Interest Payable ................... ($14,000 × 4% × 1/12) = $47

47 47

Alternative 2 May 31 Interest Expense ....................... Interest Payable ................... ($14,275 × 4% × 1/12) = $48 (f)

48 48

The alternatives are almost identical when it comes to cost. In Alternative 1 the total cash paid is $22,470 and in Alternative 2 total cash paid is $22,494, a difference of only $24. There is a difference when it comes to the cash flow, however. Alternative 1 requires higher payments at the beginning, and lower ones at the end of the loan. Alternative 2 requires a steady payment and may be easier for budgeting purposes, given the fixed payment.

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CHAPTER 16 Investments ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Problems Exercises Exercises Set A

1. Identify reasons to invest, and classify investments.

1, 2, 3, 4

1, 2

2. Demonstrate the accounting for debt investments that are reported at amortized cost.

5, 6, 7

3, 4, 5

3, 4, 5, 6

1, 2, 3, 6

3. Demonstrate the accounting for fair value investments.

8, 9, 10, 11, 14

6, 7, 8, 9, 10

7, 8, 9, 10

2, 4, 5, 6, 7

4. Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.

12, 13, 14, 15, 16

11, 12, 13

11, 12

6, 7, 8

5. Explain how investments are reported in the financial statements.

17, 18, 19

14, 15, 16

10, 12, 13, 14

1, 2, 3, 4, 5, 6, 8, 9, 10

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A

Description Record debt investments at amortized cost; show statement presentation.

Difficulty Level Moderate

Time Allotted (min.) 30-40

Record debt investments at amortized cost; show statement presentation.

Moderate

20-25

Record debt investment at amortized cost, prepare bond amortization schedule, and record liability; show statement presentation.

Moderate

40-45

Record equity and debt investments categorized as fair value through profit or loss; show statement presentation.

Moderate

30-40

Record equity investments; show statement presentation.

Moderate

35-45

Identify impact of investments on financial statements.

Complex

20-25

Analyze investment and compare fair value, equity method, and cost method.

Complex

35-45

Assess strategic investments, record investment using equity method. Show statement presentation.

Moderate

20-25

Prepare income statement and statement of comprehensive income.

Simple

20-30

10A

Prepare statement of comprehensive income and balance sheet.

Moderate

40-50

Record debt investments; show statement presentation.

Moderate

30-40

Record debt investments; show statement presentation.

Moderate

20-25

Record debt investment at amortized cost, prepare bond amortization schedule, and record liability; show statement presentation.

Moderate

40-45

Record debt and equity investments categorized at fair value through profit or loss; show statement presentation.

Moderate

30-40

Record equity trading investments; show statement presentation.

Moderate

35-45

Identify impact of investments on financial statements.

Complex

20-25

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 7B

Description Analyze investment and compare fair value, equity method, and cost method.

Difficulty Level Complex

Time Allotted (min.) 35-45

Record strategic equity investments, use fair value, cost, and equity method. Show statement presentation.

Moderate

20-25

Prepare income statement and statement of comprehensive income.

Simple

20-30

10B

Prepare statement of comprehensive income and balance sheet.

Moderate

40-50

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Learning Objectives and End-ofChapter Material Learning Objective Knowledge Comprehension 1. Identify reasons to Q16-1 Q16-2 invest, and classify BE16-1 investments. Q16-3 Q16-4 BE16-2 E16-1 E16-2 2. Demonstrate the Q16-5 Q16-6 accounting for debt Q16-7 investments that are reported at amortized cost.

3. Demonstrate the accounting for fair value investments.

Q16-8 Q16-9

Q16-10 Q16-11 Q16-14

4. Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence. 5. Explain how investments are reported in the financial statements.

Q16-16

Q16-12 Q16-13 Q16-14 Q16-15

Q16-17 Q16-18

Q16-19

Broadening Your Perspective

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Application

Analysis

Synthesis Evaluation

BE16-3 P16-2A BE16-4 P16-3A BE16-5 P16-6A P16-1B E16-3 P16-2B E16-4 P16-3B E16-6 P16-1A P16-6B BE16-6 P16-3A BE16-7 P16-4A BE16-8 P16-5A BE16-9 P16-6A BE16-10 P16-7A P16-1B E16-7 E16-8 P16-3B P16-4B E16-9 E16-10 P16-5B P16-1A P16-6B P16-2A P16-7B BE16-11 P16-6A BE16-12 P16-7A BE16-13 P16-8A E16-11 P16-6B E16-12 P16-7B P16-8B

BE16-14 P16-6A BE16-15 P16-9A BE16-16 P16-10A E16-10 P16-1B E16-12 P16-2B E16-13 P16-3B E16-14 P16-4B P16-1A P16-5B P16-2A P16-6B P16-3A P16-9B P16-4A P16-10B P16-5A BYP 16-4 BYP 16-2 BYP 16-5 BYP16-6 BYP 16-3

BYP 16-1

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ANSWERS TO QUESTIONS 1.

A corporation would purchase debt or equity securities of another corporation to provide a source of income (dividends and interest) from investing excess cash held by the business in the short term. The corporation might hope to sell the securities at a higher price than they originally paid for them and thereby generate some gains on the sale. Lastly, companies might buy common shares of another company as a strategic investment that will bring business advantages to the corporation.

Non-strategic investments are made to earn investment income. Strategic investments are made to influence or control the operations of another company in some way.

This is a strategic investment by Uram Mining Ltd. because the purpose of the investment is to secure for the investor a source for the necessary parts and supplies to keep their mining operations going.

Fair value is the amount the investment can be sold for in the market and is usually established by an active stock or bond market for investments.

The method of accounting for bonds depends on management’s intention when purchasing the bonds. If the bonds are purchased for holding for a short term and for trading, they are reported at fair value through profit or loss. On the other hand, if the bonds are purchased to earn interest revenue, they are reported at amortized cost.

Reporting investments held to earn interest at amortized cost provides the users of financial statements more relevant information than if they were reported at fair value since these investments are held to earn interest income over long periods of time. It is not management’s intention to resell these investments at a gain and so the debt investments are best reported at amortized cost.

A gain on sale of bond investment would be recorded when an investor sells a bond investment before maturity and the proceeds on the sale are greater than the amortized cost (carrying amount) of the bonds on the investors books. The opposite situation would require a loss on sale of bond investment. That is, if the investor sells the bond before maturity and the proceeds on the sale are less than the amortized cost (carrying amount) of the bonds.

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QUESTIONS (Continued) 8.

As far as measurement of the fair value of an investment, the amount arrived at will be the same under fair value through profit or loss or fair value through other comprehensive income. Where the adjustment to fair value is classified will be different. For fair value through profit or loss, any fair value adjustment recorded will be classified under other revenues or other expenses in the income statement. For investment adjustments to fair value under the fair value through other comprehensive income, the amounts recorded will be classified under other comprehensive income in the statement of comprehensive income.

Non-strategic investments in debt or equity should be designated and classified as fair value through income or loss investments.

10.

Management would designate investments in equity securities as fair value through other comprehensive income when those investments are longterm and are going to be held and not sold. In this case, it may be inappropriate to affect a company’s profit with the gains and losses on fair value adjustments caused by market fluctuations. The fair value adjustment may; therefore, be kept out of profit, but instead reflected in other comprehensive income on the statement of comprehensive income.

11.

The journal entries involved in the purchase and sale of these investments should be to a dedicated account for financial reporting called FVTOCI Investments, which is the short form for the caption that will appear on the balance sheet: Fair value through other comprehensive income. Fair value adjustments will be recorded to temporary accounts called OCI—Gain on Fair Value Adjustment or OCI Loss on Fair Value Adjustments. These temporary accounts will be closed at the end of the fiscal year to the account Accumulated Other Comprehensive Income, which is a separate equity account.

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QUESTIONS (Continued) 12. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the associate. The general guideline for use of the equity method is more than 20% ownership interest. Companies are required to use judgement: however, rather than to blindly follow the 20% guideline. For example, 25% ownership in a company that is 75% controlled by another company would not necessarily indicate significant influence. Other factors involved in determining if an investor can exercise significant influence over its investee include: a) Does the investor have representation on the investee’s board of directors? b) Does the investor participate in the investee’s policy-making process? c) Are there material transactions between the investor and investee? d) Are the common shares that are held by other shareholders concentrated among a few investors or dispersed among many? 13. The equity method is used when an investor has significant influence over the affairs of an associate, its investee. Because management’s intent is to hold or possibly grow the investment over the long term, reporting at fair value would not be relevant to the financial statement users. Two transactions need to be recorded to the investment account each year. One is an increase by the percentage ownership times the amount of profit earned by the investee in the year. A decrease is recorded in the case of a loss. Since the value of the investment increases with the increase in the investee’s equity, it is appropriate to recognize a corresponding proportionate increase in the investment account. When debiting the Investment in Associate account, a credit to the Revenue from Investment in Associate will also be recorded. Similarly, dividends paid by the investee to the investor will cause the associate’s equity to decrease. Using the same logic, a dividend is treated as a return of investment. Dividends received from the associate will be credited to the Investment in Associate account.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 14. Investments in associates differ from investments reported at cost or at fair value. Investments recorded at cost have no adjustments recorded to the investment account neither for any changes in the financial performance of the investee nor for any changes in the investment’s fair value. Investments accounted for using FVTPL or FVTOCI are adjusted to their market value at the end of each accounting period. Investments in associates are not purchased with the intention of receiving dividends or for realizing gains through the resale of the shares at a higher price. They usually involve a significant investment to acquire a high enough percentage in the associate. Because of the intention of management, it is more relevant for the financial statement users to be informed of the status of the investment, including increases for profits or decreases for losses, than to have a fair value determined by the stock market as would be the case for held for trading or fair value through other comprehensive income investments. 15.

(a) Under the cost model, the company’s initial investment is recorded at cost. That value does not change with the change in fair value, nor from the performance of the investee, nor from payment of dividends as is the case in the equity method. (b) Under the equity method, the investment is also recorded at cost on the day the investment is made. However, the investment account is increased or decreased by the investor’s share of the associate’s profit or loss for the period. The investing company would reduce the carrying value of its investment by any dividends received from the investee, since the value of the latter’s net assets decreases as it pays dividends. The investment account is not revalued to fair value at the balance sheet dates.

16. An investee is referred to as an associate in the case where significant influence is present over the associate by the investor. In order for the investee to be a subsidiary, the investor must control the investee by owning at least 50% plus one share of voting shares.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 17. Investment category Amortized cost

Fair value through profit or loss (FVTPL)

Fair value through other comprehensive income (FVTOCI)

Associate Subsidiary

Valuation method IFRS

Description

Non-strategic Amortized cost using A debt security held to the effective interest earn interest income. method Any investment in debt or Fair value; gains and equity that is not an losses included in amortized cost or profit or loss FVTOCI investment. Includes those investments held for trading purposes. Any equity investment Fair value; gains and that is designated by losses included in management to this other comprehensive category that is not held income for trading purposes. Strategic investments Strategic investment with Equity significant influence Strategic Investment with Consolidation control

Valuation method ASPE Amortized cost

Fair value; gains and losses included in profit or loss if security is actively traded on an organized exchange. N/A

FVTPL, or cost or equity method FVTPL or cost or equity or consolidation

18. (a) Investments held for trading are classified as current assets and reported at fair value. (b) Short-term debt investments purchased to earn interest are classified as current assets and reported at amortized cost. (c) Debt investments purchased to earn interest with maturities longer than 12 months are classified as long-term investments and reported at amortized cost. (d) Strategic investments accounted for using the equity method are classified as long-term investments. 19. Gains and losses on fair value adjustments of long-term strategic equity investments can be reported as other comprehensive income in the statement of comprehensive income if the investor is a public company following IFRS. If the strategic equity investment is going to be held and not sold, then it may be inappropriate to affect a company’s profit with the gains and losses on fair value adjustments caused by market fluctuations.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 (a) (b) (c) (d)

4. Long-term investments at amortized cost (AC) 1. Strategic investments 3. Short-term investments at fair value through profit or loss (FVTPL) 2. Non-strategic investments

BRIEF EXERCISE 16-2

120-day treasury bill

Common shares purchased by a bank for resale in the near future at a gain 15% of the common shares of a public company designated as FVTOCI Five-year bonds purchased by a company to hold and earn interest 10-year bonds purchased to sell in the near future at a gain

Solutions Manual .

(a) Reason Nonstrategic Nonstrategic

(b) Classification Current asset

Strategic

Non-current asset

Fair value

Nonstrategic

Non-current asset

Amortized cost

Nonstrategic

Current asset

Fair value

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Current asset

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BRIEF EXERCISE 16-3 (a) Dec. 2 Short-Term Investment at AC—Treasury Bill ........................ 148,900 Cash ............................................. (b) Dec. 31 Short-Term Investment at AC—Treasury Bill ................... 275 Interest Revenue ......................... (c) Apr. 1 Short-Term Investment at AC—Treasury Bill ................... 825 Interest Revenue ......................... Cash...................................................... 150,000 Short-Term Investment at AC—Treasury Bill ...................

148,900

275

825

150,000

BRIEF EXERCISE 16-4 (a) Jan. (b) July

1 Long-Term Investments at AC—Bonds 600,000 Cash .................................................. 600,000 1 Cash ($600,000 × 4% × 6/12)................. Interest Revenue ..............................

12,000 12,000 12,000 12,000

Since the bonds are held to earn interest income, there is no fair value adjustment at December 31.

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BRIEF EXERCISE 16-5 (a) June 30 Long-Term Investments at AC—Bonds ...................................297,000 Cash ($300,000 × .99)..................... 297,000 (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. Long-Term Investments at AC—Bonds ............................ Interest Revenue ............................

6,000 273 6,273

Since the bonds are being held to earned interest income, there is no fair value adjustment on December 31.

BRIEF EXERCISE 16-6 2017 July 1 Long-Term Investments at AC—Bonds..................................420,000 Cash................................................ 420,000

Dec. 31 Interest Receivable* ....................... 12,000 Long-Term Investments at AC—Bonds***

Interest Revenue** .................. *($400,000 x 6% x 6/12 = $12,000) **($420,000 x 5% x 6/12 = $10,500) ***($12,000 - $10,500 = $1,500)

1,500 10,500

2018 June 30 Cash................................................. 24,000 Long-Term Investments at AC—Bonds

Interest Receivable ................. Interest Revenue .....................

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1,500 12,000 10,500

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BRIEF EXERCISE 16-7 (a) June 30 Short-Term Investments at FVTPL—Bonds .........................297,000 Cash ($300,000 × .99)..................... 297,000 (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. Interest Revenue ............................ (c) Dec. 31 Loss on Fair Value Adjustment ......... Short-Term Investments at FVTPL—Bonds .................... (($300,000 × .98) – $297,000)

6,000 6,000

3,000 3,000

BRIEF EXERCISE 16-8 Aug.

1 Short-Term Investments at FVTPL—Equity .................... 114,000 Cash................................................

114,000

Oct. 15 Cash (3,000 × $2.75) ............................... 8,250 Dividend Revenue..........................

8,250

Dec.

1 Cash .................................................... 120,000 Short-Term Investments at FVTPL—Equity.................. Gain on Sale of FVTPL Investments

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BRIEF EXERCISE 16-9 Apr.

1 Long-Term Investments at FVTOCI— Equity ........................ Cash................................................ (40,000 x $15)

Dec. 15 Cash (40,000 × $0.10) ......................... Dividend Revenue..........................

600,000 600,000

4,000

Dec. 31 Long-Term Investments at FVTOCI— 80,000 Equity....................... OCI—Gain on Fair Value Adjustment [(40,000 x $17) - $600,000 = $80,000]

4,000

80,000

BRIEF EXERCISE 16-10 Jan. 15 Cash ........................................................... 690,000 OCI—Gain on Sale of FVTOCI Investments 10,000 Long-Term Investments at FVTOCI—Equity ........................ 680,000

BRIEF EXERCISE 16-11 Jan.

1 Investment in Associate ...................... 250,000 Cash .................................................

250,000

Dec. 31 Investment in Associate ........................ 44,000 Income from Investment in Associate (20% × $220,000) ......

44,000

Dec. 31 Cash (20% × $15,000)............................... 3,000 Investment in Associate .................

3,000

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BRIEF EXERCISE 16-12 Jan.

1 Investment in Associate ...................... 175,000 Cash .................................................

175,000

Dec. 31 Cash ($12,000 × 25%)............................... 3,000 Dividend Revenue ...........................

3,000

BRIEF EXERCISE 16-13 (a) Equity Method Balance Sheet: Non-current assets Investment in Associate, Dong Ltd., at cost Investment in Associate, Dong Ltd., at equity Income Statement: Dividend revenue Income from investment in associate * Investment in Associate, at equity Less dividend (20% × $20,000) Add: associate’s profit (20% × $250,000) Carrying value of investment

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(b) Cost Method

$300,000 $346,000 * 0 $50,000

$4,000

$300,000 (4,000) 50,000 $346,000

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BRIEF EXERCISE 16-14 ATWATER CORPORATION Statement of Comprehensive Income (Partial) Year Ended April 30, 2017 Profit from operations................................................ Other expenses Loss on fair value adjustment— FVTPL .............. Profit before income taxes ........................................ Income tax expense* .................................................. Profit............................................................................ Other comprehensive income Gain on fair value adjustment of investments, net of income tax of $24,769** ............................. Comprehensive income .............................................

$650,000 50,000 600,000 210,000 390,000

46,000 $436,000

*($600,000 x 35% = $210,000) ** ($46,000 ÷ (1-35%) = $70,769) tax is $70,769 x 35% = $24,769

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BRIEF EXERCISE 16-15 Financial Statement

Classification

Short-term investments at FVTPL—bonds Balance Sheet

Current assets

Dividend revenue

Income Statement

Other revenue

Investment in associate

Balance Sheet

Long-term investments

Long-Term investments at AC— bonds

Balance Sheet

Long-term investments

Gain on sale of FVTPL investments

Income Statement

Other revenue

Other comprehensive income—gain on fair value adjustment

Statement of Comprehensive Income

Other comprehensive gains

Loss on fair value adjustment — FVTPL

Income Statement

Other expenses

Interest revenue

Income Statement

Other revenue

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BRIEF EXERCISE 16-16 SABRE CORPORATION Balance Sheet (Partial) November 30, 2017 Assets Current assets Short-term investment at amortized cost—treasury bill .............................................. Short-term investments at fair value through profit or loss* ......................................................

$25,125 74,000 99,125

Non-Current assets Long-term investments at fair value through other comprehensive income—equity .............. 105,000 Long-term investments at amortized cost—bonds ........................................................ 150,000 Investment in associate ............................................... 250,000 505,000 *($26,000 + $48,000) = $74,000

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SOLUTIONS TO EXERCISES EXERCISE 16-1 1.

15% of the common shares of Lewis Telecommunications Inc. 100% of 15-year bonds of Li Internet Ltd.

Strategic investment  Management’s intention is to influence the operations of Lewis Telecommunications. Non-Strategic investment  The purpose is to generate investment income. Since the investment is in bonds, influence on the operations of Li Internet Ltd. cannot be exercised. Strategic investment 95% of the common shares of Barlow  The percentage of ownership Internet Services Inc. gives Awisse Telecommunications control over the operations of Barlow. 120-day treasury bill Non-Strategic investment  The investment does not consist of common shares and the intention is to generate interest income. 10% of the common Non-Strategic investment shares of Talk to Us  The investment was made with Ltd. the intention to generate gains from trading the investment.

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EXERCISE 16-2 1.

10-year BCE bonds

10-year GE bonds

One-year Government of Canada bonds 180-day treasury bill

4. 5. 6. 7. 8.

Bank of Montreal preferred shares Loblaw common shares Pizzutto Holdings common shares Kesha Inc., common shares – 22% interest *

(a) Nonstrategic Nonstrategic Nonstrategic Nonstrategic Nonstrategic Nonstrategic Strategic

(b) (c) Amortized cost Noncurrent NonFair value current Current Amortized cost Current Amortized cost Current Fair value Current Fair value

Noncurrent Strategic Noncurrent

N/A (consolidated) Equity method

Assume exercise significant influence and have quoted market price (if no quoted market price, must use cost method under ASPE).

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EXERCISE 16-3 (a) Jan.

2 Short-Term Investment at AC—Treasury Bills ...................... 39,760 Cash...............................................

39,760

1 Cash ...................................................... 40,000 Short-Term Investment at AC—Treasury Bills................... Interest Revenue ...........................

39,760 240

1 Short-Term Investment—Money Market Fund ................................... Cash...............................................

65,000 65,000

31 Short-Term Investment—Money Market Fund ................................... Interest Revenue ...........................

163

Sept. 30 Short-Term Investment—Money Market Fund ................................... Interest Revenue ...........................

163

May

Aug.

Oct.

1 Short-Term Investments at AC— Treasury Bills .................... Cash...............................................

163

29,821 29,821

15 Cash ................................................... 65,408 Interest Revenue ........................... Short-Term Investments—Money Market Fund* ............................ *($65,000 + $163 + $163) (b) Oct. 31 Short-Term Investments at AC—Treasury Bills* ...................... Interest Revenue ........................... * ($29,821 x 2.4% x 1/12)

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82 65,326

60 60

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EXERCISE 16-4 (a) (1) Imperial (investor) July 1 Long-Term Investments at AC—Bonds .................................... 461,000 Cash................................................ 461,000 (2) Acme (investee) July 1 Cash ........................................................ 461,000 Bonds Payable ............................... 461,000 (b) (1) Imperial (investor) Dec. 31 Interest Receivable ($500,000 × 4% × 6/12)........................ Long-Term Investments at AC—Bonds Interest Revenue ........................... ($461,000 × 5% × 6/12) (2) Acme (investee) Dec. 31 Interest Expense................................. Bonds Payable ............................... Interest Payable ............................. (c) (1) Imperial (investor) Jan. 1 Cash .................................................... Interest Receivable ........................ (2) Acme (investee) Jan. 1 Interest Payable.................................. Cash................................................

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10,000 1,525 11,525

11,525 1,525 10,000

10,000 10,000

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EXERCISE 16-5 (a)

The carrying value at April 1, 2017 of $418,444 is higher than the face or maturity value of $400,000, which indicates that the bonds were purchased at a premium.

(b) $400,000, as given in the description of the bonds. (c)

The bonds’ amortized cost will be $400,000 at the maturity date.

(d) Contractual interest rate = 4% $8,000 ÷ $400,000 = 2% semi-annually; 2% × 2 = 4% annually Market interest rate = 3% $6,277 ÷ $418,444 = 1.5% semi-annually; 1.5% × 2 = 3% annually (e) 2017 Apr. 1 Long-Term Investments at AC—Bonds .................................... 418,444 Cash................................................ 418,444 Oct. 1

Cash .................................................... Long-Term Investments at AC—Bonds ............................. Interest Revenue..........................

2018 Mar. 31 Interest Receivable............................. Long-Term Investments at AC—Bonds ............................. Interest Revenue.......................... Apr. 1

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Cash .................................................... Interest Receivable ......................

16-23

8,000 1,723 6,277 8,000 1,749 6,251 8,000 8,000

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EXERCISE 16-6 (a) 2017 Jan. 1 Long-Term Investments at AC—Bonds ................................ 135,666 Cash ....................................................

135,666

July 1 Cash ($120,000 × 7% × 6/12) ..................... 4,200 Long-Term Investments at AC—Bonds Interest Revenue ($135,666 x 5% x 6/12)

808 3,392

Dec. 31 Interest Receivable ................................... 4,200 Long-Term Investments at AC—Bonds Interest Revenue ................................ [($135,666 - $808) x 5% x 6/12] = $3,371 2018 Jan. 1

829 3,371

Cash ........................................................... 4,200 Interest Receivable ............................

4,200

July 1 Cash ........................................................... 4,200 Long-Term Investments at AC—Bonds Interest Revenue ................................ [($135,666 - $808 - $829) x 5% x 6/12] = $3,351

849 3,351

July 2 Cash ....................................................... 131,000 Loss on Sale of Bond Investments .......... 2,180 Long-Term Investments at AC—Bonds

133,180

(b) Purchase price of bonds Jan. 1, 2017 Amortization of bond premium July 1, 2017 Amortization of bond premium Dec. 31, 2017 Balance of investments in bonds Dec. 31, 2017

$135,666 (808) (829) $134,029

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EXERCISE 16-7 (a) 2017 Aug. 1

Short-Term Investments at FVTPL—Bonds .............................100,000 Cash................................................ 100,000

(b) Dec. 31 Interest Receivable............................. Interest Revenue ............................ ($100,000 x 7% x 5/12)

2,917 2,917

Dec. 31 Short-Term Investments at FVTPL—Bonds ......................... 1,000 Gain on Fair Value Adjustment—FVTPL

1,000

(c) The investment would be reported in Chen’s balance sheet as Fair value through profit or loss investments of $101,000 under current assets. (d) 2018 Jan. 31

Cash ($100,000 x 7% x 6/12) .............. Interest Receivable ........................ Interest Revenue ...........................

3,500 2,917 583

(e) 2018 Feb. 1

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Cash ....................................................... 102,000 Gain on Sale of FVTPL Investments 1,000 Short-Term Investments at FVTPL—Bonds ................... 101,000

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EXERCISE 16-8 2017 Sept. 28 Short-Term Investments at FVTPL—Equity ......................... 140,000 Cash (3,500 × $40)........................... 140,000 Oct.

1 Short-Term Investments at FVTPL— Bonds .......................... Cash.................................................

Nov. 12

Dec.

300,000 300,000

Cash (1,900 × $42) ............................... 79,800 Short-Term Investments at ............ FVTPL—Equity .......................... Gain on Sale of FVTPL Investments *($140,000 ÷ 3,500 × 1,900)

1 Cash [(3,500 – 1,900) × $1.50] ............. Dividend Revenue...........................

2,400

31 Interest Receivable.............................. Interest Revenue ($300,000 × 4% × 3/12) ....................

3,000

31 Short-Term Investments at FVTPL— Bonds*.......................... Loss on Fair Value Adjustment –FVTPL ........................................ Short-Term Investments at FVTPL— Equity [(3,500 – 1,900) × ($40 – $38)]……… *(($300,000 × 1.01) – $300,000)

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76,000 3,800

2,400

3,000

3,000 200

3,200

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EXERCISE 16-8 (Continued) 2018 Mar. 31 Cash (1,600 × $40) ............................... 64,000 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL–Equity (1,600 × $38)....... Apr.

3,200 60,800

1 Cash ($300,000 × 4% × 6/12) .................. 6,000 Interest Receivable ............................ Interest Revenue ................................

3,000 3,000

1 Cash ($300,000 × 4% × 6/12) .................. Interest Revenue ................................

6,000 6,000

Dec. 31 Interest Receivable................................. Interest Revenue ($300,000 × 4% × 3/12) .......................

3,000

Oct.

31 Short-Term Investments at FVTPL—Bonds*...................... 3,000 Gain on Fair Value Adjustment—FVTPL *(($300,000 × 1.02) – $303,000)

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EXERCISE 16-9 (a)

The cash amount received on the sale of the investment is the carrying value of the investment sold of $4,000 less the loss on sale of the FVTPL investment of $3,000 which is equal to $1,000.

(b) 2017 Dec. 31 Cash ......................................................... Loss on Sale of FVTPL Investments ...... Short-Term Investments at FVTPL—Equity.......................... Dec. 31

1,000 3,000 4,000

Short-Term Investments at FVTPL—Equity ........................... 2,500 Gain on Fair Value Adjustment—FVTPL

2,500

11,000 2,500 5,500* 15,000

Dec. 31, 2017

Short-Term Investments at FVTPL—Equity ........................... Cash.................................................

4,000

5,500 5,500

*($11,000+$2,500)-$4,000 = $9,500 $15,000 - $9,500 = $5,500

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EXERCISE 16-10 (a) Dec. 31 Loss on Fair Value Adjustment—FVTPL OCI—Loss on Fair Value Adjustment .. Short-Term Investments at FVTPL—Equity ..................... Long-Term Investments at FVTOCI—Equity ........................ (b) YANIK INC. Balance Sheet (Partial) December 31, 2017

1,000 4,000 1,000 4,000

Current assets Short-term investments at fair value through..... profit or loss—equity......................................... $30,000 Non-Current assets Long-term investments at fair value through other comprehensive income—equity ............... 19,000 YANIK INC. Comprehensive Income Statement (Partial) Year Ended December 31, 2017

Other expenses Loss on fair value adjustment—FVTPL ................... $1,000 Other comprehensive income Loss on fair value adjustment .................................. $4,000 (c) 2018 Mar. 20 Cash .......................................................... 13,500 Loss on Sale of FVTPL Investments .... 500 Short-Term Investments at FVTPL—Equity ........................... 14,000 Solutions Manual .

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EXERCISE 16-11 (a) 2017 Jan.

2 Investment in Associate ........................ 216,000 Cash (30,000 × 40% × $18) .............. 216,000

June 15 Cash ($30,000 × 40%) ............................... 12,000 Investment in Associate.................. 12,000 Dec. 31 Investment in Associate ........................ 152,000 Income from Investment in Associate ($380,000 × 40%) ........ 152,000 (b) Investment in Associate Jan. 2, 2017 Dec. 31, 2017 Dec.31, 2017

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216,000 June 15, 2017 12,000 152,000 356,000

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EXERCISE 16-12 (a) Jan.

1 Investment in Associate ..................... 480,000 Cash .............................................. 480,000

Dec. 31 Cash ($35,000 × 25%) .......................... Investment in Associate...............

8,750

Dec. 31 Investment in Associate ..................... Income from Investment in Associate ($280,000 × 25%) ......

70,000

(b)

8,750

70,000

Balance Sheet Non-current assets Investment in associate ($480,000 – $8,750 + $70,000) ...............

$541,250

Income Statement Other revenue Income from investment in associate

$70,000

1 Investment in Associate ........................ 480,000 Cash .............................................. 480,000

Dec. 31 Cash ($35,000 × 25%) .......................... Dividend Revenue ........................

8,750 8,750

Balance Sheet Non-current assets Investment in associate ........................

$480,000

Income Statement Other revenue Dividend revenue ..............................

$8,750

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EXERCISE 16-13 NEW BAY INC. Balance Sheet December 31, 2017

Assets Current assets Cash........................................................................... $ 22,000 Short-term investments at fair value through profit or loss—equity ............................. 48,500 Accounts receivable ...................................... $60,000 Less: Allowance for doubtful accounts ... 10,000 50,000 Interest receivable .................................................... 1,500 Total current assets ............................................. 122,000 Non-Current assets Long-term investments at fair value through other comprehensive income—equity ........................ 25,000 Note receivable, 5%, due April 21, 2020 .................. 60,000 Long-term investments at amortized cost—bonds 180,000 Investment in associate ........................................... 55,000 Equipment 66,000 Less: Accumulated depreciation............... 40,000 26,000 Total non-current assets ....................... 346,000 Total assets ..............................................................$ 468,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 16-13 (Continued) NEW BAY INC. Balance Sheet (Continued) December 31, 2017

Liabilities and Shareholders' Equity Current liabilities Accounts payable ..................................................... Interest payable ........................................................ Total current liabilities ......................................... Long-term liabilities Bonds payable, 8%, due 2019 .................................. Total liabilities ...................................................... Shareholders' equity Common shares, no par value, unlimited shares authorized, 10,000 shares issued ...................................................................... Retained earnings..................................................... Accumulated other comprehensive income ........... Total shareholders' equity ................................... Total liabilities and shareholders' equity ...........

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$ 35,000 18,000 53,000 268,000 321,000

100,000 45,000 2,000 147,000 $468,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 16-14 (a)

Oakridge uses IFRS. Other Comprehensive Income account does not exist under ASPE.

(b) OAKRIDGE LTD. Statement of Comprehensive Income (Partial) Year Ended December 31, 2017

Profit from operations ......................................................... $125,000 Other revenue Interest revenue .................................................. $5,000 Gain on sale of fair value through profit or loss investments ..................................... 1,500 6,500 131,500 Other expenses Interest expense .............................................. 8,000 Loss on fair value adjustment—FVTPL ........ 7,500 15,500 Profit before income tax ........................................................ 116,000 Income tax ($116,000 × 30%) ............................................. 34,800 Profit................................................................................... 81,200 Other comprehensive income: Gain on fair value adjustment (net of $900 income tax)* 2,100 Comprehensive income ........................................................ $83,300 * [$3,000 – ($3,000 × 30%)]

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SOLUTIONS TO PROBLEMS PROBLEM 16-1A (a) Jan.

1 Short-Term Investment at AC— Treasury Bill ..................................... 98,039 Cash ...................................................

June 30 Cash......................................................... 100,000 Interest Revenue ............................... Short-Term Investment at AC— Treasury Bill ......................... July

Oct.

98,039 1,961 98,039

5 Short-Term Investment—Money Market Fund ............................................. 25,000 Cash ...................................................

25,000

1 Cash .......................................................... 25,185 Short-Term Investment—Money Market Fund .................................... Interest Revenue ...............................

25,000 185

1 Short-Term Investment— Term Deposit .................................... 75,000 Cash ...................................................

75,000

Dec. 31 Interest Receivable ($75,000 × 3% × 3/12) Interest Revenue .................................

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563 563

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PROBLEM 16-1A (Continued) (b) LIU CORPORATION Partial Balance Sheet December 31, 2017

Current assets Interest receivable...................................................... $ 563 Short-term investment—term deposit............................75,000

LIU CORPORATION Income Statement (Partial) Year Ended December 31, 2017

Other revenue Interest revenue ($1,961 + $185 + $563) ........................... $2,709

Taking It Further: Interest earned ($100,000 – $98,039) Principal Annual rate ($1,961 ÷ $98,039) × 12/6

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$1,961 $98,039 4.0%

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-2A 2017: (a) Jan. 1 Long-Term Investments at AC—Bonds ......................... 627,660 Cash ......................................... (b) Jul. 1 Cash ($600,000 × 4% × 6/12) ............ 12,000 Long-Term Investments at AC—Bonds ..................... Interest Revenue ..................... ($627,660 × 3% × 6/12) (c) Dec. 31 Interest Receivable ........................... 12,000 Long-Term Investments at AC—Bonds ....................... Interest Revenue ..................... [($627,660 – $2,585) × 3% × 6/12]

627,660

2,585 9,415

2,624 9,376

(d) MORRISON INC. Partial Balance Sheet December 31, 2017

Non-current assets Long-term investments at amortized cost—bonds ($627,660 – $2,585 – $2,624)

(e) 2018: Jan. 1 Cash....................................................... 12,000 Interest Receivable..................

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$622,451

12,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-2A (Continued) (f) 2022: Jan.

1 Cash..................................................... 600,000 Long-Term Investments at AC—Bonds..................

600,000

1 Short-Term Investments at FVTPL—Bonds ............................... 627,660 Cash .........................................

627,660

(g) 2017: Jan.

Jul.

1 Cash ($600,000 × 4% × 6/12) ............ Short-Term Investments at FVTPL—Bonds ................... Interest Revenue ..................... ($627,660 × 3% × 6/12)

Dec. 31

12,000

Interest Receivable ........................... 12,000 Short-Term Investments at FVTPL—Bonds ................... Interest Revenue ..................... [($627,660 – $2,585) × 3% × 6/12]

Dec. 31 Loss on Fair Value Adjustment —FVTPL .............................................. *2,451 Short-Term Investments at FVTPL—Bonds ...................... Fair value adjustment: Carrying value of bond, January 1 Amortization of premium, July 1 Amortization of premium, Dec. 31 Carrying value of bond, Dec. 31 Fair value of bond, Dec.31 Fair value adjustment (loss), Dec. 31 Solutions Manual .

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2,585 9,415

2,624 9,376

2,451

$627,660 (2,585) (2,624) 622,451 (620,000) $ 2,451* Chapter 16

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-2A (Continued)

Taking It Further: The market rate of interest was 3.108% per year. The interest calculated below of 1.554% × 2 for the semi-annual interest payments. Using a financial calculator: PV $ (620,000) I/Y ? Yields 1.554% N 8 PMT $12,000 FV $600,000 Type 0

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3A (a) Finance Company paid $959,400 for the Power bonds purchased $4,797,000 ÷ 5 = $959,400 or ($5,000,000 ÷ $4,797,000 = 0.9594), and ($1,000,000 × 0.9594) = $959,400 (b) 2017 – Finance Company Jan. 1 Long-Term Investments at AC—Bonds ............................... 959,400 Cash .......................................

959,400

(c) Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 7% Bonds Issued at market rate of 8% Date

Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019

Solutions Manual .

(A) (B) (C) Interest Interest Received Revenue Discount $1,000,000 × (D) × 8% × Amortization 7% × 6/12 6/12 (B) – (A) $35,000 35,000 35,000 35,000

$38,376 38,511 38,651 38,798

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$3,376 3,511 3,651 3,798

(D) Bond Amortized Cost (D) + (C) $959,400 962,776 966,287 969,938 973,736

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3A (Continued) (d) 2017 – Finance Company July 1 Cash ........................................... Long-term investments at AC—Bonds ................................... Interest Revenue ...................

35,000 3,376 38,376

Dec. 31 Interest Receivable .................... Long-term investments at AC—Bonds .................................. Interest Revenue ................... 2018 – Finance Company Jan. 1 Cash ........................................... Interest Receivable ...............

35,000 3,511 38,511

35,000 35,000

(e) FINANCE COMPANY Balance Sheet (Partial) December 31, 2017

Non-current assets Long-term investments at amortized cost—bonds

$966,287

FINANCE COMPANY Income Statement (Partial) Year Ended December 31, 2017

Other revenues Interest revenue ($38,376 + $38,511) .......................

$76,887

(f) 2017 – Power Ltd. Jan. 1 Cash................................................ 4,797,000 Bonds Payable ......................

4,797,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3A (Continued) (g) 2017 – Power Ltd. Jul. 1 Interest Expense ($38,376 × 5).. Bonds Payable ($3,376 × 5) .. Cash ($5,000,000 × 7% × 6/12) ....... Dec. 31 Interest Expense ($38,511 × 5).. Bonds Payable ($3,511 × 5) .. Interest Payable ($5,000,000 × 7% × 6/12) ....... 2018 – Power Ltd. Jan. 1 Interest Payable ......................... Cash .......................................

191,880 16,880 175,000 192,555 17,555 175,000

175,000 175,000

(h) POWER LTD. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................

$175,000

Non-current liabilities Bonds payable, 8%, due 2022 ................................... $4,831,435* *($966,287 × 5) POWER LTD. Income Statement (Partial) Year Ended December 31, 2017

Other expenses Interest expense [($38,376 + $38,511) × 5] ..............

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$384,435

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3A (Continued)

Taking It Further: Cash received for interest $35,000 x 10 Cash received at maturity January 1, 2022 Total cash inflows

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$350,000 1,000,000 $1,350,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-4A (a) Feb. 1 Short-Term Investments at FVTPL—Equity .............................. 25,300 Cash ...................................................

25,300

Mar. 1 Short-Term Investments at FVTPL—Equity .............................. 48,000 Cash ...................................................

48,000

Apr.

1 Short-Term Investments at FVTPL—Bonds .............................. 200,000 Cash ................................................... 200,000

July

1 Cash (575 × $1.50) ................................. Dividend Revenue .............................

863

Aug. 1 Cash (250 × $48) .................................... Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL—Equity .............................. [($25,300  575) × 250]

12,000

Oct.

3,000

1 Cash ($200,000 × 3% × 6/12) ................. Interest Revenue ...............................

863 1,000 11,000

3,000

1 Cash......................................................... 205,000 Gain on Sale of FVTPL Investments 5,000 Short-Term Investments at FVTPL—Bonds............................. 200,000

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PROBLEM 16-4A (Continued) (a) (Continued) Dec. 31 Loss on Fair Value Adjustment—FVTPL 4,050 Short-Term Investments at FVTPL—Equity($62,300 – $58,250) Common Shares IBF Raimundo

Cost $14,300* 48,000 $62,300 * $25,300 – $11,000

(b)

Fair Value $16,250 42,000 $58,250

4,050

(325 × $50) (1,500 × $28)

RAKAI CORPORATION Balance Sheet (Partial) December 31, 2017

Current assets Short-term investments at fair value through profit or loss—equity ................................ $58,250

RAKAI CORPORATION Income Statement (Partial) Year Ended December 31, 2017

Other revenue Interest revenue .................................. Dividend revenue ................................ Gain on sale of fair value through profit or loss investments ............... Other expenses Loss on fair value adjustment—FVTPL

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$3,000 863 5,000

$8,863

4,050

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-4A (Continued)

Taking It Further: If the company needs cash in the near future, it is usually not recommended to invest in equity securities. Equity securities tend to fluctuate suddenly and dramatically, when compared to fixed income investments. The principal amount invested may not be fully recovered. Money-market instruments are recommended because they are low-risk and highly liquid.

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PROBLEM 16-5A (a) FINANCIAL HOLDINGS Balance Sheet (Partial) December 31, 2016

Current assets Short-term investments at fair value through profit or loss—equity ...................................................... $38,000 (b) 2017 Jan. 15 Long-Term Investments at FVTOCI—Equity ............................ 22,500 Cash (1,500 × $15) ............................ Mar. 20

Cash ....................................................... 3,000 Dividend Revenue (2,000 × $1.50)....

June 15 Cash (750 × $15.75) ............................... 11,813 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL—Equity .......................... ($13,500 ÷ 1,000 × 750) Aug. 5 Cash ....................................................... Dividend Revenue (250 × $2.50).......

22,500

3,000

1,688 10,125

625 625

Oct. 15 No entry is necessary for the stock split. The number of shares held is now doubled to 3,000 (1,500 × 2), at a carrying amount of $7.50 per share ($22,500 ÷ 3,000).

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PROBLEM 16-5A (Continued) (b) (Continued) Market Price $16.00 13.75

Number of Shares 250 2,000

Carrying Amount $ 3,375* 24,500 $27,875

Fair Value $4,000 27,500 $31,500

$7.00

3,000

$22,500

$ 21,000

Sabo PYK Total * $13,500 – $10,125 = $3,375 Hazmi

Dec. 31 Short-Term Investments at FVTPL—Equity ............................. 3,625 Gain on Fair Value Adjustment—FVTPL ($31,500 – $27,875)...........................

3,625

Dec. 31 OCI—Loss on Fair Value Adjustment .. 1,500 Long-Term Investments at FVTOCI—Equity ($22,500 – $21,000)

1,500

Other revenue Dividend revenue ................................ Gain on fair value adjustment - FVTPL Gain on sale of fair value through profit or loss investments ...............

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$3,625 3,625 1,688 $8,938

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-5A (Continued) (c) (Continued) FINANCIAL HOLDINGS Statement of Comprehensive Income (Partial) Year Ended December 31, 2017

Other comprehensive income: Loss on fair value adjustment (net of tax)

$1,500

Taking It Further: 750 Sabo common shares cost ($15,000 x 750 ÷ 1,000)

$11,250

Loss on fair value adjustment—FVTPL Dec. 31, 2016 ($1,500 x 750 ÷ 1,000) .......................... Gain on Sale of FVTPL Investments June 15, 2017 Net profit .........................................................

$(1,125) 1,688 $563

Profit as a percentage of cost ...........................

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-6A

Balance Sheet

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Assets + + NE (+/–) + + NE (+/–) +(+/–) – (+/–) + NE + + NE

Liabilities NE NE NE NE NE NE NE NE NE NE NE NE NE NE

Solutions Manual

Income Statement

Shareholders’ Equity + + NE + + NE + + NE + + NE

16-50 .

Revenues Expenses and and Gains Losses + NE + NE NE NE + NE + NE NE NE + NE NE NE + NE NE NE NE NE NE + + NE NE NE

Profit + + NE + + NE + NE + NE NE + NE

Statement of Comprehensive Income Other Comprehensive Income NE NE NE NE NE NE NE NE NE + NE NE NE

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-6A (Continued)

Taking It Further: If Corded Industries Ltd. is a private company reporting using ASPE, there is no Other Comprehensive Income. Therefore, transaction #8 would be affected. The loss from the sale of the fair value through other comprehensive income investment in Cedarshakes would instead be reported as a loss in the income statement. As well, transaction #11 would be affected. Corded’s investment in Cedarshakes’s common shares would be reported at fair value in its balance sheet and the gain on the fair value adjustment would be reported in the income statement if a quoted market price is available or at cost if none is available. Corded would also have a choice in the way in which it accounts for investment with significant influence in Diane’s Cosmetics Inc. It could account for the investment using the equity method as given, but could also account for the investment at fair value if the shares’ quoted market price is readily available or at cost if the shares’ quoted market price is not readily available.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-7A (a)

Kang purchased 30,000 shares [($1,320,000 – $120,000) ÷ $40].

(b)

Kang owns 25% (30,000 ÷ 120,000) of Sandhu shares.

(c)

The cash dividend per share was $3.00 ($90,000 ÷ 30,000 shares).

(d)

The fair value per share was $44 ($1,320,000 ÷ 30,000).

(e)

Because Kang can exercise significant influence over the Sandhu Ltd., 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 profits 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 Ltd. (30,000 shares × $40) Less: cash dividends received Plus: 25% of Sandhu Ltd.’s earnings for the year that the investment was owned (derived) Balance of investment, December 31, 2017

$1,200,000 (90,000) 1,110,000 290,000 $1,400,000

If $290,000 is 25% of Sandhu’s income for the year, then the Sandhu Ltd. must have earned $1,160,000 throughout the year ($290,000 ÷ 25%).

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-7A (Continued) (f)

Under the equity method, Kang would report its share of Sandhu Ltd.’s profits as follows: KANG INC. Income Statement (Partial) Year Ended December 31, 2017 Other revenues Income from investment in associate .........

(g)

$290,000

Under the cost model, Kang would report only the dividends received as revenues as follows: KANG INC. Income Statement (Partial) Year Ended December 31, 2017 Other revenues Dividend revenue..........................................

$90,000

Taking It Further: The potential advantages of having significant influence over another company include: a) The investor’s ability to secure a relationship with the associate as an essential source of supply for a key raw material in a manufacturing process. b) The investor’s ability to secure a relationship with the associate as a key customer. c) The investor and associate could exchange key management personnel for their mutual benefit. d) The investor could provide its associate with key technological information that will help the associate become more profitable and the investment more lucrative for the investor.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-8A (a)

(b) Jan.

The presence of significant influence is not a matter of what percentage ownership one business has of another, but rather it is based on the investor’s ability to participate in the associate’s operating and policy decisions. In this case, this influence has been exercised. The owner of the shares, Neitzche Company, is a customer of the Associate, Triple Titanium, and holds two of the ten board of directors positions.

1 Investment in Associate ......................... 525,000 Cash ................................................... 525,000 Cash ($65,000 x 35%)................................ 22,750 Investment in Associate ...................

22,750

Investment in Associate ......................... 105,000 Income from Investment in Associate ($300,000 x 35%)........... 105,000 (c) Cash ($80,000 x 35%)................................ 28,000 Investment in Associate ...................

28,000

Investment in Associate ........................... 84,000 Income from Investment in Associate ($240,000 x 35%)...........

84,000

(d) Beginning balance ......................... Purchase of shares ....................... Less dividends received................ Share of income of associate........ Ending balance ..............................

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2017 2018 0 $607,250 $525,000 (22,750) (28,000) 105,000 84,000 $607,250 $663,250

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PROBLEM 16-8A (Continued) (e) NEITZCHE COMPANY Balance Sheet (Partial) December 31, 2017

Non-current assets Investment in associate ................................................ $607,250 NEITZCHE COMPANY Income Statement (Partial) Year Ended December 31, 2017 Other revenues Income from investment in associate ...............

$105,000

Taking It Further: If Neitzche Company were to purchase an additional 30% of the common shares of Triple Titanium it would have control over the company since it would own well over half of the shares issued, with a total 65% ownership interest. In this case the operations of Triple Titanium would be consolidated with those of Neitzche for financial reporting purposes.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-9A (a) SILVER LINING CORPORATION Income Statement Year ended September 30, 2017 (in millions) Silver sales Cost of sales Gross profit Operating expenses Profit from operations Other revenue Dividend revenue Interest revenue

$3,350 2,214 1,136 639 497 $ 6 38

Other expenses Loss from investment in associate Loss on fair value adjustment—FVTPL Interest expense Income before income tax Income tax expense Profit

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6 27 7

44 541

40 501 60 $ 441

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-9A (Continued) (a) (Continued) SILVER LINING CORPORATION Statement of Comprehensive Income Year ended September 30, 2017 (in millions) Profit Other comprehensive income Gain on fair value adjustment (net of tax of $5) Comprehensive income

(b)

Accumulated other comprehensive income ($49 + $12)

$441 12 $453

$61 million

Taking It Further: Standard setters are concerned about the manipulation of profit through reclassifications. The classification of investments is based on management’s intention at the time the investment is purchased.

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PROBLEM 16-10A STINSON CORPORATION Statement of Comprehensive Income Year Ended April 30, 2017

Service revenue ................................................................. $550,000 Operating expenses Salaries expense ........................................... $235,000 Rent expense ............................................. 79,000 Depreciation expense................................ 27,500 341,500 Profit from operations ......................................................... 208,500 Other revenues Dividend revenue ....................................... 11,000 Gain on sale of fair value through profit or loss investments ................................ 3,000 Gain on fair value adjustment—FVTPL .... 1,500 Interest revenue ......................................... 3,360 18,860 227,360 Other expenses Loss on fair value adjustment—FVTPL.... 1,500 Interest expense ........................................ 7,500 9,000 Profit before tax ................................................................... 218,360 Income tax expense ........................................................... 82,860 Profit ..................................................................................... 135,500 Other comprehensive income Loss on fair value adjustment, net of $3,600 tax......... 12,000 Comprehensive income .................................................... $123,500

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PROBLEM 16-10A (Continued) STINSON CORPORATION Balance Sheet April 30, 2017

Assets Current assets Cash............................................................................. $ 100,480 Short-term investments at fair value through profit or loss ........................................................... 76,000* Accounts receivable ................................................... 48,000 Interest receivable........................................................... 1,680 Total current assets ................................................... 226,160 Non-current assets Long-term investments Long-term investments at fair value through other comprehensive income, equity $220,000 Investment in associate ................................. 170,000 Long-term investments at amortized cost, bonds ............................................. 24,000 Total investments ....................................................... 414,000 Property, plant, and equipment Equipment ...................................................... 275,000 Less: Accumulated depreciation................ 72,000 203,000 Total assets ................................................................... $843,160 * ($15,000 + $61,000 = $76,000)

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PROBLEM 16-10A (Continued) STINSON CORPORATION Balance Sheet (Continued) April 30, 2017

Liabilities and Shareholders' Equity Current liabilities Accounts payable ...................................................... $ 65,000 Income tax payable ...................................................... 25,000 Total current liabilities .......................................... 90,000 Long-term liabilities Bonds payable, due 2021 ............................................ 150,000 Total liabilities ......................................................... 240,000 Shareholders' equity Share capital Common shares, no par value, unlimited authorized, 200,000 shares issued ..................................................... Retained earnings* ................................................... Accumulated other comprehensive income** Total shareholders' equity .................................... Total liabilities and shareholders' equity ............

300,000 297,160 6,000 603,160 $843,160

* $161,660 + $135,500 Profit = $297,160 ** $18,000 – $12,000 = $6,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-10A (Continued)

Taking It Further:

Return on equity

$135,500 ($603,160 + $510,400) ÷ 2

24.34%

Given that Stinson’s return on equity is 24.34% and the industry average is 18%, we can conclude that Stinson’s operating performance is excellent.

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PROBLEM 16-1B (a) Feb. 1 Short-Term Investment— Term Deposit....................................... 50,000 Cash .................................................

50,000

Aug. 1 Cash........................................................ 51,250 Short-Term Investment— Term Deposit ............................... Interest Revenue .............................

50,000 1,250

Aug. 1 Short-Term Investment— Money Market Fund.......................... Cash .................................................

55,000

Dec. 1

55,000

Cash ..................................................... 55,735 Short-Term Investment— Money Market Fund .................... Interest Revenue .............................

55,000 735

1 Short-Term Investment at AC— Treasury Bill ........................................ 99,260 Cash .................................................

99,260

31 Short-Term Investment at AC— Treasury Bill ($99,508 – $99,260)..... Interest Revenue .............................

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PROBLEM 16-2B (Continued) (b) LANNAN CORP. Partial Balance Sheet (Partial) December 31, 2017

Current assets Short-term investment at amortized cost —treasury bill ............................................................... $99,508

LANNAN CORPORATION Income Statement (Partial) Year Ended December 31, 2017

Other revenue Interest revenue ($1,250 + $735 + $248) ........................... $2,233

Taking it Further: Interest earned (February 1 to August 1)—6 months $1,250 Principal $50,000 Annual Rate ($1,250 ÷ $50,000) × 2 5.0%

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PROBLEM 16-2B 2017: (a) July 1 Long-Term Investments at AC— 275,400 Bonds................................. Cash ($300,000 × .918) ............ (b) Dec. 31 Interest Receivable ($300,000 × 3% × 6/12) ................. Long-Term Investments at AC—Bonds ........................... Interest Revenue ...................... ($275,400 × 4% × 6/12)

275,400

4,500 1,008 5,508

Current assets Interest receivable .................................................... Non-current assets Long-term investments at amortized cost—bonds ($275,400 + $1,008) 2018: (d) Jan. 1 Cash .............................................. Interest Receivable..................

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$276,408

4,500

(e) July 31 Cash .............................................. 4,500 Long-Term Investments at AC— 1,028 Bonds......................... Interest Revenue ..................... [($275,400 + $1,008) × 4% × 6/12]

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$4,500

4,500

5,528

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-2B (Continued) (f) 2027: July 1 Cash..................................................... 300,000 Long-Term Investments at AC—Bonds .....................

300,000

(g) 2017: (a) July 1 Short-Term Investments at FVTPL—Equity ............................ 275,400 Cash ($300,000 × .918) ............ (b) Dec. 31 Interest Receivable ($300,000 × 3% × 6/12) ................. Short-Term Investments at FVTPL—Equity ................. Interest Revenue ...................... ($275,400 × 4% × 6/12) Dec. 31 Short-Term Investments at FVTPL—Bonds ......................... Gain on Fair Value Adjustment—FVTPL ......... Fair value adjustment: Carrying value of bond, July 1 Amortization of discount, Dec. 31 Carrying value of bond, Dec. 31 Fair value of bond, Dec.31 ($300,000 x .96) Fair value adjustment, Dec. 31

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275,400

4,500 1,008 5,508

*11,592 11,592

$275,400 1,008 276,408 (288,000) $ 11,592*

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-2B (Continued)

Taking It Further: The market rate of interest was 3.4986 % per year. The interest calculated below of 1.7493% × 2 for the semiannual interest payments. Using a financial calculator: PV $ (288,000) I/Y ? Yields 1.7493% N 19 PMT $4,500 FV $300,000 Type 0

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3B (a) Treasury Ltd. paid $2,080,000 for the Surge bonds purchased ($2,000,000 × 1.04) (b) 2017 – Treasury Ltd. Jan. 1 Long-Term Investments at AC—Bonds ............................... 2,080,000 Cash ......................................... 2,080,000 (c) Bond Premium Amortization Table Effective-Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 4.5%

Date

Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019

(A) (B) Interest Interest Received Revenue $2,000,000 × (D) × 4.5% × 5% × 6/12 6/12 $50,000 50,000 50,000 50,000

$46,800 46,728 46,654 46,579

(d) 2017 – Treasury Ltd. July 1 Cash ............................................. Long-Term Investments at AC—Bonds...................... Interest Revenue ..................... Dec. 31 Interest Receivable ...................... Long-Term Investments at AC—Bonds....................... Interest Revenue .....................

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(D) Bond Amortized Cost (D) - (C) $2,080,000 2,076,800 2,073,528 2,070,182 2,066,761

50,000 3,200 46,800 50,000 3,272 46,728

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3B (Continued) (d) (Continued) 2018 – Treasury Ltd. Jan. 1 Cash ........................................... Interest Receivable ...............

50,000 50,000

TREASURY LTD. Balance Sheet (Partial) December 31, 2017

Non-current assets Long-term investments at amortized cost -bonds

$2,073,528

TREASURY LTD. Income Statement (Partial) Year Ended December 31, 2017

Other revenues Interest revenue ($46,800 + $46,728) .......................

$93,528

(e) 2017 – Surge Ltd. Jan. 1 Cash ($6,000,000 × 1.04) ................ 6,240,000 Bonds Payable ......................

6,240,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3B (Continued) (f) 2017 – Surge Ltd. Jul. 1 Interest Expense (1) .................. 140,400 Bonds Payable........................... 9,600 Cash ($6,000,000 × 5% × 6/12) (1) ($6,240,000 X 4.5% X 6/12) = $140,400

150,000

Dec. 31 Interest Expense (2) .................. 140,184 Bonds Payable........................... 9,816 Interest Payable ($6,000,000 × 5% × 6/12) ....... 150,000 (2) [($6,240,000 - $9,600) X 4.5% X 6/12] = $140,184 2018 – Surge Ltd. Jan. 1 Interest Payable ......................... Cash .......................................

150,000 150,000

(g) SURGE LTD. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable............................................................. $150,000 Non-current liabilities Bonds payable, 5%, due 2027 .................................... $6,220,584* *($6,240,000 - $9,600 - $9,816) SURGE LTD. Income Statement Year Ended December 31, 2017

Other expenses Interest expense ($140,400 + $140,184) ..................

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$280,584

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-3B (Continued)

Taking It Further: The market rate of interest increased. When Surge issued the bonds, the market rate of interest was 4.5%, 0.5% lower than the stated rate of 5%. Treasury paid 104 for the bonds because of the attractive rate. At Dec. 31, 2017, the bonds were trading at a lower price of 103. The effective interest rate had; therefore, increased since January 1, 2017. If Treasury purchased the bonds to earn interest, and intends to hold them to maturity, they should not care if the market rate of interest increases or decreases. Should an emergency arise that requires Treasury to sell the bonds before maturity, in spite of their original intention, they would want the current market interest rate to be lower so that their Surge bonds will be more attractive on resale and command a higher price on the date they are sold.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-4B (a) Feb. 1 Short-Term Investments at FVTPL—Equity .............................. Cash ................................................

63,600

Mar. 1 Short-Term Investments at FVTPL—Equity ............................. Cash ................................................

7,500

Apr.

July

1 Short-Term Investments at FVTPL—Bonds ............................ Cash ................................................

63,600

7,500 100,000 100,000

1 Cash (2,400 × $2) ................................ Dividend Revenue ..........................

4,800

Aug. 1 Cash (1,600 × $25) .............................. Loss on Sale of FVTPL Investments . Short-Term Investments at FVTPL—Equity ........................ ($63,600 ÷ 2,400 × 1,600)

40,000 2,400

Oct.

2,000

1 Cash ($100,000 × 4% × 6/12) .............. Interest Revenue ............................

4,800

42,400

2,000

2 Cash .................................................... 101,000 Gain on Sale of FVTPL Investments 1,000 Short-Term Investments at FVTPL—Bonds....................... 100,000

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PROBLEM 16-4B (Continued) (a) (Continued) Dec. 31 Short-Term Investments at FVTPL—Equity* ....................... Gain on Fair Value Adjustment— FVTPL ............ *($30,800 – $28,700) Number of Shares Lemelin 2,400 – 1,600 = 800 RSD 600 Total * $63,600 – $42,400 (b)

Cost $21,200* 7,500 $28,700

2,100 2,100

Fair Value $22,400 8,400 $30,800

(800 × $28) (600 × $14)

MEAD INVESTMENT CORPORATION Balance Sheet (Partial) December 31, 2017

Current assets Short-term investments at fair value through profit or loss—equity ..................................................... $30,800 MEAD INVESTMENT CORPORATION Income Statement (Partial) Year ended December 31, 2017

Other revenues Dividend revenue ................................... Interest revenue ..................................... Gain on fair value adjustment—FVTPL Gain on sale of fair value through profit or loss investments .................. Other expenses Loss on sale of fair value through profit or loss investments .................. Solutions Manual .

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$4,800 2,000 2,100 1,000

$9,900

$ 2,400 Chapter 16

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PROBLEM 16-4B (Continued)

Taking It Further: When Mead invested in the MRT bonds, it was anticipating a decline in the market interest rate which would in turn increase the resale value of the bonds.

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PROBLEM 16-5B (a) COMMERCIAL INC. Balance Sheet (Partial) December 31, 2016

Current assets Short-term investments at fair value through profit or loss, equity...................................................... $55,500 (b) 2017 Apr. 15 Cash (1,250 × $27).................................. 33,750 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL—Equity ......................... [($39,000 ÷ 1,500) × 1,250]

1,250 32,500

June 15 Short-Term Investments at FVTPL—Equity................................. 27,500 Cash (1,000 × $27.50) ........................

27,500

July 31 Long-Term Investments at FVTOCI—Equity ............................... 16,000 Cash (4,000 × $4.00)..........................

16,000

Aug. 5 Cash.......................................................... 5,000 Dividend Revenue (2,000 × $2.50)....

5,000

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PROBLEM 16-5B (Continued) (b) (Continued) Oct. 15 No entry is necessary for the stock split. The number of shares held is now doubled to 8,000 (4,000 × 2), at a carrying amount of $2.00 per share ($16,000 ÷ 8,000). Dec. 31 Loss on Fair Value Adjustment—FVTPL Short-Term Investments at FVTPL—Equity ........................... ($50,500 – $49,500)

1,000

Dec. 31 OCI—Loss on Fair Value Adjustment .. Long-Term Investments at FVTOCI—Equity ......................... ($16,000 – $12,800)

3,200

Number of Shares Market Price $30.00 1,250* 6.00 2,000

Fahim PLJ Total * 1,500 – 1,250 + 1,000 = 1,250 * $39,000 – $32,500 + $27,500 = $34,000 Hopeful

Solutions Manual .

$1.60

8,000

16-75

1,000

3,200

Carrying Amount $34,000** 16,500 $50,500

Fair Value $37,500 12,000 $49,500

$16,000

$12,800

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-5B (Continued) (c) COMMERCIAL INC. Statement of Comprehensive Income (Partial) Year Ended December 31, 2017

Profit from operations Other revenue Dividend revenue ................................................ $5,000 Gain on sale of FVTPL investments ............... 1,250 Other expenses Loss on fair value adjustment—FVTPL ......

6,250

1,000

Profit................................................................................... Other comprehensive income: Loss on fair value adjustment (net of tax)........................ (3,200) Comprehensive income ....................................................

Taking It Further: Commercial Inc. has decided to report the Hopeful Industries common shares as fair value through other comprehensive income investments because the gains and losses arising from fair value adjustments of these shares may not be relevant information to users when assessing the economic performance of the company.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-6B

Balance Sheet

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Assets + – (+/–) NE (+/–) + + – – (+/–) + NE (+/–) + NE + NE + –

Liabilities NE NE NE NE NE NE NE NE NE NE NE NE NE NE NE

Solutions Manual

Income Statement

Shareholders’ Equity + – NE + + – – + NE + NE + NE + –

16-77 .

Revenues Expenses and gains and losses + NE NE + NE NE + NE + NE NE NE NE NE + NE NE NE + NE NE NE NE NE NE NE + NE NE NE

Profit + – NE + + NE NE + NE + NE NE NE + NE

Statement of Comprehensive Income Other Comprehensive Income NE NE NE NE NE NE – NE NE NE NE + NE NE –

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-6B (Continued)

Taking It Further: If Pepper Corporation is a private company reporting using ASPE, there is no Other Comprehensive Income. Therefore, transactions #7, #12, and #15 would be affected. Pepper’s investment in Hegal’s and Baudillard’s common shares would be reported at fair value through profit or loss in its balance sheet and the loss on the sale of the Hegal shares would be reported in the income statement under other expenses and losses as would the loss on fair value adjustment at the end of the year for both Hegal and Baudillard. Pepper Corporation would also have a choice in the way in which it accounts for investments with significant influence in Lincoln Corporation. It could account for the investment using the equity method as given, but could also account for the investment at fair value if the shares’ quoted market price is readily available or at cost if the shares’ quoted market price is not readily available.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-7B (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 Corp.

(b)

Hadley would have received 20% of any dividends declared by Letourneau, or $40,000 ($200,000 × 20%).

(c)

Hadley purchased 80,000 common shares of Letourneau Corp. This amount could be calculated as follows: Balance in Investment in Associate account, Dec. 31 Less: Hadley’s share of Letourneau’s earnings 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 issue price of Letourneau’s shares was $10 per share, it follows that 80,000 shares were purchased. 1 Part (b) above (d)

If significant influence does not exist and Hadley chooses to designate the investment at FVTOCI, the following will be reported: Hadley Inc. Statement of Comprehensive Income (partial) Year Ended December 31, 2017

Profit................................................................................ Other comprehensive income: Gain on fair value adjustment net of tax of $34,000 .... $136,000 Comprehensive income ................................................. ($970,000 - $800,000) x 20% = $34,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-7B (Continued) (e)

Under the cost model, Hadley would report the investment at cost of $800,000 on the balance sheet and only the dividends received of $40,000 as other revenue on the income statement.

Taking It Further: 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 common shares held by other shareholders are concentrated among a few investors or dispersed among many A company owning 19% of the common shares of another company could have significant influence over that associate. This situation could occur when the common shares held by other shareholders are widely dispersed.

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PROBLEM 16-8B (a)

(b) Jan.

The presence of significant influence is not just a matter of what percentage ownership one business has of another. Rather it is based on the investor’s ability to participate in the associate’s operating and policy decisions. In this case, this influence has been exercised. Carnegie Inc. holds two of the eight positions on the board of directors of its associate, Aquinas Auto Inc.

1 Investment in Associate ......................... 225,000 Cash ................................................... 225,000 Cash ($35,000 x 15%) ............................ Investment in Associate ...................

5,250 5,250

Investment in Associate ........................... 22,500 Income from Investment in Associate ($150,000 x 15%)...........

22,500

Cash ($45,000 x 15%) ............................ Investment in Associate ...................

6,750

Investment in Associate ........................... 48,750 Income from Investment in Associate ($325,000 x 15%)........... (d) Beginning balance ......................... Purchase of shares ....................... Less dividends received................ Share of income of associate........ Ending balance ..............................

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48,750

2017 2018 0 $242,250 $225,000 (5,250) (6,750) 22,500 48,750 $242,250 $284,250

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-8A (Continued) (e) CARNEGIE INC. Balance Sheet (Partial) December 31, 2017

Non-current assets Investment in associate ................................................ $242,250 CARNEGIE INC. Income Statement (Partial) Year Ended December 31, 2017 Other revenues Income from investment in associate ...................

$22,500

Taking It Further: Carnegie has the benefit of participating in and hearing candid discussions held at the meetings of the board of directors of Aquinas. These discussions may include information concerning some of Aquinas’ customer and business relationships. Carnegie is then able to get information it would not otherwise be able to obtain. This information could in turn assist Carnegie in developing a new customer market.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-9B (a) INVESTMENTS R US COMPANY Income Statement Year ended November 30, 2017 (in millions) Revenues Operating expenses Profit from operations Other revenue Gain on sale of land Interest revenue Income from investment in associate Dividend revenue Gain on fair value adjustment—FVTPL Other expenses Interest expense Loss on sale of FVTPL investments Other expenses Profit before income tax Income tax expense Profit

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$7,240 4,616 2,624 $ 26 6 4 3 2

299 194 21

41 2,665

514 2,151 781 $1,370

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-9B (Continued) (a) (Continued) INVESTMENTS R US COMPANY Statement of Comprehensive Income Year ended November 30, 2017 (in millions) Profit Other comprehensive income: Loss on fair value adjustment (net of tax) Comprehensive income

(b)

Accumulated other comprehensive loss: ($150 + $68)

$1,370 68 $1,302

$218 million

Taking It Further: Fair value adjustments of FVTPL investments are included in profit because the investments are short-term in nature. Including the gain or loss in profit helps users predict future profitability. Valuing these investments at fair value on the balance sheet also provides more relevant information for statement users. For FVTOCI investments, since the investments are long-term and are going to be held and not sold, it may be inappropriate to affect a company’s profit with the gains and losses on fair value adjustments caused by market fluctuations. The fair value adjustment may; therefore, be kept out of profit, but instead reflected in other comprehensive income on the statement of comprehensive income.

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PROBLEM 16-10B VLADIMIR CORPORATION Statement of Comprehensive Income Year Ended December 31, 2017

Service revenue ................................................................. $651,000 Operating expenses Salaries expense ........................................... $335,000 Rent expense ............................................. 45,000 Depreciation expense................................ 28,000 408,000 Profit from operations ......................................................... 243,000 Other revenues Income from investment in associate ...... 31,000 Dividend revenue ....................................... 9,000 Gain on sale of fair value through profit or loss investments ................................ 2,500 Gain on fair value adjustment—FVTPL ... 2,600 Interest revenue ......................................... 3,300 48,400 291,400 Other expenses Interest expense ........................................ 12,500 Loss on fair value adjustment—FVTPL ... 1,500 14,000 Profit before tax ................................................................... 277,400 Income tax expense ........................................................... 79,290 Profit ..................................................................................... 198,110 Other comprehensive income Gain on fair value adjustment, net of $3,600 tax ......... 12,000 Comprehensive income .................................................... $210,110

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PROBLEM 16-10B (Continued) VLADIMIR CORPORATION Balance Sheet December 31, 2017

Assets Current assets Cash ............................................................................... $150,000 Short-term investments at FVTPL .................................. 119,500* Accounts receivable ...................................... $68,000 Less: Allowance for doubtful accounts .... 4,000 64,000 Total current assets ............................................. 333,500 Non-current assets Long-term investments Notes receivable, due 2020.............................. 75,000 Long-term investments at amortized cost–bonds .................................................... 36,000 Long-term investments at fair value through other comprehensive income—equity 185,000 Investment in associate ............................... 215,000 Total investments................................................. 511,000 Property, plant, and equipment Equipment ............................................... 288,000 Less: Accumulated depreciation........... 92,000 196,000 Total assets ............................................................$1,040,500 * ($37,000 + $82,500 = $119,500)

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PROBLEM 16-10B (Continued) VLADIMIR CORPORATION Balance Sheet (Continued) December 31, 2017

Liabilities and Shareholders' Equity Current liabilities Accounts payable ..................................................... $ 85,000 Interest payable ........................................................ 5,000 Income tax payable ...................................................... 16,000 Total current liabilities ......................................... 106,000 Long-term liabilities Bonds payable ............................................................. 250,000 Total liabilities ...................................................... 356,000 Shareholders' equity Common shares, no par value, unlimited shares authorized, 200,000 shares ........................ 250,000 Retained earnings .................................................... 394,500 Accumulated other comprehensive income*......... 40,000 Total shareholders' equity ................................... 684,500 Total liabilities and shareholders' equity ........... $1,040,500

* Beginning Balance of Accumulated other Comprehensive income Add: Other comprehensive income for the year Ending Balance

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$28,000 12,000 $40,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 16-10B (Continued)

Taking It Further:

Return on equity

$198,110 ($684,500 + $605,100) ÷ 2

30.7%

Given that Vladimir’s return on equity is 30.7% and the industry average is 36%, we can conclude that Vladimir’s operating performance is good but not as strong as its peers.

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CUMULATIVE COVERAGE: CHAPTERS 13 TO 16 (a) Jan.

7 Cash ..................................................... 25,000 Preferred Shares ............................ 25,000

Mar. 16 Short-Term Investments at FVTPL—Equity .............................. 19,200 Cash (800 × $24) ............................. 19,200 July

1 Long-Term Investments at AC—Bonds .................................... 108,200 Cash ($100,000 × 108.2) ................. 108,200

Aug.

2 Cash (800 × $25) .................................. 20,000 Short-Term Investments at FVTPL—Equity ........................ 19,200 Gain on Sale of FVTPL Investments 800 5 Short-Term Investment— Money Market Fund........................... 20,000 Cash ................................................ 20,000

Sep. 25 Preferred Shares ($25,000 ÷ 1,000 × 500) ........................ 12,500 Common Shares............................. 12,500 Oct. 24 Cash ..................................................... 20,200 Short-Term Investment— Money Market Fund...................... 20,000 Interest Revenue ............................ 200 Nov. 30 Cash ..................................................... 50,000 Notes Payable................................. 50,000 Dec.

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1 Cash Dividends - Preferred ..................1,000 Dividends Payable (500 x $2) ........

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1,000

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CUMULATIVE COVERAGE (Continued) (a) (Continued)

Dec. 31 Interest Expense ($50,000 × 6% × 1/12) .......................... 250 Notes Payable ($1,521 – $250) .......... 1,271 Cash ................................................

1,521

31 Investment in Associate ($20,000 × 40%) .............................. 8,000 Income from Investment in Associate ...................................

8,000

31 Cash.................................................. Investment in Associate ($1,200 × 40%)..................................

480

31 Interest Receivable ($100,000 × 5% × 6/12) .......................... 2,500 Long-Term Investments at AC— Bonds ($2,500 – $2,164) ..... Interest Revenue ($108,200 × 4% × 6/12).................. 31 Interest Expense ($126,025 × 7%) ........8,822 Bonds Payable ($8,822 – $7,800).... Interest Payable ($130,000 × 6%)................................

480

336 2,164

1,022 7,800

31 OCI—Loss on Fair Value Adjustment* 2,000 Long-Term Investments at FVTOCI—Equity ...................... 2,000 * $28,000 (fair value) – $30,000 (carrying amount) = $2,000

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CUMULATIVE COVERAGE (Continued) (b) PLANKTON CORPORATION Trial Balance December 31, 2017 Debit

Credit

Cash ($48,000 + $25,000 – $19,200 – $108,200 + $20,000 – $20,000 + $20,200 + $50,000 – $1,521 + $480) ........................................... $ 14,759 Accounts receivable ........................................ 51,000 Allowance for doubtful accounts .................... $ 2,500 Interest receivable............................................ 2,500 Merchandise inventory ................................... 22,700 Investment in associate ($85,000 + $8,000 – $480) ............................ 92,520 Long-term investments at AC—bonds 107,864 ($108,200 – $336) ......................................... Long-term investments at FVTOCI–equity ($30,000 – $2,000) ............................................ 28,000 Land .................................................................. 90,000 Building............................................................. 200,000 Accumulated depreciation—building ............. 40,000 Equipment......................................................... 40,000 Accumulated depreciation—equipment ......... 15,000 Accounts payable............................................. 18,775 Dividends payable ............................................ 1,000 Income tax payable .......................................... 4,500 Interest payable ................................................ 7,800 Notes payable ($50,000 – $1,271) .................... 48,729 Bonds payable (6%, due 2022) ($126,025 + $1,022) ...................................... 127,047 $2, noncumulative preferred shares, convertible no par value, 500 issued ($25,000 – $12,500) ........................................ 12,500 Common shares, no par value, 102,500 issued ($100,000 + $12,500) ...................................... 112,500

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CUMULATIVE COVERAGE (Continued) (b) (Continued) PLANKTON CORPORATION Trial Balance (Continued) December 31, 2017 Debit

Credit $110,775

Retained earnings ........................................ Cash dividends - preferred .......................... $ 1,000 5,000 Accumulated other comprehensive income Sales.............................................................. 750,000 Cost of goods sold ....................................... 370,000 Operating expenses ..................................... 180,000 2,739 Interest revenue ($375 + $200 + $2,164)...... Interest expense ($6,250 + $250 + $8,822) .. 15,322 Income from investment in associate......... 8,000 Income tax expense ..................................... 50,000 Gain on sale of FVTPL investments............ 800 OCI—loss on fair value adjustment................. 2,000 Totals $1,267,665 $1,267,665

(c)

Revenues Sales....................................................... Interest revenue..................................... Income from investment in associate. ......................................... Gain on sale of FVTPL investments.....

$750,000 2,739

Expenses Cost of goods sold ................................ Operating expenses .............................. Interest expense .................................... Income before income tax ................... Dec. 31

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Income Tax Expense [($196,217 × 27%) – $50,000].......... Income Tax Payable................... 16-92

8,000 800 $761,539

370,000 180,000 15,322

565,322 196,217

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CUMULATIVE COVERAGE (Continued) (c)

(Continued) PLANKTON CORPORATION Trial Balance December 31, 2017

Debit

Credit

Cash ($48,000 + $25,000 – $19,200 – $108,200 + $20,000 – $20,000 + $20,200 + $50,000 – $1,521 + $480)................................................ $ 14,759 Accounts receivable ........................................ 51,000 Allowance for doubtful accounts .................... $ 2,500 Interest receivable............................................ 2,500 Merchandise inventory ................................... 22,700 Investment in associate ($85,000 + $8,000 – $480) ............................ 92,520 Long-term investments at AC—bonds ($108,200 – $336) ......................................... 107,864 Long-term investments at FVTOCI—equity ($30,000 – $2,000) ........................................ 28,000 Land .................................................................. 90,000 Building............................................................. 200,000 Accumulated depreciation—building ............ 40,000 Equipment......................................................... 40,000 Accumulated depreciation—equipment ......... 15,000 Accounts payable............................................. 18,775 Dividends payable ............................................ 1,000 Income tax payable ($4,500 + $2,979) ............. 7,479 Interest payable ................................................ 7,800 Notes payable ($50,000 – $1,271) .................... 48,729 Bonds payable (6%, due 2022) ($126,025 + $ 1,022) ..................................... 127,047 $2-noncumulative preferred shares, convertible no par value, 500 issued ($25,000 – $12,500) ........................................ 12,500 Common shares, no par value, 102,500 issued ($100,000 + $12,500) ...................................... 112,500

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CUMULATIVE COVERAGE (Continued) (c) (Continued) PLANKTON CORPORATION Trial Balance (Continued) December 31, 2017 Debit

Credit $110,775

Retained earnings ........................................ Cash dividends - preferred .......................... $ 1,000 Accumulated other comprehensive income 5,000 Sales.............................................................. 750,000 Cost of goods sold ....................................... 370,000 Operating expenses ..................................... 180,000 Interest revenue ($375 + $200 + $2,164)...... 2,739 Interest expense ($6,250 + $250 + $8,822) .. 15,322 Income from investment in associate......... 8,000 Income tax expense ($50,000 + $2,979) ...... 52,979 Gain on sale of FVTPL investments............ 800 OCI—loss on fair value adjustment................. 2,000 Totals $1,270,644 $1,270,644

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CUMULATIVE COVERAGE (Continued) (d) PLANKTON CORPORATION Income Statement Year Ended December 31, 2017 Sales................................................................................ $750,000 Cost of goods sold ......................................................... 370,000 Gross profit..................................................................... 380,000 Operating expenses ....................................................... 180,000 Profit from operations.................................................... 200,000 Other revenues Interest revenue ................................................ $2,739 Income from investment in associate ............... 8,000 Gain on sale of fair value through profit or loss investments .............................................. 800 11,539 211,539 Other expenses Interest expense ........................................................ 15,322 Profit before income tax ................................................ 196,217 Income tax expense ....................................................... 52,979 Profit................................................................................ $143,238

PLANKTON CORPORATION Statement of Comprehensive Income Year Ended December 31, 2017 Profit............................................................................ Other comprehensive income Loss on fair value adjustment ................................. Comprehensive income .............................................

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$143,238 2,000 $141,238

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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017

Preferred Shares Balance, January 1, 2017 Issued shares for cash Preferred shares converted Cash dividends–preferred Comprehensive income Balance, December 31, 2017

$25,000 (12,500)

$12,500

Accumulated Other Comprehensive Income

Common Shares

Retained Earnings

$100,000

$110,775

$5,000

(1,000) 143,238 $253,013

(2,000) $3,000

12,500

$112,500

Total $215,775 25,000 0 (1,000) 141,238 $381,013

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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Balance Sheet December 31, 2017

Assets Current assets Cash ................................................................................ $ 14,759 Accounts receivable ......................................... $51,000 Less: Allowance for doubtful accounts ........ 2,500 48,500 Interest receivable ........................................................ 2,500 Merchandise inventory .................................................. 22,700 Total current assets ..................................................... 88,459 Non-current Long-term investments Long-term investments at fair value through other comprehensive income—equity ............28,000 Long-term investments at amortized cost—bonds ................................................... 107,864 Investment in associate .................................... 92,520 Total investments ....................................................... 228,384 Property, plant, and equipment Land ............................................................... 90,000 Building ........................................... $200,000 Less: Accumulated depreciation... 40,000 160,000 Equipment ........................................... 40,000 Less: Accumulated depreciation.. 15,000 25,000 Total property, plant and equipment ......................... 275,000 Total assets .............................................................. $591,843

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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Balance Sheet (Continued) December 31, 2017

Liabilities and Shareholders' Equity Current liabilities Accounts payable .......................................................... $ 18,775 Dividends payable ...................................................... 1,000 Income tax payable..................................................... 7,479 Interest payable .......................................................... 7,800 Current portion of notes payable ................................... 15,757 Total current liabilities ........................................... 50,811 Long-term liabilities Notes payable, 6%, due 2020......................... $ 32,972* Bonds payable, 6%, due 2022 ........................ 127,047 Total long-term liabilities ......................................... 160,019 Total liabilities .......................................................... 210,830 Shareholders' equity Share capital $2-noncumulative preferred shares, convertible, no par value, 500 shares issued................................... $ 12,500 Common shares, no par value, unlimited number of shares authorized, 102,500 shares issued............................. 112,500 Total share capital ............................................. 125,000 Retained earnings ...................................................... 253,013 Accumulated other comprehensive income ............. 3,000 Total shareholders' equity ................................ 381,013 Total liabilities and shareholders' equity ......... $591,843 *($48,729 – $15,757 = $32,972)

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CUMULATIVE COVERAGE (Continued) (e) If Plankton had purchased the Solar Inc. bonds to trade, the bond investment would have been accounted for as a fair value through profit or loss investment instead of amortized cost. The bonds would have been classified as current assets on the balance sheet. In this case the bonds which had a carrying amount of $107,864 based on amortized cost, would have been reported at the fair value of $106,000 ($100,000 × 106%). The reduction in the carrying amount would have a modest reduction of profit in the amount of $1,864 ($107,864 – $106,000). This amount would have been reported as a FVTPL loss on fair value adjustment, under other expenses. This difference of $1,864 reconciles with the interest revenue recognized at amortized cost of $2,164 and the interest received of $2,500 ($336) and the amount of the change in the market price of the bonds from the date of acquisition to the year-end date. ($108,200 – $106,000 = $2,200) (f)

If Plankton Corporation were a private company and reported under ASPE, it would present an income statement only. The amount for profit would remain the same. The balance sheet would not include Accumulated Other Comprehensive Income in shareholders’ equity. The FVTOCI investments in common shares in BCB would be shown at its fair value if there is a quoted fair value from an active market; otherwise, it would be shown at its carrying value.

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BYP16-1 FINANCIAL REPORTING PROBLEM (a)

For the year ended August 31, 2014, Corus recorded Equity loss of investees of $1,685,000.

(b)

The names of the associates are Figerprint Digital Inc., Food Network Canada, KidsCo Limited, and SoCast Inc. Corus’ share of the net assets of associates totals $8,587,000.

(c)

During the year Corus purchased 100% of Historia Network and Séries + Network. It also increased its investment in ABC Spark Network from 51% to 100% and TELETOON Canada from 50% to 100% ownership.

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BYP16-2 INTREPRETING FINANCIAL STATEMENTS (a) Royal Bank likely chooses to invest a higher percentage of its FVTPL investments held for trading in debt instruments instead of equity instruments to reduce the risk of losses due to market fluctuations since the bank may need access to the money on short notice to issue new loans to clients. Debt investments are low risk and typically low incomeyielding investments, while equity investments are higher risk and potentially higher income-yielding investments. Royal Bank favours the lower risk investments. (b) Since both debt and equity trading investments are actively traded on the stock and bond markets, they will be valued on Royal Bank’s balance sheet at fair value. (c) The Royal Bank chooses to report long-term strategic equity investment gains and losses from the fair value adjustments in other comprehensive income to remove those market fluctuations from profit. The realized gains and losses from market fluctuations will be reflected in profit when the investments are sold. This has the advantage of reducing the volatility of profit. The disadvantage is that the profit figure does not reflect all gains and losses from market fluctuations. Only gains and losses from trading and non-strategic investments are included.

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BYP16-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

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BYP16-4 COMMUNICATION ACTIVITY Memo to: President of Lunn Financial Enterprises From: Accountant Subject: Reporting of debt investments at amortized cost and at fair value. Debt investments are reported at both amortized cost and at fair value through profit or loss depending on the intentions of management in acquiring the investment. For example, debt investments that are acquired for the purposes of earning interest are reported at amortized cost. This treatment is required because the primary purpose of the investment is to hold the investment and earn interest, and not to trade and realize gains on market fluctuations. Using amortized cost provides a more relevant balance sheet valuation and a more accurate representation of the profit generated from the investment. It also allows users to assess cash flows from the receipt of interest. Debt investments may also be acquired for speculative purposes and sold to generate gains. For these investments, fair value through profit or loss results in a more relevant value for balance sheet presentation purposes. In this case, the earning of interest revenue is incidental. The fair value measure of the investment allows users to better predict cash flows and assess the company’s liquidity and solvency. The method applied to debt investments is based on the purpose of the investment and management’s intention at the time the investment is purchased. Each method shows financial results on the income statement based on the intention of the investment – debt investments acquired to receive interest will report mostly interest revenue whereas debt investments acquired for trading purposes will mostly generate gains and losses from FVTPL fair value adjustments and selling.

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BYP16-5 “ALL ABOUT YOU” ACTIVITY (a) An RRSP is primarily intended for retirement savings. RRSPs provide an incentive to Canadians to invest because of a tax deduction for RRSP contributions. Contributions to a TFSA are not tax-deductible. An investment in an RRSP is usually considered strategic in that it is part of an individual’s long-term strategy for retirement planning. A TFSA investment may be either strategic or non-strategic. It can be used as part of a long-term strategic plan for income growth or for short-term purposes. (b) The types of investment income that can be generated from equity securities include dividends and gains from the sale of the investments. Bonds can generate interest income as well as gains from the sale of the bonds. While the equity securities offer more variety in the types of companies in which to invest, they bring with them higher risk due to market fluctuations but also potentially higher returns. (c) Assuming monthly contributions of $200 per month for 20 years at a return of 6%, using an income range of $10,000 to $39,999, the TFSA account would yield a balance of $92,870 vs. $84,582 for a taxable account, an increase of $8,288 (numbers are different for each province). (d) Assuming monthly contributions of $200 per month for 20 years at a return of 6%, but using an income range of $40,000 to $79,999, the TFSA account would yield a balance of $92,870 vs. $77,053 for a taxable account, an increase of $15,817 (numbers are different for each province).

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BYP16-6 Santé Smoothie Saga (a) 1. The amount of influence you would have in Nouveau Delight Ltd. would determine how you would account for the investment. Given that you would own 20% of the common shares of Nouveau Delight Ltd., it would be assumed (unless there was evidence to the contrary) that you could exert significant influence over the dayto-day operations of the business. This is especially so given the small number of shareholders. Significant influence over an associate may also result from representation on the board of directors, participation in policy-making processes, and material intercompany transactions. Assuming significant influence exists, the investment would be accounted for using the equity method of accounting. However, in this case, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decisionmaking process. In particular, since each sister owns 40%, this means that any decision proposed can be overturned by the sisters. This makes significant influence unlikely. In this case, the investment would be accounted for using the cost method. This method would be used rather than fair value, since there is no active market for the Nouveau Delight Ltd. shares, given that there are only three shareholders. 2. We have established that the investment in Nouveau Delight Ltd. will be at cost. The remaining three investments will be accounted based on the intention of Santé’s management. If management does not believe that it will need to sell the $20,000 Bell Canada bonds until maturity, these bonds should be accounted for at amortized cost and classified as a long-term investment on the balance sheet.

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BYP 16-6 (Continued) (a) 2. (Continued) On the other hand, the investment in the Loblaw and WestJet Airlines shares were likely purchased for trading and not to be held for the long term. These shares should be accounted for using the fair value through profit or loss method and classified as current assets. The fair value through other comprehensive income is not an option for these investments as Santé Smoothies & Sweets Ltd. reports under ASPE. (b) Since the equity method is applied when an investor can exercise significant influence, details of the relationship between Santé Smoothies & Sweets Ltd. and Nouveau Delight Ltd. are required to support or refute significant influence. For example, who are the current members of the board of directors and how many positions would be vacated from the sale of the shares? How many positions on the board of directors would be occupied by the new shareholder? How will decisions regarding company policy be made, and what will Janet, Brian, and Natalie’s responsibilities be in the running of Nouveau Delight Ltd.? Because of the voting control exercised by the two sisters, Janet, Brian, and Natalie should have a contract setting out their responsibilities and amount of influence they would be able to exercise. (c)

Because the investment in Nouveau Delight Ltd. is a strategic investment, it would be classified as a long-term investment in the non-current assets section of Santé Smoothies & Sweets Ltd.’s balance sheet. If the investment were accounted for using the cost method, it would be recorded at its original cost. Its value would be adjusted at year-end to its fair value, if the shares had a market value; however, this is unlikely since there are only three shareholders. Any dividends received would be recorded as income.

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BYP 16-6 (Continued) (c) (Continued) If the investment were accounted for using the equity method, it would be accounted for at its original cost plus a proportionate share of Nouveau Delight ’s income, less a proportionate share of any dividends paid by Nouveau Delight Ltd. (d) 2019 Feb. 1 Investments in Associate..................... Cash ..................................................

30,000 30,000

1 Long-Term Investments at AC—Bonds 21,487 Cash ..................................................

21,487

1 Short-Term Investments at FVTPL—Equity .................................. Cash ($13,718 + $11,650) .................

25,368

(e) Loblaw WestJet Total

Market Price $72.15 25.50

Number of Shares 200 400

Carrying Amount $13,718 11,650 $25,368

2019 May 31 Loss on Fair Value Adjustment—FVTPL Short-Term Investments at FVTPL—Equity ............................. ($25,368 - $24,630 =$738) 31 Interest Receivable ............................... Long-Term Investments at AC—Bonds Interest Revenue .............................. ($20,000 x 5% x 4/12 = $333) ($21,487 x 3% x 4/12 = $215) Solutions Manual .

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Fair Value $14,430 10,200 $24,630

738 738

333 118 215

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CHAPTER 17 The Cash Flow Statement ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Brief Problems Questions Exercises Exercises Set A

1. Discuss the usefulness, 1, 2, 3, 4 content, and format of the cash flow statement.

1, 2

2. Prepare a cash flow statement using the indirect method.

3, 4, 5, 6, 4, 5, 6, 7, 7, 8, 9, 8, 9, 10, 10, 11, 12 11, 18

2A, 3A, 4A, 5A, 6A, 7A, 9A, 10A, 11A

2B, 3B, 4B, 5B, 6B, 7B, , 9B, 10B, 11B

3. Prepare the operating 10, 11, 12 section of the cash flow statement using the direct method.

13, 14, 15, 16, 17, 18

12, 13, 14, 15, 16, 17, 18

2A, 3A, 2B, 3B, 8B, 8A, 9A, 9B, 10B, 10A, 12A 12B

4. Analyze the cash flow statement.

19, 20

5A, 6A, 13A

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5, 6, 7, 8, 9, 13, 14, 15

16, 17

17-1

1, 2, 3

Problems Set B

5B, 6B, 13B

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Classify transactions by activity. Indicate impact on cash and profit.

Simple

25-35

Prepare operating activities section–indirect and direct methods.

Moderate

30-40

Prepare operating activities section–indirect and direct methods.

Moderate

25-35

Calculate cash flows for investing activities and financing activities.

Complex

50-60

Simple

20-25

Simple

20-25

Prepare a cash flow statement-indirect method, and calculate free cash flow. Prepare a cash flow statement-indirect method, and calculate free cash flow. Prepare cash flow statement–indirect method.

Moderate

20-25

Prepare cash flow statement–direct method.

Moderate

20-25

Prepare cash flow statement–indirect method and direct method.

Moderate

50-60

10A

Prepare cash flow statement–indirect method and direct method.

Moderate

50-60

11A

Prepare cash flow statement–indirect method.

Moderate

30-40

12A

Prepare cash flow statement–direct method.

Moderate

30-40

13A

Calculate free cash flow and evaluate cash.

Simple

10-15

Classify transactions by activity. Indicate impact on cash and profit.

Simple

25-35

Prepare operating activities section–indirect and direct methods.

Moderate

30-40

Prepare operating activities section–indirect and direct methods.

Moderate

25-35

Calculate cash flows for investing activities and financing activities.

Complex

50-60

Prepare a cash flow statement-indirect method, and calculate free cash flow. Prepare a cash flow statement-indirect method, and calculate free cash flow.

Simple

20-25

Simple

20-25

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare cash flow statement–indirect method.

Moderate

20-25

Prepare cash flow statement–direct method.

Moderate

20-25

Prepare cash flow statement–indirect method and direct method.

Moderate

50-60

10B

Prepare cash flow statement–indirect method and direct method.

Moderate

50-60

11B

Prepare cash flow statement–indirect method.

Moderate

30-40

12B

Prepare cash flow statement–direct method.

Moderate

30-40

13B

Calculate free cash flow and evaluate cash.

Simple

10-15

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objective 1. Describe the usefulness, content, and format of the cash flow statement. 2.

Prepare a cash flow statement using the indirect method.

Knowledge Q17-2 Q17-4

Comprehension Q17-1 Q17-3 Q17-4 BE17-2

Q17-5 Q17-6 Q17-7 Q17-8 Q17-9 Q17-13 Q17-14 Q17-15

Application BE17-1 E17-1 E17-2 E17-3 P17-1A P17-1B Q17-16 BE17-3 BE17-4 BE17-5 BE17-6 BE17-7 BE17-8 BE17-9 BE17-10 BE17-11 BE17-12 E17-4 E17-5 E17-6 E17-7 E17-8 E17-9 E17-10 E17-11 E17-18

P17-2A P17-3A P17-4A P17-5A P17-6A P17-7A P17-9A P17-10A P17-11A P17-2B P17-3B P17-4B P17-5B P17-6B P17-7B P17-9B P17-10B P17-11B

E17-20 P17-2A P17-3A P17-8A P17-9A P17-10A P17-12A P17-2B P17-3B P17-8B P17-9B P17-10B P17-12B

Prepare a cash flow statement using the direct method.

Q17-10 Q17-11 Q17-12

BE17-13 BE17-14 BE17-15 BE17-16 BE17-17 BE17-18 E17-12 E17-13 E17-14 E17-15 E17-16 E17-17 E17-18

Analyze the cash flow statement.

Q17-16 Q17-17

BE17-19 P17-5A P17-6A

Broadening Your Perspective

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17-4

Analysis

Synthesis

BE17-20 E17-19 E17-20 P17-13A P17-13B BYP17-1 BYP17-2 BYP17-3 BYP17-4

Evaluation

BYP17-5

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ANSWERS TO QUESTIONS 1.

A cash flow statement is a statement that shows sources and uses of cash classified along the three main lines of business activities: operating, investing, and financing. The cash flow statement is useful because it helps investors, creditors, and others assess the following aspects of the firm’s financial position:    

the company’s ability to generate future cash flows the ability of the company to pay dividends and meet obligations the reasons for the difference between profit and cash provided (used) by operating activities the cash investing and financing transactions during a period.

For the cash flow statement preparation, cash is generally defined as cash on hand (coins, paper currency, cheques) and money on deposit at a bank less any bank overdrafts.

The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses, and enter into the determination of profit. An example would be a sale of goods for cash. Investing activities include: (a) acquiring and disposing of investments and productive long-lived assets and (b) lending money and collecting loans. An example is buying land (not for resale) for cash. Financing activities include: (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from shareholders and providing them with a return on their investment, such as a dividend payment. An example is the payment of the principal on a mortgage payable.

In general terms, current assets and current liabilities relate to accruals contained in the operating activities and are used to adjust income statement elements (revenues and expenses) and convert them to cash collections and cash payments. Non-current assets generally involve investing activities and are used to extract information about sources and uses of cash in investing activities. Long-term liabilities and equity items involve financing activities and are used to extract information about sources and uses of financing activities. An exception to these general guidelines is a short-term note payable that does not relate to purchases. Although this note payable is classified as a current liability, it is a result of the business borrowing and later repaying a note payable. Consequently, cash transactions relating to this note payable would be classified as financing activities.

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QUESTIONS (Continued) 5.

The cash flow statement is prepared from a comparative balance sheet, an income statement, and selected transaction information. It presents information that is not readily available in the other financial statements since the balance sheet and income statement are prepared on an accrual basis.

Revenues and expenses, and consequently profit, are recognized based on the accrual method of accounting and not on the cash basis of accounting. Consequently, profit and loss reported on the income statement will not necessarily be consistent with cash increases and decreases. A number of factors could have caused a decrease in cash despite the company earning profit. These include (1) low cash-based revenues relative to high cash-based expenses; (2) purchase of property, plant, and equipment; (3) purchase of investments; and (4) repayment of debt or reacquisition of share capital. An increase in cash could have occurred despite a loss. Factors that could lead to this include: (1) high cash-based revenues relative to low cashbased expenses; (2) sales of property, plant, and equipment; (3) sales of investments; and (4) issuing of debt or share capital.

When revenues and expenses are recorded using accrual-basis accounting, it is necessary to adjust profit for the changes in the related noncash current assets and current liabilities to determine the amount of cash provided from operations. These adjustments are necessary when using the indirect method of showing cash provided (used) by operating activities. Increases in current assets occur when cash has been spent acquiring assets not yet used in operations, or not yet converted to cash from operations. Consequently, the amount of the increase of these asset balances must be deducted from profit to arrive at cash provided (used) by operations. Similarly, when noncash current liabilities increase, it is generally because expenses have been incurred for which payments have not yet been made. Since no cash has yet been spent, the increases in these liability accounts balances are added to profit to arrive at cash provided (used) by operations.

Vijaya is incorrect. While it is true that depreciation is an expense that does not involve cash flow, it is an expense that has been deducted from revenues to arrive at the profit. When using the indirect method, we add back the depreciation expense to profit effectively cancelling this expense to arrive at the amount of cash provided (used) by operations.

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QUESTIONS (Continued) 9.

Gains and losses do not normally arise from operating activities. Under the indirect method, losses are added back to profit, and gains are deducted from profit, to reconcile profit to net cash provided by operating activities. Since losses are deductions in calculating profit, and are already included in the profit figure; adding them back to profit effectively cancels them. Conversely, gains have already increased profit, so deducting them cancels their effect on profit.

10.

Sales on the income statement include cash and credit sales made in the current period only. Cash collected from customers on the statement of cash flows can come from sales in the current or previous periods, and not all current period sales are collected in the current period.

11.

Depreciation expense is not listed in the direct method operating activities section because it is not a cash flow item—it does not affect cash. Recall the journal entry to record depreciation: debit Depreciation Expense and credit Accumulated Depreciation. No cash is involved in this entry.

12.

The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that it does not reconcile the cash flows from operating activities with profit. The advantage of the indirect method is its reconciliation of profit to net cash provided by operating activities. Its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. Both methods are acceptable. Standard setters prefer the direct method. Most companies favour the indirect method because: (1) it is easier to prepare, (2) it provides a reconciliation between profit and net cash flow from operating activities, (3) it also discloses less competitive information about the company, and (4) it is the format most familiar to users of financial statements.

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QUESTIONS (Continued) 13.

The cash received from the sale of equipment is reported as an inflow in the investing activities section. Neither the gain nor the loss itself provided or used cash from operating activities. Because a gain does not provide cash from operating activities, it must be deducted from profit in the operating activities section of a cash flow statement prepared using the indirect method. The noncash gain, which was included in profit, must be deducted from profit on the cash flow statement to convert profit to net cash provided by operating activities. When the statement is prepared using the direct method, any gain is simply excluded from the operating activities section. Because a loss does not use cash from operating activities, it must be added to profit in the operating activities section of a cash flow statement prepared using the indirect method. The noncash loss, which was deducted from profit in the income statement, must be added to profit on the cash flow statement to convert profit to net cash provided by operating activities. When the statement is prepared using the direct method, any loss is simply excluded from the operating activities section.

14.

Unless a cash dividend is paid, the simple declaration of a dividend which causes it to be reported as a reduction of retained earnings in the statement of changes in shareholder’s equity will not result in any reduction in cash reported as an outflow in the cash flow statement.

15.

A financially healthy, growing company will generally be generating positive flows from operating activities. Growth is evidenced by negative flows in investing activities as the company purchases property, plant, and equipment and replaces older assets to assist its growth. The financing activities section will usually show negative flows as the company repays debt and pays dividends to owners or occasionally positive flows if the company is issuing debt to finance growth.

16.

If the net capital expenditures exceed the cash provided by operating activities, the free cash flow will be negative.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 17-1 (a) (b) (c) (d) (e) (f) (g) (h) (i)

− + − − NE + + NE NE

BRIEF EXERCISE 17-2 (a) (b)

(i)

(F) (I)

Financing activity Investing activity (Note: The sale of land is an investing activity. If using the indirect method, the loss is added back under operating activities to cancel its impact on profit.) (F) Financing activity (I) Investing activity (NC) Significant noncash activity (F) Financing activity (O) Operating activity None. Depreciation expense is reported in the operating activities section using the indirect method only to cancel it from profit. It is neither a source nor a use of cash in any way. None. The payment of cash dividends results in a financing activity. The declaration is not a use of cash.

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BRIEF EXERCISE 17-3 (a) (b) (c) (d) (e) (f) (g) (h)

+ – + − + + + +

BRIEF EXERCISE 17-4 DIAMOND LTD. Cash Flow Statement (Partial) Year Ended November 30, 2017

Operating activities Profit ............................................................................... $ 850,000 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense .............................. $175,000 Increase in accounts receivable ................ (80,000) Decrease in prepaid expenses .................... 35,000 Increase in accounts payable ................ 170,000 300,000 Net cash provided by operating activities ............$1,150,000

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BRIEF EXERCISE 17-5 Montalvo Company Cash Flow Statement (Partial)—Indirect Method Year Ended May 31, 2017

Operating activities Profit .................................................................. $300,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Decrease in accounts receivable ............... $80,000 Increase in inventory ................................... (30,000) Increase in prepaid expenses................. (28,000) 22,000 Net cash provided by operating activities.......... $322,000

BRIEF EXERCISE 17-6 Chas Company Cash Flow Statement (Partial)—Indirect Method Year Ended June 30, 2017

Operating activities Profit .................................................................. $300,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ................................. $32,000 Gain on sale of equipment .......................... (25,000) Increase in accounts receivable ................. (35,500) Decrease in inventory ............................. 22,500 Decrease in prepaid expenses ............... 12,800 Increase in accounts payable .................. 16,000 22,800 Net cash provided by operating activities.......... $322,800

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BRIEF EXERCISE 17-7 MIRZAEI LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended March 31, 2017

Operating activities Profit .................................................................. $330,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ................................. $50,000 Gain on sale of equipment .......................... (45,200) Increase in accounts receivable ................. (20,000) Decrease in inventory ............................. 7,000 Increase in prepaid expenses................. (2,000) Decrease in accounts payable ............... (5,000) Increase in income tax payable .............. 6,000 (9,200) Net cash provided by operating activities.......... $320,800

BRIEF EXERCISE 17-8 Indirect method: Operating activities: Loss on sale of equipment

$ 1,500

Investing activities: Sale of equipment

17,000*

The operating activities section would also show depreciation expense of $12,000 and the investing activities section would show purchase of equipment of $(41,600). * Cash............................................. 17,000 Loss on Sale of Equipment .......... 1,500 Accumulated Depreciation ........... 5,500 Equipment ................................................ 24,000

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BRIEF EXERCISE 17-9 In order to arrive at the ending balance of $63,200 for Retained Earnings, a debit of $7,700 is needed ($27,500 + $43,400 - $63,200). Dividends of $7,700 were declared and paid during the year.

BRIEF EXERCISE 17-10 Investing activities: Proceeds from sale of land ...................................$120,000 1 Equipment purchase ................................................ (89,000) 2 Net cash provided by investing activities .............. $ 31,000 1.

Decrease in land ($180,000 − $95,000) ........... $ 85,000 Plus gain ............................................................ 35,000 Cash proceeds from sale of land...................... $120,000

Balance in equipment account, Dec. 31, 2017 $237,000 Balance, Jan. 1, 2017 ................... Cost of equipment purchased ........................

(148,000) $89,000

BRIEF EXERCISE 17-11 Dividends paid $46,000 Proof: Retained earnings December 31, 2017 .............. Profit..................................................................... Retained earnings, December 31, 2016 ............. Dividends declared during 2017......................... Increase in dividends payable............................ Cash payment for dividends ..............................

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$(261,000) 197,000 114,000 50,000 (4,000) $ 46,000

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BRIEF EXERCISE 17-12 Financing activities Sale of common shares 1 ................................................ $ 10,000 Repayment of mortgage payable ....................(25,000) Payment of cash dividends 2 ........................................ (65,000) Net cash used by financing activities ..................... $(80,000) 1.

$10,000 = $55,000 − $45,000

Payment of cash dividends: Retained earnings, beginning of year ...................... Add: Profit..................................................................

$85,000 145,000 230,000 Less: Cash dividends paid (calculated)................... (65,000) Retained earnings, end of year ................................. $165,000

Note X: During the year, the company acquired a building with a cost of $500,000 by paying $200,000 cash and incurring a mortgage payable of $300,000.

BRIEF EXERCISE 17-13 Sales revenue ............................................. $640,000 Add: Decrease in accounts receivable ..... 13,650 Cash receipts from customers .................. $653,650

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BRIEF EXERCISE 17-14 (a) Increase in inventory ................................. Add: Cost of goods sold ............................ Cost of goods purchased ..........................

$ 5,600 89,500 $95,100

(b) Cost of goods sold ..................................... Add: Increase in inventory ........................ Less: Increase in accounts payable ......... Cash payments to suppliers......................

$89,500 5,600 (7,200) $87,900

BRIEF EXERCISE 17-15 Operating expenses ......................................... Plus: Increase in prepaid expenses ................ Less: Increase in accrued expenses payable Cash payments for operating expenses .........

$100,000 10,900 (6,400) $104,500

BRIEF EXERCISE 17-16 Salaries expense .............................................. Add: Decrease in salaries payable.................. Cash payments to employees .........................

$188,000 1,500 $189,500

BRIEF EXERCISE 17-17 Income tax expense ......................................... Less increase in income tax payable.............. Cash payments for income tax........................

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$90,000 (9,000) $81,000

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BRIEF EXERCISE 17-18 ANGUS MEAT CORPORATION Cash Flow Statement (Partial) Year Ended December 31, 2017

Operating activities Cash receipts from customers1 ..................................................... $350,000 Cash payments: To suppliers2...................................... $(164,000) For operating expenses3 ................... (71,000) 4 For income taxes .............................. (45,000) (280,000) Net cash provided by operating activities ............. $ 70,000 1.

Sales revenue ............................................ Less: Increase in accounts receivable..... Cash receipts from customers .................

$375,000 (25,000) $350,000

Cost of goods sold .................................... Add: Increase in inventory ...................... Add: Decrease in accounts payable ....... Cash payments to suppliers .....................

$150,000 7,000 7,000 $164,000

Operating expenses .................................. Less: Decrease in prepaid expenses ....... Cash payments for operating expenses ..

$75,000 (4,000) $71,000

Income tax expense .................................. Less: Increase in income tax payable...... Cash payments for income tax.................

$50,000 (5,000) $45,000

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BRIEF EXERCISE 17-19 Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $360,000 – $200,000 = $160,000

BRIEF EXERCISE 17-20 (a) Free cash flow = Cash provided (used) by operating activities − Cash used (provided) by investing activities Company A Company B = $(10,000) − $70,000 = $50,000 − $(30,000) = $(80,000) = $80,000 (b) Company A is more likely to be in the early stages of its development. It has negative cash flow from operating and investing activities and positive cash flow from financing. This indicates the company issued debt and/or equity and used some of the money to buy assets and fund its operations.

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SOLUTIONS TO EXERCISES EXERCISE 17-1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Payment of interest on notes payable operating Exchange of land for patent noncash investing Sale of building at book value investing Payment of dividends financing Depreciation operating Receipt of dividends on investment operating Receipt of interest on notes receivable operating Issuance of common shares financing Amortization of patent operating Issuance of bonds at par for land noncash investing financing 11. Purchase of land investing 12. Conversion of bonds into noncash common shares financing 13. Sale of land at a loss: investing Proceeds from sale of land operating Loss on sale of land 14. Sale of Wellman bonds financing

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EXERCISE 17-2 Transaction 1. Sold inventory for $1,000 cash. 2. Purchased a machine for $30,000. Made a $5,000 down payment and issued a long-term note for the remainder. 3. Issued common shares for $50,000. 4. Collected $16,000 of accounts receivable. 5. Paid a $25,000 cash dividend. 6. Sold a long-term equity investment with a carrying value of $15,000 for $10,000. 7. Sold bonds at par for $200,000. 8. Paid $18,000 on accounts payable. 9. Purchased inventory for $28,000 on account. 10. Purchased a long-term investment in bonds for $100,000. 11. Sold equipment with a carrying amount of $16,000 for $13,000. 12. Paid $12,000 interest expense on long-term notes payable.

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(a) Classification O

(b) Cash Inflow or Outflow +$1,000

−$5,000

NC F

NE +$50,000

+$16,000

F I

−$25,000 +$10,000

F O NC

+$200,000 −$18,000 NE

−$100,000

+$13,000

−$12,000

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EXERCISE 17-3 1. (a)

Cash .......................................................... 15,000 Land................................................. Gain on Disposal ............................

12,000 3,000

(b) Operating activities: deduct Gain from profit; Investing activities: show Proceeds of $15,000 from sale of land

2. (a)

(b)

3. (a)

(b)

4. (a)

(b)

5. (a)

(b)

Cash .......................................................... 20,000 Common Shares .............................

20,000

Financing activities: add Issuance of common shares $20,000

Depreciation Expense .............................. 17,000 Accumulated Depreciation - Buildings

17,000

Operating activities: add Depreciation Expense to profit.

Salaries Expense ....................................... 9,000 Cash ................................................

9,000

Operating activities: No entry as amount of salaries expense already included in profit.

Equipment .................................................. 8,000 Common Shares .............................

8,000

This is a noncash financing investing activity that is not reported on the statement of cash flows but in a note to the financial statements.

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EXERCISE 17-3 (Continued) 6. (a)

Cash........................................................ Accumulated Depreciation - Equipment Loss on Disposal ................................... Equipment .......................................

1,200 7,000 1,800 10,000

(b) Operating activities: add Loss of $1,800 to profit. Investing activities: show Proceeds of $1,200 from sale of equipment

EXERCISE 17-4 PESCI LTD. Cash Flow Statement (Partial) Year Ended November 30, 2017

Operating activities Profit ............................................................................... $ 78,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $50,000 Gain on sale of equipment ......................... (10,000) Decrease in accounts receivable................ 36,000 Increase in inventory.................................. (19,000) Increase in prepaid expenses ...................... (2,000) Decrease in accounts payable................... (12,000) Decrease in income taxes payable .......... (4,000) 39,000 Net cash provided by operating activities ................... $117,000

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EXERCISE 17-5 SCOOTERS RENTALS Cash Flow Statement (Partial) Year Ended December 31, 2017 Operating activities Profit .............................................................................. $153,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $24,000 Increase in accounts receivable ................ (21,000) Decrease in inventory ................................. 14,000 Increase in prepaid expenses ...................... (5,000) Decrease in accounts payable ..................... (7,000) Increase in accrued expenses payable ... 10,000 15,000 Net cash provided by operating activities ................... $168,000

EXERCISE 17-6 CHARRON INC. Cash Flow Statement (Partial) Year Ended October 31, 2017

Operating activities Profit ................................................................................ $87,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $23,000 Loss on sale of equipment ........................... 8,000 Increase in accounts receivable ................ (23,000) Decrease in inventory ................................. 13,500 Increase in prepaid expenses ...................... (1,700) Increase in accounts payable ....................... 7,000 Decrease in accrued expenses payable .. (3,000) Decrease in income taxes payable .......... (5,000) 18,800 Net cash provided by operating activities ................... $105,800

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EXERCISE 17-7 Operating activities Profit ................................................................................ $77,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $28,000 Loss on disposal of equipment............. 7,000 35,000 Investing activities Sale of equipment* ..................................... Purchase of equipment ..............................

12,000 (70,000)

Financing activities Payment of cash dividends........................

(14,000)

*Cost of equipment sold .................................. Accumulated depreciation............................... Net carrying amount ........................................ Loss on disposal of equipment....................... Cash proceeds from sale...............................

$49,000 30,000 19,000 7,000 $12,000

Cash .................................................................. 12,000 Accumulated Depreciation .............................. 30,000 Loss on Disposal.............................................. 7,000 Equipment ......................................................................... 49,000

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EXERCISE 17-8 DUPRÉ CORP. Cash Flow Statement (Partial) Year Ended December 31, 2017

Investing activities Sale of equipment* ..................................... $ 5,000 Purchase of equipment................................ (65,000) Net cash used by investing activities...................... $(60,000) Financing activities Payment of cash dividends........................ Net cash used by financing activities ...

(8,000)

*Cost of equipment sold .................................. Accumulated depreciation............................... Net carrying amount ........................................ Loss on sale of equipment .............................. Cash proceeds from sale.................................

$46,000 38,000 8,000 3,000 $ 5,000

(8,000)

Cash .................................................................. 5,000 Accumulated Depreciation - Equipment......... 38,000 Loss on Disposal.............................................. 3,000 Equipment ......................................................................... 46,000

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EXERCISE 17-9 LU CORPORATION Cash Flow Statement—Indirect method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $22,630 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ................................. $5,000 Loss on sale of land ($6,000 - $4,900).... 1,100 Decrease in accounts receivable ........... 2,200 Decrease in accounts payable ............... (18,730) (10,430) Net cash provided by operating activities .............. 12,200 Investing activities Sale of land .................................................. 4,900 Net cash provided by investing activities

4,900

Financing activities Payment of cash dividends ............................ (19,500) Issue of common shares ................................ 6,000 Net cash used by financing activities ..................... (13,500) Net increase in cash.......................................................... 3,600 Cash, January 1................................................................. 10,700 Cash, December 31 ........................................................... $ 14,300

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EXERCISE 17-10 PREFERRED HOMES LTD. Cash Flow Statement (Partial) Year Ended September 30, 2017

Investing activities Sale of equipment (3) ................................. $ 3,000 Purchase of land (Note X)............................... (35,000) Purchase of equipment................................. (20,000) Net cash used by investing activities...................... $(52,000) Financing activities Payment of cash dividends (4) ....................... (80,000) Issuance of common shares (2) ................ 85,000 Repayment of mortgage note payable (1) . (5,000) Net cash from financing activities .........................

$ 0

Note X: Land costing $100,000 was acquired by paying $35,000 cash and issuing a mortgage note payable for $65,000. (1) Transactions involving Mortgage Note Payable Mortgage Note Payable Repayments

5,000

Oct. 1, 2016 50,000 Land purchase 65,000 Sept. 30, 2017 110,000

(2) Transactions involving Common Shares: Common Shares Oct. 1, 2016 Issuance Sept. 30, 2017

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150,000 85,000 235,000

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EXERCISE 17-10 (Continued) (3) Transactions involving Equipment: Equipment Oct. 1, 2016 Purchases Sept. 30, 2017

125,000 20,000 139,000

Disposal

6,000

Accumulated Depreciation Disposal

5,000

Oct. 1, 2016 Sept. 30 Sept. 30, 2017

55,000 15,000 65,000

*Cost of equipment sold .................................. Accumulated depreciation............................... Net carrying amount ........................................ Add: Gain on sale of equipment..................... Cash proceeds from sale.................................

$6,000 5,000 1,000 2,000 $3,000

Cash .................................................................. Accumulated Depreciation-Equipment........... Gain on Disposal .......................................... Equipment .....................................................

3,000 5,000 2,000 6,000

(4) Transactions involving Retained Earnings: Retained Earnings Dividends

70,000

Oct. 1, 2016 Profit Sept. 30, 2017

80,000 210,000 220,000

Dividends Payable Dividends paid

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17-27

Oct. 1, 2016 Dividends Sept. 30, 2017

20,000 70,000 10,000

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EXERCISE 17-11 SAVARY LIMITED Cash Flow Statement Year Ended December 31, 2017

Operating activities Profit .............................................................................. $200,000 Adjustments to reconcile profit to net cash used by operating activities: Depreciation expense .............................. $ 70,000 Increase in accounts receivable .............. (150,000) Increase in inventory................................ (170,000) Decrease in prepaid insurance ............. 7,000 Increase in accounts payable................ 26,000 Decrease in salaries payable ..................... (10,000) Increase in interest payable .................. 6,000 (221,000) Net cash used by operating activities .............. (21,000) Investing activities Purchase of equipment................................. (250,000) Net cash used by investing activities....................... (250,000) Financing activities Issued note payable ....................................... 150,000 Issued common shares ................................. 200,000 Payment of cash dividends* ......................... (50,000) Net cash provided by financing activities ................ 300,000 Increase in cash ............................................................... 29,000 Cash, January 1 ................................................................. 85,000 Cash, December 31............................................................ $114,000 * Profit was $200,000, and retained earnings only increased by $150,000, so $50,000 in dividends must have been declared and paid.

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EXERCISE 17-12 MACGREGOR COMPANY Cash Flow Statement Year Ended December 31, 2017 Operating activities Cash receipts Cash receipts from customers * .............................. $132,000* Cash payments for operating expenses **................. (55,000) Net cash provided by operating activities ......................... $77,000 Revenues ........................................................... $192,000 Less ending balance accounts receivable ....... (60,000) Cash receipts from customers* ........................ $132,000 Operating expenses ............................................ $78,000 Less ending balance accounts payable ........... (23,000) Cash payments for operating expenses**.......... $55,000

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EXERCISE 17-13 FLYPAPER AIRLINES INC. Cash Flow Statement Year Ended March 31, 2017 Operating activities Cash receipts Cash receipts from customers ................................ $254,000* Dividends on investments ...................................... 14,000 268,000 Cash payments To suppliers ........................................... $(110,000) For operating expenses ....................... (28,000) For salaries ........................................... (51,000) For interest ........................................... (8,000) For income tax .......................................... (7,500) (204,500) Net cash provided by operating activities ......... 63,500 Investing activities Sale of aircraft ............................................. $212,000 Purchase of land .......................................... (174,000) Purchase of equipment............................... (22,000) Net cash provided by investing activities ................... 16,000 Financing activities Payment of cash dividends ........................ (14,000) Net cash used by financing activities ..................... (14,000) Net increase in cash .............................................................. 65,500 Cash, April 1, 2016 ............................................................. 35,000 Cash, March 31, 2017 ....................................................... $ 100,500 Note X: Land costing $35,000 was acquired by issuing common shares. * $53,000 + $201,000 = $254,000

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EXERCISE 17-14 PESCI LTD. Cash Flow Statement (Partial) Year Ended November 30, 2017

Operating activities Cash receipts from customers1 ..................................................... $984,000 Cash payments: To suppliers2 ............................................................. $(521,000) For operating expenses3 ................. (312,000) 4 For income taxes ............................ (34,000) (867,000) Net cash provided by operating activities .............. $117,000 1.

Sales revenue ............................................ $948,000 Add: Decrease in accounts receivable .... 36,000 Cash receipts from customers ................. $984,000

Cost of goods sold .................................... $490,000 Add: Increase in inventory ...................... 19,000 Add: Decrease in accounts payable ....... 12,000 Cash payments to suppliers ..................... $521,000

Operating expenses .................................. $310,000 Add: Increase in prepaid expenses ......... 2,000 Cash payments for operating expenses .. $312,000

Income tax expense .................................. Add: Decrease in income tax payable ..... Cash payments for income tax.................

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$30,000 4,000 $34,000

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EXERCISE 17-15 (a) Sales revenue ........................................... Less: Increase in accounts receivable .. Cash receipts from customers ................

$275,000 (14,100) $260,900

(b) Cost of goods sold................................... Less: Decrease in inventory ................... Add: Decrease in accounts payable ..... Cash payments to suppliers ...................

$110,000 (3,300) 1,700 $108,400

(c) Operating expenses ................................. Less: Depreciation expense ................... Add: Increase in prepaid expenses ........ Decrease in accrued expenses payable........................................ Cash payments for operating expenses..

$70,000 (20,000) 2,500

(d) Interest expense.......................................

$18,000

Cash payments for interest expense ......

$18,000

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2,000 $54,500

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EXERCISE 17-16 McTAVISH LTD. Cash Flow Statement (partial)—Direct Method Year Ended September 30, 2017

Operating activities Cash receipts Cash receipts from customers 1................................................. $262,000 Cash payments For operating expenses 2 ...................................... (114,600) For interest 3 ......................................... (3,500) 4 For income taxes ............................... (28,700) (146,800) Net cash provided by operating activities ............ 115,200 1. Cash receipts from customers Service revenue .................................................. Less: Increase in accounts receivable .............

2. Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ................... Less: Increase in accrued expenses payable...

3. Cash payments for interest Interest expense ................................................. Less: Increase in interest payable.....................

$285,000 (23,000) $262,000 $122,000 3,100 (10,500) $114,600 $ $

4. Cash payments for income taxes Income tax expense............................................ Less: Increase in Income taxes payable ...........

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4,000 (500) 3,500

$ 38,500 (9,800) $ 28,700

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Accounting Principles, Seventh Canadian Edition

EXERCISE 17-17 CHARRON INC. Cash Flow Statement (partial)—Direct Method Year Ended October 31, 2017 Operating activities Cash receipts Cash receipts from customers 1................................................. $602,000 Cash payments To suppliers 2 ................................................................ $(369,500) For operating expenses 3..................... (92,700) 4 For income taxes ............................... (34,000) (496,200) Net cash provided by operating activities .......... $105,800 1. Cash receipts from customers Sales .................................................................... Less: Increase in accounts receivable ............. 2. Cash payments to suppliers Cost of goods sold ............................................. Less: Decrease in inventory .............................. Increase in accounts payable .................. 3. Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ................... Decrease in accrued expenses payable .. 4. Cash payments for income taxes Income tax expense............................................ Add: Decrease in income taxes payable ...........

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$625,000 (23,000) $602,000 $390,000 (13,500) (7,000) $369,500 $88,000 1,700 3,000 $92,700 $29,000 5,000 $34,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 17-18 (a) STORM ADVENTURES LTD. Cash Flow Statement—Indirect method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $69,900 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ............................... $50,000 Loss on sale of land .................................... 10,000 Decrease in accounts receivable ........... 9,000 Decrease in inventory ................................. 12,000 Increase in prepaid expenses ................ (7,000) Increase in accounts payable................. 5,000 Decrease in income taxes payable ........ (3,500) 75,500 Net cash provided by operating activities ............ 145,400 Investing activities Sale of land ($25,000 − $10,000 loss) .............. 15,000 Purchase of equipment.................................. (80,000) Net cash used by investing activities......................... (65,000) Financing activities Payment of cash dividends (1) ...................... (30,000) Redemption of bonds ..................................... (60,000) Issue of common shares .............................. 40,000 Net cash used by financing activities ..................... (50,000) Net increase in cash .............................................................. 30,400 Cash, January 1 .................................................................. 12,600 Cash, December 31............................................................. $ 43,000

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EXERCISE 17-18 (Continued) (a) (Continued) (1) Transactions involving Retained Earnings: Retained Earnings Dividends

32,500

Jan. 1, 2017 Profit Dec.31, 2017

103,600 69,900 141,000

Dividends Payable Dividends paid

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30,000

17-36

Jan. 1, 2017 Dividends Dec.31, 2017

5,000 32,500 7,500

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Accounting Principles, Seventh Canadian Edition

EXERCISE 17-18 (Continued) (b) STORM ADVENTURES LTD. Cash Flow Statement—Direct Method Year Ended December 31, 2017

Operating activities Cash receipts Cash receipts from customers (1) ........................... $687,000 Cash payments To suppliers (2)...................................... $(422,800) For operating expenses (3).................. (87,000) For interest ........................................... (5,000) For income taxes (4) ............................ (26,800) (541,600) Net cash provided by operating activities ............ 145,400 Investing activities Sale of land ($25,000 − $10,000 loss) .............. 15,000 Purchase of equipment................................. (80,000) Net cash used by investing activities......................... (65,000) Financing activities Payment of cash dividends ........................... (30,000) Redemption of bonds ..................................... (60,000) Issue of common shares .............................. 40,000 Net cash used by financing activities ..................... (50,000) Net increase in cash.......................................................... Cash, January 1................................................................. Cash, December 31 ........................................................... (1) Cash receipts from customers Sales .................................................................... Add: Decrease in accounts receivable.............

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30,400 12,600 $ 43,000 $678,000 9,000 $687,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 17-18 (Continued) (b) (Continued) (2) Cash payments to suppliers Cost of goods sold ............................................. Less: Decrease in inventory .............................. Cost of goods purchased................................... Less: Increase in accounts payable ..................

(3) Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ...................

(4) Cash payments for income taxes Income tax expense............................................ Add: Decrease in Income taxes payable ...........

$439,800 (12,000) 427,800 (5,000) $422,800 $80,000 7,000 $87,000 $23,300 3,500 $26,800

EXERCISE 17-19 Company A is clearly in a better financial position than Company B. While both companies experienced similar increases in cash, it should be noted that Company A’s cash flow comes mainly from its operations, while company B’s cash was acquired through debt/equity, as evidenced by the large amount of cash generated through financing activities. By contrast, Company A appears to be paying down debt/equity, as its cash flow from financing activities is negative. Essentially, Company A appears to be self-sustaining (independent of external sources for its financing) to a much greater degree than Company B.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 17-20 (a) ($ in millions) Cash provided (used) by operating activities Cash provided (used) by investing activities Cash provided (used) by financing activities Increase in cash

Bank of Montreal

Scotiabank

$(2,927)

$ 4,944

3,293

(586)

(465) $ (99)

(4,186) $ 172

Bank of Montreal

Scotiabank

$(2,927)

$ 4,944

3,293 $ 366

(586) $ 4,358

(b) ($ in millions)

− = (c)

Cash provided (used) by operating activities Cash provided (used) by investing activities Free cash flow

At first glance, Scotiabank appears to have better cash management performance because it had a larger increase in cash for the year. When we look closer at the sources of the change in the cash balance, we see that Scotiabank generated most of its cash from operations with very little used by investing activities. By contrast, Bank of Montreal’s extremely large use of cash from operating activities has been completely financed by investing activities, leaving little use of cash by financing activities. Looking more closely at the transactions that lead to this result would be necessary to draw more detailed conclusions.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 17-20 (Continued) (d) A manufacturing company’s free cash flow would come primarily from its operating activities, not its investing activities. Due to the nature of its operations, banks invariably are more involved in investing activities than a manufacturing company and so larger amounts would appear on their statement of cash flow for investing activities compared to operating activities. There is an exception to this generality in the case of Scotiabank as evidenced in the above analysis.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 17-1A

Transaction 1. 2. 3. 4.

5. 6. 7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17. 18.

Paid telephone bill for the month. Sold equipment for cash, at a loss.* Sold an investment, at a gain.* Acquired a building by paying 10% in cash and signing a mortgage payable for the balance. Made principal repayments on the mortgage. Paid interest on the mortgage.** Sold inventory on account, at a price greater than cost. Paid wages owing (previously accrued) to employees. Declared and paid a cash dividend to common shareholders.** Paid rent in advance. Sold inventory for cash, at a price greater than cost. Wrote down the value of inventory to net realizable value, which was lower than cost. Received semi-annual bond interest.** Received dividends on an investment in associate.** Issued common shares. Paid a cash dividend to common shareholders.** Collected cash from customers on account. Collected service revenue in advance.

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(a) Classification O I I I

(b) Cash

NC F

NE −

O O

− NE

−

O O

− +

O O

+ +

F F

+ −

− + + −

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-1A (Continued) *

Using the indirect method, the loss/gain would be added/deducted under operating activities. ** Interest and dividends received can be reported as operating or investing activities. Interest and dividends paid can be reported as operating or financing activities. Taking It Further: Operating activities can increase cash without increasing profits in cases where cash is received at a different time from when revenue is earned, for example:  Collection of outstanding receivables (Dr) Cash, (Cr) Accounts Receivable — profit was increased when the sale was recognized and not when cash is collected;  Cash received in advance of being earned (Dr) Cash, (Cr) Unearned Revenue — profit will be increased when the revenue is earned and not when cash is collected.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-2A (a)

MOLLOY LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended September 30, 2017

Operating activities Profit ......................................................... $116,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ......................... $25,000 Gain on sale of land ............................ (35,000) Decrease in accounts receivable ....... 15,000 Increase in inventory .......................... (7,000) Decrease in prepaid expenses ........... 5,000 Increase in accounts payable............. 10,000 Increase in accrued expenses payable 4,000 Decrease in income taxes payable .... (6,000) 11,000 Net cash provided by operating activities $127,000 (b) MOLLOY LTD. Cash Flow Statement (Partial)—Direct Method Year Ended September 30, 2017

Operating activities Cash receipts From customers (1)..................................... $595,000 Cash payments To suppliers ................................ $(337,000) (2) For operating expenses ......... (87,000) (3) For income taxes.................... (44,000) (4) (468,000) Net cash provided by operating activities $127,000

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PROBLEM 17-2A (Continued) (b) (Continued) Calculations (1)

(2)

(3)

(4)

Cash receipts from customers Sales ............................................................ Add: decrease in accounts receivable ..... Cash receipts from customers ..................

$580,000 15,000 $595,000

Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ......................... Cost of purchases ...................................... Less: increase in accounts payable ......... Cash payments to suppliers ......................

$340,000 7,000 347,000 (10,000) $337,000

Cash payments for operating expenses Operating expenses .................................. Less: Increase in accrued expenses payable Decrease in prepaid expenses.......... Cash payments for operating expenses ...

$96,000 (4,000) (5,000) $87,000

Cash payments for income taxes Income tax expense.................................... Add: Decrease in income tax payable ...... Cash payments for income taxes ..............

$38,000 6,000 $44,000

Taking It Further: The direct method of preparing the operating activities section will always produce the same amount of cash provided (used) by operations as the indirect method. The two methods differ in presentation format only and present the same net cash inflows and outflows.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-3A (a) HANALEI INTERNATIONAL INC. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2017

Operating activities Profit .............................................................................. $123,750 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense .............................. $35,000 Loss on sale of equipment ........................ 25,000 Increase in accounts receivable ............... (12,000) Decrease in prepaid expenses .............. 3,000 Decrease in accounts payable .................. (11,000) Increase in interest payable .................. 750 Decrease in income tax payable ........... (1,500) Increase in unearned revenue ............... 4,000 43,250 Net cash provided by operating activities $167,000 (b) HANALEI INTERNATIONAL INC. Cash Flow Statement (Partial)—Direct Method Year Ended December 31, 2017

Operating activities Cash receipts from customers (1) ......................... $472,000 Cash payments For operating expenses .................... $(253,000) (2) For interest ...................................... (9,250) (3) For income tax ..................................... (42,750) (4) (305,000) Net cash provided by operating activities $167,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-3A (Continued) (b) (Continued) Calculations: (1) Cash receipts from customers Service revenue ................................................... Less: Increase in accounts receivable ............ Add: Increase in unearned revenue ................ Cash receipts from customers ...........................

$480,000 (12,000) 4,000 $472,000

(2) Cash payments for operating expenses Operating expenses ............................................ Less: Decrease in prepaid insurance ............... Add: Decrease in accounts payable ............... Cash payments for operating expenses ............

$245,000 (3,000) 11,000 $253,000

(3) Cash payments for interest Interest expense .................................................. Less: Increase in interest payable .................... Cash payments for interest ................................

$10,000 (750) $ 9,250

(4) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income tax payable ............... Cash payments for income tax...........................

$41,250 1,500 $42,750

Taking It Further: The direct method of preparing the operating activities section shows the specific cash receipts and payments related to operations. This information is usually more meaningful to users. The preparation of the operating activities section using the direct method provides more details to the company’s competitors, which is a disadvantage. The other disadvantage of the direct method is that most users are not as familiar with this format. Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-4A TRUDEAU INC. Cash Flow Statement (Partial) Year Ended December 31, 2017 (a) Investing activities Sale of equipment (1) ................................. $ 3,875 Sale of building (2)...................................... 22,500 Purchase of land ............................................. (40,000) Purchase of building (2) ............................... (150,000) Purchase of equipment (Note X) ................. (10,000) Net cash used by investing activities..................... $(173,625)

(b) Profit reported by Trudeau Inc. In 2017 is $125,000. See calculation (5) (c) Financing activities Repayment of notes (3)................................. $(35,000) Repayment of mortgage (4) ............................ (40,000) Payment of cash dividends (5) ....................... (21,250) Issuance of common shares (6) ................. 122,000 Net cash provided from financing activities $ 25,750 (d) Note X: Equipment costing $75,000 was acquired by paying $10,000 cash and issuing a note payable for $65,000.

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PROBLEM 17-4A (Continued) Calculations: (1) Transactions involving Equipment: Equipment Jan. 1, 2017 Purchases Dec. 31, 2017

340,000 75,000 393,000

Disposal

22,000

Accumulated Depreciation—Equipment Disposal

19,125

Jan. 1, 2017 Depreciation Dec. 31, 2017

94,000 49,125 124,000

Cost of equipment sold.................................... Accumulated depreciation (derived above) ... Net carrying amount ........................................ Add: Gain on disposal of equipment .............. Cash proceeds from sale.................................

$22,000 19,125 2,875 1,000 $ 3,875

Cash .................................................................. Accumulated Depreciation-Equipment........... Gain on Disposal ......................................... Equipment .....................................................

3,875 19,125

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1,000 22,000

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PROBLEM 17-4A (Continued) Calculations: (Continued) (2) Transactions involving Building: Building Jan. 1, 2017 Purchases Dec. 31, 2017

750,000 150,000 850,000

Disposal

50,000

Accumulated Depreciation—Building Disposal

17,500

Jan. 1, 2017 Depreciation Dec. 31, 2017

300,000 25,000 307,500

Cost of building sold........................................ Accumulated depreciation (derived above) ... Net carrying amount ........................................ Less: Loss on disposal of building................. Cash proceeds from sale.................................

$50,000 17,500 32,500 10,000 $22,500

Cash .................................................................. Accumulated Depreciation-Building ............... Loss on Disposal.............................................. Building ........................................................

22,500 17,500 10,000 50,000

(3) Transactions involving Notes Payable: Notes Payable Repayments

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35,000

17-49

Jan. 1, 2017 New notes Dec. 31, 2017

310,000 65,000 340,000

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PROBLEM 17-4A (Continued) Calculations: (Continued) (4) Transactions involving Mortgage Payable: Mortgage Payable Repayments

Jan. 1, 2017

585,000

Dec. 31, 2017

545,000

40,000

(5) Transactions involving Retained Earnings: Retained Earnings Closing div.

25,000

Jan. 1, 2017 Profit (b) Dec. 31, 2017

100,000 125,000 200,000

Dividends decl. Dec. 31, 2017

Cash Dividends 25,000 Closing entry 0

25,000

Dividends Payable Dividends paid

21,250

Jan. 1, 2017 2,500 Dividends decl. 25,000 Dec. 31, 2017 6,250

(6) Transactions involving Common Shares: Common Shares Jan. 1, 2017 Issuance Dec. 31, 2017

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685,000 122,000 807,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-4A (Continued) (e)

Cash December 31, 2017 Cash December 31, 2016 Net increase in cash for fiscal year 2017 Add: Cash used in investing activities (a) Less: Cash provided by financing activities (c) Cash provided from operating activities

$ 22,125 10,000 12,125 173,625 (25,750) $160,000

Taking It Further: A net cash outflow from investing activities is usually seen as favourable since it signifies investment in the company’s productive capacity (net purchases of long-term assets). The net cash outflow from investing activities indicates purchasing in anticipation of future growth, efficiencies, productivity, and profitability. However, this does not guarantee that the company’s plans and predictions will be realized or that the purchases are economical or efficient.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-5A (a) GIL COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $32,000 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) .......................... $14,500 Increase in accounts receivable ................ (16,000) Increase in inventory.................................... (7,000) Increase in accounts payable ....................... 9,000 Decrease in income taxes payable .......... (1,000) (500) Net cash provided by operating activities 31,500 Investing activities Sale of equipment (1) .................................. 8,500 Net cash provided by investing activities Financing activities Dividends paid ............................................. Repayments of notes payable .................... Issuance of common shares....................... Net cash used by financing activities

8,500

(20,000) (6,000) 4,000 (22,000)

Net increase in cash.......................................................... Cash, Jan. 1 ....................................................................... Cash, Dec. 31 .....................................................................

18,000 20,000 $ 38,000

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PROBLEM 17-5A (Continued) (a) (Continued) (1) Transactions involving Equipment:

Jan. 1, 2017 Dec. 31, 2017

Equipment 78,000 Disposal 60,000

18,000

Accumulated Depreciation—Equipment Disposal

9,500

Jan. 1, 2017 Depreciation Dec. 31, 2017

24,000 14,500 29,000

Cost of equipment sold.................................... Accumulated depreciation (derived above) ... Net carrying amount ........................................ No gain or loss on income statement ............. Cash proceeds from sale.................................

$18,000 9,500 8,500 0 $ 8,500

Cash .................................................................. Accumulated Depreciation-Equipment........... Equipment .....................................................

8,500 9,500 18,000

(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $31,500 – ($8,500) = $40,000

Taking It Further: It is possible to have had a negative cash balance at any point in the year if there is an arrangement with the bank that Gil’s bank account can go into an overdraft position. Depending on the timing of major disbursements, such as the payment of dividends, there might not be sufficient cash in the bank account at that date.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-6A (a) STRONG SHOES Cash Flow Statement—Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $28,300 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) ............................ $5,200 Loss on disposal (1) ...................................... 4,500 Increase in accounts receivable .................. (1,900) Increase in accounts payable................... 8,500 16,300 Net cash provided by operating activities 44,600 Investing activities Sale of equipment (1) .................................. 4,300 Purchase of investments ................................. (7,000) Net cash used by investing activities

(2,700)

Financing activities Dividends paid ............................................. Repayment of notes payable ...................... Issuance of common shares....................... Net cash used by financing activities

(31,400)

(26,400) (20,000) 15,000

10,500 17,700 $ 28,200

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PROBLEM 17-6A (Continued) (a) (Continued) (1) Transactions involving Equipment:

Jan. 1, 2017 Dec. 31, 2017

Equipment 70,000 Disposal 60,000

10,000

Accumulated Depreciation-Equipment Disposal

1,200

Jan. 1, 2017 Depreciation Dec. 31, 2017

Cost of plant assets sold ................................. Accumulated depreciation............................... Net carrying amount ........................................ Loss on disposal .............................................. Cash proceeds from sale.................................

10,000 5,200 14,000

$10,000 1,200 8,800 4,500 $ 4,300

(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $44,600 +$4,300– $0 = $48,300

Taking It Further: Strong Shoes may desire to present its cash flows from operations using the direct method instead of the indirect method to highlight certain amounts. They may believe that communicating cash collections from customers, for example will better communicate to the financial statement users, the size of its operations. The total amount of cash flow from operations would remain the same under both methods.

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PROBLEM 17-7A COYOTE LTD. Cash Flow Statement—Indirect Method Year Ended May 31, 2017

Operating activities Profit ................................................................................$108,000 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) .......................... $28,250 Loss on sale of land .................................... 20,000 Increase in accounts receivable .................. (9,000) Increase in inventory.................................. (12,000) Decrease in prepaid expenses ..................... 2,500 Increase in accounts payable ....................... 5,000 Decrease in income taxes payable .......... (3,500) 31,250 Net cash provided by operating activities 139,250 Investing activities Sale of land ($50,000 – $20,000) ...................... 30,000 Purchase of equipment (2) ........................... (135,000) Purchase of land (Note X)............................. (55,000) Net cash used by investing activities........................(160,000) Financing activities Sale of common shares............................... 50,000 Payment of cash dividends (4) ...................... (59,650) Net cash used by financing activities ....................... (9,650) Net decrease in cash ............................................................ (30,400) Cash, June 1, 2016.............................................................. 43,000 Cash, May 31, 2017 ............................................................. $ 12,600 Note X: Land with a cost of $100,000 was purchased by paying $55,000 cash and issuing a mortgage note payable for $45,000.

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PROBLEM 17-7A (Continued) (1) Increase in accumulated depreciation ($68,250 – $40,000) (2) Increase in equipment ($325,000 – $190,000) (3) Beginning balance of mortgage payable Add: New note issued for land purchase Ending balance of mortgage payable

$ 80,000 45,000 125,000

(4) Transactions involving Retained Earnings: Retained Earnings Div. (derived)

62,150

June 1, 2016 Profit May 31, 2017

215,500 108,000 261,350

Dividends Payable Dividends paid

59,650

June 1, 2016 5,000 Dividends decl. 62,150 May. 31, 2017 7,500

Taking It Further: A net cash outflow from financing activities is usually seen as favourable since it signifies repayment of debt and payment of dividends to owners. On the other hand, a net cash inflow from financing activities can be either favourable or unfavourable. It is favourable if the company is acquiring financing through debt or issue of shares to finance production or acquire long-term assets. It is unfavourable when the company is seeking to generate cash it cannot obtain otherwise. When combined with low or negative cash from operating activities and cash inflows from investing activities, the company may be sacrificing long-term profitability for short-term survival.

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PROBLEM 17-8A

COYOTE LTD. Cash Flow Statement—Direct Method Year Ended May 31, 2017

Operating activities Cash receipts From customers (1).......................

$664,250

Cash payments To suppliers (2) ............................. $(410,950) For operating expenses (3)........... (69,550) For interest (4) ............................... (5,000) For income tax (5) ......................... (39,500) (525,000) Net cash provided by operating activities ............ 139,250 Investing activities Sale of land ($50,000 – $20,000) ..... $ 30,000 Purchase of equipment (6) ........................... (135,000) Purchase of land (Note X)............................. (55,000) Net cash used by investing activities........................(160,000) Financing activities Sale of common shares............................... 50,000 Payment of cash dividends (7) ...................... (59,650) Net cash used by financing activities ....................... (9,650) Net decrease in cash ............................................................ (30,400) Cash, June 1, 2016.............................................................. 43,000 Cash, May 31, 2017 ............................................................. $ 12,600 Note X: Land with a cost of $100,000 was purchased by paying $55,000 cash and issuing a mortgage note payable for $45,000.

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PROBLEM 17-8A (Continued) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Less: Increase in accounts payable................... (3) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense (7) .......................... Less: Decrease in prepaid expenses ................. (4) Cash payments for interest Interest expense .................................................. (5) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income taxes payable............

$673,250 (9,000) $664,250 $403,950 12,000 415,950 (5,000) $410,950 $100,300 (28,250) (2,500) $ 69,550 $ 5,000 $ 36,000 3,500 $ 39,500

(6) Increase in equipment ($325,000 – $190,000)

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PROBLEM 17-8A (Continued) Calculations: (Continued) (7) Transactions involving Retained Earnings: Retained Earnings Div. (derived)

62,150

June 1, 2016 Profit May 31, 2017

215,500 108,000 261,350

Dividends Payable Dividends paid

59,650

June 1, 2016 5,000 Dividends decl. 62,150 May. 31, 2017 7,500

Taking It Further: If Coyote Inc. was reporting under IFRS instead of ASPE, the interest paid could be classified as financing activities or the dividends paid could be classified as operating activities.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 17-9A (a) E-PERFORM LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................$141,180 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense ............................... $46,500 Loss on sale of equipment ........................... 7,500 Increase in accounts receivable ................ (32,800) Increase in inventory.................................. (29,650) Increase in prepaid expenses .................... (12,400) Increase in accounts payable ..................... 15,700 Increase in accrued expenses payable ... 4,500 (650) Net cash provided by operating activities ................ 140,530 Investing activities Sale of equipment* ...................................... 1,500 Purchase of long-term investments ............... (14,000) Purchase of equipment (Note X) ................... (25,000) Net cash used by investing activities......................... (37,500) Financing activities Sale of common shares............................... 59,000 Retirement of note payable**.........................(100,000) Payment of cash dividends*** ........................ (12,630) Net cash used by financing activities ....................... (53,630) Net increase in cash .............................................................. 49,400 Cash, January 1 .................................................................. 48,400 Cash, December 31............................................................. $ 97,800 Note X: Equipment was purchased by paying $25,000 cash and issuing a note payable for $60,000. Solutions Manual .

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PROBLEM 17-9A (Continued) (a) (Continued) *

Cash ................................................................... 1,500 Accumulated Depreciation-Equipment .......... 48,500 Loss on Disposal .............................................. 7,500 Equipment ................................................

57,500

* Cost of equipment sold $242,500 + $85,000 − $270,000 = $57,500 Accumulated depreciation removed from accounts ($52,000 + $46,500 depreciation expense) − $50,000 = $48,500 NBV = Cost $57,500 − Accumulated depreciation $48,500 = $9,000 Cash proceeds = NBV $9,000 − Loss on sale $7,500 = $1,500 ** Notes payable, 2016 ............................................ Note issued for equipment.................................. Notes payable retired .......................................... Notes payable, 2017 ............................................ *** Retained earnings, 2016 ...................................... Profit ..................................................................... Dividends declared and paid .............................. Retained earnings, 2017 ......................................

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$150,000 60,000 210,000 (100,000) $110,000 $105,450 141,180 246,630 (12,630) $234,000

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PROBLEM 17-9A (Continued) (b) E-PERFORM LTD. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2017

Operating activities Cash receipts from customers ............................... $459,980 (1) Cash payments To suppliers................................. $(199,410) (2) For operating expenses .............. (70,310) (3) For income tax............................. (45,000) For interest .................................. (4,730) (319,450) Net cash provided by operating activities ....... 140,530 Calculations: (1)

Cash receipts from customers Sales ............................................................ Less: Increase in accounts receivable ......

(2)

Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ........................ Cost of goods purchased........................... Less: Increase in accounts payable ..........

(3)

$492,780 (32,800) $459,980

$185,460 29,650 215,110 (15,700) $199,410

Cash payments for operating expenses Operating expenses ................................... Add: Increase in prepaid expenses .......... Less: Increase in accrued expenses payable

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$62,410 12,400 (4,500) $70,310

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PROBLEM 17-9A (Continued)

Taking It Further: The company generated significant amounts of cash from its operations through cash received from customers. Some of this cash has been reinvested in the company through the purchase of equipment and by paying down the company’s debts and paying dividends to its owners.

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PROBLEM 17-10A (a) WETASKIWIN LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $36,000 Adjustments to reconcile profit to net cash used by operating activities: Depreciation expense ............................. $11,000 (1) Loss on sale of equipment ..................... 2,000 Increase in accounts receivable ............... (14,000) Increase in inventory .............................. (4,000) Decrease in accounts payable ................... (18,000) Decrease in income tax payable ............ (17,000) (40,000) Net cash used by operating activities ................ (4,000) Investing activities Collection of notes receivable......................... 23,000 Issue of notes receivable ................................ (14,000) Sale of equipment ............................................ 8,000 (2) Net cash provided by investing activities ................... 17,000 Financing activities Repayment of note payable ............................. (5,000) (3) Payment of cash dividends ........................... (9,000) (4) Net cash used by financing activities ..................... (14,000) Net decrease in cash......................................................... Cash, January 1................................................................. Cash, December 31 ...........................................................

(1,000) 10,000 $ 9,000

Note: Equipment costing $10,000 was purchased by issuing a note payable.

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PROBLEM 17-10A (Continued) Calculations: (1) Depreciation expense Accumulated depreciation, beginning of year ............ $24,000 Less: Accumulated depreciation of equipment sold ($15,000 − $10,000) ............................... (5,000) Accumulated depreciation, end of year ............ (30,000) Depreciation expense ................................................... $11,000 (2) Cash from the sale of equipment Equipment carrying amount .................................................................... $10,000 Less: Loss on sale ......................................................... (2,000) Cash received ............................................................... $ 8,000 (3) Note Payable Note payable, beginning of year .................................. $10,000 Add: Issue of note for equipment ............................... 10,000 20,000 Less: Repayment of note (calculated) ........................ (5,000) Note payable, end of year............................................. $15,000 (4) Cash dividends Retained earnings, beginning of year.......................... $28,000 Add: Profit.................................................................... 36,000 64,000 Less: Dividends (calculated)....................................... (9,000) Retained earnings, end of year .................................... $55,000

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PROBLEM 17-10A (Continued) (b) WETASKIWIN LTD. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2017

Operating activities Cash receipts From customers ...................................................... $272,000 (1) From interest ........................................................... 1,000 Cash payments To suppliers..................................... $(216,000) (2) For operating expenses .................. (27,000) (3) For interest ...................................... (2,000) For income tax................................. (32,000) (4) (277,000) Net cash used by operating activities ................ (4,000) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Add: Decrease in accounts payable ................ (3) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense ............................... (4) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income tax payable .............

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$286,000 (14,000) $272,000 $194,000 4,000 198,000 18,000 $216,000 $38,000 (11,000) $27,000 $15,000 17,000 $32,000 Chapter 17

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PROBLEM 17-10A (Continued)

Taking It Further: Yes. A small change is the result of offsetting balances. For Wetaskiwin, the cash flow statement shows that operating activities used cash of $4,000 during the year. This is important information since the company’s main source of sustainable cash is operating activities. A negative cash flow from operations is a strong indicator of financial difficulties, unless the company is in its start-up phase. The cash flow statement also shows that the company’s negative cash flow from operations was counterbalanced by cash inflows from the collection of outstanding notes receivable. This is a nonrenewable source of cash for the following year (the notes outstanding at the end of 2017 are lower at $14,000).

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PROBLEM 17-11A DIATESSARON INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $68,000 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ............................. $43,500 (1) Loss on sale of equipment ..................... 3,000 Increase in accounts receivable ............... (26,000) Increase in inventory.................................. (49,500) Increase in accounts payable ..................... 10,500 Decrease in income tax payable ............ (1,000) (19,500) Net cash provided by operating activities ............. 48,500 Investing activities Acquisition of long-term investment ............ (101,500) Purchase of equipment.................................. (105,000) Sale of equipment .......................................... 6,000 (2) Net cash used by investing activities....................... (200,500) Financing activities Issue of note payable .................................. 28,000 Issuance of common shares....................... 105,000 Payment of dividends ($15,000 − $6,000) ... (9,000) Repayment of note payable ........................ (3,000) Net cash provided by financing activities................. 121,000 Net decrease in cash......................................................... Cash, January 1................................................................. Cash, December 31 ...........................................................

(31,000) 98,000 $67,000

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PROBLEM 17-11A (Continued) Calculations: (1) Depreciation expense Accumulated depreciation, end of year .................... $162,500 Plus: Accumulated depreciation of equipment sold ($30,000 − $9,000)...................................... 21,000 Accumulated depreciation, beg. of year ......... (140,000) Depreciation expense ...................................................$ 43,500 (2) Cash from sale of equipment Carrying amount of equipment ...................................... $9,000 Less: Loss on sale........................................................ (3,000) Cash received ................................................................. $6,000

Taking It Further: Both the proceeds and the repayment should be shown separately. Information in financial statements is usually condensed and regrouped so that proceeds from issuing a note and repayments do not necessarily relate to the same debt instrument. Showing both separately allows the user to tie the amounts to note disclosure about the various debt instruments.

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PROBLEM 17-12A DIATESSARON INC. Cash Flow Statement – Direct Method Year Ended December 31, 2017

Operating activities Cash receipts From customers ...................................................... $637,000 (1) From interest ........................................................... 4,500 Cash payments To suppliers..................................... $(471,000) (2) For operating expenses .................. (104,000) (3) For interest ...................................... (3,000) For income tax................................. (15,000) (4) (593,000) Net cash provided by operating activities .............. 48,500 Investing activities Acquisition of long-term investment.. (101,500) Purchase of equipment........................... (105,000) Sale of equipment .................................... 6,000 (6) Net cash used by investing activities ...................... (200,500) Financing activities Issue of note payable .................................. 28,000 Issuance of common shares ...........................105,000 Payment of dividends ($15,000 − $6,000) ... (9,000) Repayment of note payable .......................... (3,000) Net cash provided by financing activities ................ 121,000 Net decrease in cash ............................................................ (31,000) Cash, January 1 ................................................................... 98,000 Cash, December 31.............................................................. $67,000

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PROBLEM 17-12A (Continued) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Less: Increase in accounts payable.................. (3) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense* .............................. (4) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income tax payable ............. (5) Cash from sale of equipment Carrying amount of equipment.................................. Less: Loss on sale .................................................... Cash received .............................................................

$663,000 (26,000) $637,000 $432,000 49,500 481,500 (10,500) $471,000 $147,500 (43,500) $104,000 $14,000 1,000 $15,000 $9,000 (3,000) $6,000

Depreciation expense Accumulated depreciation, end of year .................... $162,500 Plus: Accumulated depreciation of equipment sold ($30,000 − $9,000)...................................... 21,000 Accumulated depreciation, beg. of year ......... (140,000) Depreciation expense ....................................................$43,500

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PROBLEM 17-12A (Continued)

Taking It Further: Accounts payable can arise from various expenditures. The accounts payable used for purchases is necessary to calculate cash payments to suppliers. Accounts payable can also relate to operating expenses and the information is necessary to properly match the accrual to the related expense. If payments to suppliers and payments for operating expenses are grouped together on the cash flow statement, the information would not be necessary.

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PROBLEM 17-13A (a)

Net cash provided (used) by operating activities − net cash (provided) used by investing activities = free cash flow ($ in U.S. millions)

(b)

Potash:

$2,614 − $1,160 = $1,454

Agrium:

$1,312 − $2,068 = $(756)

Potash appears to be in the stronger financial position. It generates more cash from operating activities, it is investing in property, plant, and equipment, and it is also paying down its debt. It also has a higher profit, and a higher free cash flow.

Taking It Further: Agrium appears to be in a growth stage as well as Potash Corporation as both companies spent more than $1.1 billion on investing activities. Agrium was forced to borrow from creditors and/or investors to finance its purchases of property, plant, and equipment, or other businesses.

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PROBLEM 17-1B

Transaction 1. Paid telephone bill for the month. 2. Sold land for cash, at a gain.* 3. Acquired land by issuing common shares. 4. Paid a cash dividend to preferred shareholders. 5. Performed services for cash. 6. Performed services on account. 7. Purchased inventory for cash. 8. Purchased inventory on account. 9. Paid income tax. 10. Made principal repayment on a trade note payable. 11. Paid semi-annual bond interest. 12. Received rent from a tenant in advance. 13. Recorded depreciation expense. ** 14. Reacquired common shares at a price greater than the average cost of the shares. 15. Issued preferred shares for cash. 16. Collected cash from customers on account. 17. Issued a note payable. 18. Paid insurance for the month.

(a) Classification O I

(b) Cash

−

O O O O O

+ NE − NE −

−

F O

+ −

− +

Interest paid can be classified as a financing activity. * The gain on sale of land would appear in the operating section of the cash flow statement if the indirect method was used.

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PROBLEM 17-1B (Continued) ** Depreciation expense is added to cash from operating activities when using the indirect method, not because it is a source of cash, but rather to cancel the deduction from profit because there is no source of cash from depreciation expense. Taking It Further: Operating activities can decrease cash without decreasing profit in the following cases:  Prepayments in excess of consumption of goods or services;  Payments on current liabilities (related to operating activities) in excess of current year’s expenses.

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PROBLEM 17-2B (a)

LUI INC. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2017

Operating activities Profit ......................................................... $90,500 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ......................... $28,500 Loss on sale of equipment ................. 9,500 Decrease in accounts receivable ....... 21,000 Increase in inventory .......................... (32,000) Decrease in prepaid expenses ........... 7,000 Decrease in accounts payable ........... (5,000) Increase in accrued expenses payable 8,500 Increase in interest payable ............... 3,500 Decrease in income tax payable ........ (6,500) 34,500 Net cash provided by operating activities $125,000 (b) LUI INC. Cash Flow Statement (Partial)—Direct Method Year Ended December 31, 2017

Operating activities Cash receipts From customers (1)..................................... Cash payments To suppliers ................................ $(529,000) (2) For operating expenses ......... (146,500) (3) For interest ............................. (4,000) (4) For income taxes.................... (36,500) (5) Net cash provided by operating activities

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$841,000

(716,000) $125,000

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PROBLEM 17-2B (Continued) Calculations (1)

(2)

(3)

(4)

(5)

Cash receipts from customers Sales ............................................................ Add: decrease in accounts receivable ..... Cash receipts from customers ..................

$820,000 21,000 $841,000

Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ......................... Cost of purchases ...................................... Add: decrease in accounts payable ......... Cash payments to suppliers ......................

$492,000 32,000 524,000 5,000 $529,000

$162,000 (8,500) (7,000) $146,500

Cash payments for interest Interest expense ............................................... Less: increase in interest payable................... Cash payments for interest ..................................

7,500 (3,500) $4,000

Cash payments for income taxes Income tax expense.................................... Add: Decrease in income tax payable ...... Cash payments for income taxes ..............

$30,000 6,500 $36,500

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PROBLEM 17-3B (a) SABLE ISLAND LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2017

Operating activities Profit .............................................................................. $169,500 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense ................................ $50,000 Gain sale of equipment ...............................(23,000) Decrease in accounts receivable ............ 8,000 Increase in prepaid expenses ...................... (2,500) Increase in accounts payable.................. 5,000 Decrease in income tax payable .................. (5,250) Increase in interest payable .................... 450 Increase in unearned revenue ................. 3,750 36,450 Net cash provided by operating activities $205,950 (b) SABLE ISLAND LTD. Cash Flow Statement (Partial)—Direct Method Year Ended December 31, 2017

Operating activities Cash receipts from customers ................................ $911,750 (1) Cash payments For operating expenses .............. $(639,500) (2) For interest .................................. (4,550) (3) For income tax............................. (61,750) (4) (705,800) Net cash provided by operating activities ...... $205,950

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PROBLEM 17-3B (Continued) Calculations: (1)

Cash receipts from customers Fees earned .............................................. $900,000 Add: Decrease in accounts receivable .. $ 8,000 Add: Increase in unearned revenue ....... 3,750 11,750 Cash receipts from customers ................................ $911,750

(2)

(3)

(4)

Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ................. Less: Increase in accounts payable ................. Cash payments for operating expenses ...........

$642,000 2,500 (5,000) $639,500

Cash payments for interest expense Interest expense ....................................................... Less: Increase in interest payable .......................... Cash payments for income tax................................

$5,000 (450) $4,550

Cash payments for income tax Income tax expense ................................................. Add: Decrease in income tax payable .................. Cash payments for income tax................................

$56,500 5,250 $61,750

Taking It Further: The indirect method of preparing the operating activities section focuses on the differences between profit and net cash flow from operating activities. It is also easier to prepare than the direct method and provides fewer details to the company’s competitors. It is usually considered less meaningful to users than the direct method since it does not show the specific cash receipts and payments related to operations.

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PROBLEM 17-4B BIRD CORP. Cash Flow Statement (Partial) Year Ended December 31, 2017 (a) Investing activities Sale of equipment (1) ................................. $ 1,000 Sale of building (2)...................................... 35,500 Purchase of land and building (Note X) ......... (25,000) Purchase of equipment (1) ........................... (40,000) Net cash used by investing activities...................... $(28,500) (b) Profit reported by Bird Corp. In 2017 is $66,250 per calculation (5). (c) Financing activities Repayment of notes payable (3)................. $(157,000) Repayment of mortgage payable (4) ......... (15,000) Payment of cash dividends (5) .................. (6,250) Issuance of preferred shares ..................... 50,000 (29,300) Repurchase of common shares (6) ........... Net cash used by financing activities ... $ (157,550) (d) Note X: Land costing $50,000 and building costing $130,000 were acquired by paying $25,000 cash and using a note payable for $155,000.

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PROBLEM 17-4B (Continued) Calculations: (1) Transactions involving Equipment: Equipment Jan. 1, 2017 Purchases Dec. 31, 2017

480,000 40,000 492,000

Disposal

28,000

Accumulated Depreciation—Equipment Disposal

22,000

Jan. 1, 2017 Depreciation Dec. 31, 2017

192,000 48,000 218,000

Cost of equipment sold.................................... Accumulated depreciation (derived above) ... Net carrying amount ........................................ Less: Loss on sale of equipment .................... Cash proceeds from sale.................................

$28,000 22,000 6,000 5,000 $ 1,000

Cash .................................................................. Accumulated Depreciation-Equipment........... Loss on Disposal.............................................. Equipment .....................................................

1,000 22,000 5,000

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PROBLEM 17-4B (Continued) Calculations: (Continued) (2) Transactions involving Buildings: Building Jan. 1, 2017 Purchases Dec. 31, 2017

1,250,000 130,000 1,310,000

Disposal

70,000

Accumulated Depreciation—Building Disposal

52,500

Jan. 1, 2017 Depreciation Dec. 31, 2017

600,000 31,250 578,750

Cost of building sold (derived)........................ Accumulated depreciation (derived above) ... Net carrying amount ........................................ Add: Gain on sale of building.......................... Cash proceeds from sale.................................

$70,000 52,500 17,500 18,000 $35,500

Cash .................................................................. Accumulated Depreciation-Building ............... Gain on Disposal ......................................... Building .........................................................

35,500 52,500 18,000 70,000

(3) Transactions involving Notes Payable: Notes Payable Repayments

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17-83

Jan. 1, 2017 New note Dec. 31, 2017

216,000 155,000 214,000

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PROBLEM 17-4B (Continued) Calculations: (Continued) (4) Transactions involving Mortgage Payable: Mortgage Payable Repayments

Jan. 1, 2017

350,000

Dec. 31, 2017

335,000

15,000

(5) Transactions involving Retained Earnings: Retained Earnings Jan. 1, 2017 Profit (b) Dec. 31, 2017

240,000 66,250 300,000

Cash Dividends—Preferred Dividends decl. 6,250 Closing entry Dec. 31, 2017 0

6,250

Closing div.

6,250

Since there are no dividends payable reported at the end of either fiscal year, the amount of the dividends declared for preferred shares is the amount of dividends paid.

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PROBLEM 17-4B (Continued) Calculations: (Continued) (6) Transactions involving Common Shares: Common Shares Reacquisition

Jan. 1, 2017

154,000

Dec. 31, 2017

123,200

30,800

Contributed Surplus—Reacquisition of Common Shares Jan. 1, 2017 0 Reacquisition 1,500 Dec. 31, 2017 1,500 Common Shares ................................................... 30,800 Contributed Surplus—Reacquisition of Common Shares ................................ Cash.............................................................. (e)

Cash December 31, 2017 Cash December 31, 2016 Net increase in cash for fiscal year 2017 Add: Cash used in investing activities (a) Cash used in financing activities (c) Cash provided from operating activities

1,500 29,300 $ 21,000 5,000 16,000 28,500 157,550 $202,050

Taking It Further: A net cash inflow from investing activities can be either favourable or unfavourable. It is only favourable if the company is disposing of assets it no longer needs, and is not disposing of long-term assets to generate cash it cannot obtain otherwise.

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PROBLEM 17-5B (a) GAUDET COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $38,000 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) ............................ $6,000 Increase in accounts receivable .................. (9,000) Increase in inventory.................................. (16,000) Decrease in accounts payable ................... (12,000) Increase in income taxes payable............ 6,000 (25,000) Net cash provided by operating activities 13,000 Investing activities Sale of equipment (1) ....................................... 10,000 Purchase of equipment.................................... (5,000) Net cash provided by investing activities

5,000

Financing activities Dividends paid ............................................. Issuance of notes payable .......................... Net cash used by financing activities

(23,000)

(33,000) 10,000

Net decrease in cash......................................................... Cash, Jan. 1 ....................................................................... Cash, Dec. 31 .....................................................................

(5,000) 33,000 $ 28,000

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PROBLEM 17-5B (Continued) (a) (Continued) (1) Transactions involving Equipment: Equipment Jan. 1, 2017 Purchases Dec. 31, 2017

78,000 5,000 70,000

Disposal

13,000

Accumulated Depreciation—Equipment Disposal

3,000

Jan. 1, 2017 Depreciation Dec. 31, 2017

24,000 6,000 27,000

Cost of equipment sold.................................... Accumulated depreciation (derived above) ... Net carrying amount ........................................ No gain or loss on income statement ............. Cash proceeds from sale.................................

$13,000 3,000 10,000 0 $ 10,000

Cash .................................................................. Accumulated Depreciation-Equipment........... Equipment .....................................................

10,000 3,000 13,000

(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $13,000 – $5,000 = $8,000

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PROBLEM 17-5B (Continued)

Taking It Further: It is possible to have had a negative cash balance at any point in the year if there is an arrangement with the bank that Gaudette’s bank account can go into an overdraft position. Depending on the timing of major disbursements, such as the payment of dividends, there might not be sufficient cash in the bank account at that date.

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PROBLEM 17-6B (a) WANWRIGHT COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................$102,660 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense ............................... $35,500 Gain on disposal .......................................... (5,000) Increase in accounts receivable ................ (33,800) Increase in inventory.................................. (29,250) Increase in accounts payable ..................... 14,420 Decrease in salaries payable.................... (3,730) (21,860) Net cash provided by operating activities 80,800 Investing activities Sale of plant assets (1) .................................... 15,000 Sale of investments ......................................... 22,500 Purchase of plant assets ............................. (141,000) Net cash used by investing activities (103,500) Financing activities Dividends paid .................................................(38,000) Issuance of common shares....................... 50,000 Issuance of notes payable .......................... 70,000 Net cash provided by financing activities

82,000

59,300 33,400 $ 92,700

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PROBLEM 17-6B (Continued) (a) (Continued) (1) Transactions involving Plant Assets: Plant Assets Jan. 1, 2017 Purchases Dec. 31, 2017

205,000 141,000 310,000

Disposal

36,000

Accumulated Depreciation Disposal

26,000

Jan. 1, 2017 Depreciation Dec. 31, 2017

Cost of plant assets sold ................................. Accumulated depreciation (derived above) ... Net carrying amount ........................................ Gain on disposal .............................................. Cash proceeds from sale.................................

40,000 35,500 49,500

$36,000 26,000 10,000 5,000 $ 15,000

(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $80,800 – $141,000 + $15,000 = $(45,200) Taking It Further: A loss does not necessarily mean the company has a reduction in cash from operating activities. For example, a loss may be created (or increased) by noncash expenses such as deprecation which do not use cash. Or the company may have significant operating expenses which have not used cash because the company has not paid for the expenses yet, and has instead increased its liabilities. Finally, the company may be collecting its accounts receivables, which increases cash, but this will not increase profit.

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PROBLEM 17-7B KING CORP. Cash Flow Statement—Indirect Method Year Ended July 31, 2017

Operating activities Profit ................................................................................$106,500 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) .......................... $51,000 Gain on sale of land .................................. (30,000) Loss on sale of equipment (1).................. 6,000 Increase in accounts receivable .............. (14,000) Increase in inventory ................................ (12,000) Increase in prepaid expenses .................. (1,500) Decrease in accounts payable ................. (9,000) Increase in salaries payable .................... 2,700 Increase in income taxes payable............ 4,500 (2,300) Net cash provided by operating activities 104,200 Investing activities Sale of land (Note X) .................................... 55,000 Sale of equipment (1) .................................. 14,000 Purchase of land.......................................... (100,000) Purchase of equipment (1) .......................... (80,000) Net cash used by investing activities (111,000) Financing activities Sale of common shares............................... 35,000 Payments on mortgage note payable (2) ........(15,000) Net cash provided by financing activities

20,000

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PROBLEM 17-7B (Continued) Note X: Land was sold for $90,000 and the proceeds from the sale were cash of $55,000 and a note receivable for $35,000. (1) Transactions involving Equipment: Equipment Aug. 1, 2016 Purchases July 31, 2017

170,000 80,000 225,000

Disposal

25,000

Accumulated Depreciation—Equipment Disposal

5,000

Aug. 1, 2016 Depreciation July 31, 2017

35,000 51,000 81,000

Cost of equipment sold.................................... Carrying value – given ..................................... Accumulated depreciation...............................

$25,000 20,000 $ 5,000

Carrying value .................................................. Less: Cash proceeds from the sale ................ Loss on sale of equipment ..............................

$20,000 14,000 $ 6,000

14,000 5,000 6,000

(2) Beginning balance of mortgage note payable Less: Principal repayments during year Ending balance of mortgage note payable

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25,000

$ 80,000 15,000 $ 65,000

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PROBLEM 17-7B (Continued)

Taking It Further: A net cash inflow from financing activities can be either favourable or unfavourable. It is favourable if the company is acquiring financing through debt or issue of shares to finance production or acquire long-term assets. It is unfavourable when the company is seeking to generate cash it cannot obtain otherwise. When combined with low or negative cash from operating activities and cash inflows from investing activities, the company may be sacrificing long-term profitability for shortterm survival.

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PROBLEM 17-8B KING CORP. Cash Flow Statement—Direct Method Year Ended July 31, 2017 Operating activities Cash receipts From customers (1)....................... From interest (2) ............................

$913,250 3,500 $916,750

Cash payments To suppliers (3) ............................. $(573,750) For operating expenses (4)........... (188,800) For interest (5) ............................... (6,500) For income tax (6) ......................... (43,500) (812,550) Net cash provided by operating activities ............ 104,200 Investing activities Sale of land (Note X) .................................... $ 55,000 Sale of equipment (7) .................................. 14,000 Purchase of land.......................................... (100,000) Purchase of equipment (7) .......................... (80,000) Net cash used by investing activities (111,000) Financing activities Sale of common shares............................... 35,000 Payments on mortgage note payable (8) ........(15,000) Net cash provided by financing activities

20,000

Net increase in cash.......................................................... 13,200 Cash, Aug. 1, 2016............................................................. 11,000 Cash, July 31, 2017 ........................................................... $ 24,200 Note X: Land was sold for $90,000 and the proceeds from the sale were cash of $55,000 and a note receivable for $35,000.

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PROBLEM 17-8B (Continued) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash receipts from interest Interest revenue................................................... (3) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Add: Decrease in accounts payable ................. (4) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense (7) .......................... Add: Increase in prepaid expenses.................... Less: Increase in salaries payable ..................... (5) Cash payments for interest Interest expense .................................................. (6) Cash payments for income tax Income tax expense ............................................ Less: Increase in income taxes payable............

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$927,250 (14,000) $913,250 $3,500 $552,750 12,000 564,750 9,000 $573,750 $241,000 (51,000) 1,500 (2,700) $188,800 $6,500 $48,000 (4,500) $43,500

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PROBLEM 17-8B (Continued) Calculations: (Continued) (7) Transactions involving Equipment: Equipment Aug. 1, 2016 Purchases July 31, 2017

170,000 80,000 225,000

Disposal

25,000

Accumulated Depreciation—Equipment Disposal

5,000

Aug. 1, 2016 Depreciation July 31, 2017

Cost of equipment sold.................................... Carrying value – given ..................................... Accumulated depreciation...............................

35,000 51,000 81,000 $25,000 20,000 $ 5,000

(8) Beginning balance of mortgage note payable Less: Principal repayments during year Ending balance of mortgage note payable

$ 80,000 15,000 $ 65,000

Taking It Further: If King Corp. was reporting under IFRS instead of ASPE, the interest received could be also be classified as investing activities. As well, the interest paid could be classified as financing activities.

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PROBLEM 17-9B (a) WAYFARER INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $75,600 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ............................. $69,300 (1) Loss on sale of equipment ..................... 3,600 Increase in accounts receivable ............... (46,800) Increase in inventory................................ (111,600) Increase in accounts payable ..................... 40,500 Decrease in income tax payable ............ (3,600) (48,600) Net cash provided by operating activities ........ 27,000 Investing activities Acquisition of long-term investment ........... (176,400) Sale of equipment ........................................ 12,600 (2) Net cash used by investing activities....................... (163,800) Financing activities Issue of note payable ....................................... 90,000 Repayment of note payable .......................... (9,000) Net cash provided by financing activities ................ 81,000 Net decrease in cash ............................................................ (55,800) Cash, January 1 ................................................................. 176,400 Cash, December 31............................................................ $120,600 Note: Common shares were issued to purchase equipment costing $225,000.

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PROBLEM 17-9B (Continued) Calculations: (1) Depreciation expense Accumulated depreciation, end of year ................... $292,500 Plus: Accumulated depreciation of equipment 28,800 sold ($45,000 – $16,200)............................... Accumulated depreciation, beg. of year....... (252,000) Depreciation expense ............................................... $ 69,300 (2) Cash from sale of equipment Carrying amount of equipment.................................. $16,200 Less: Loss on sale .................................................... (3,600) Cash received ............................................................. $12,600

(b) WAYFARER INC. Cash Flow Statement (partial)– Direct Method Year Ended December 31, 2017

Operating activities Cash receipts From customers ........................... $1,090,800 (1) From interest ................................ 9,900 $1,100,700 Cash payments To suppliers ...................................... (843,300) (2) For operating expenses .................... (196,200) (3) For interest .................................... (5,400) For income tax............................... (28,800) (4) (1,073,700) Net cash provided by operating activities .............. 27,000

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PROBLEM 17-9B (Continued) Calculations: (1) Cash receipts from customers Sales ..........................................................................$1,137,600 Less: Increase in accounts receivable .................. (46,800) $1,090,800 (2) Cash payments to suppliers Cost of goods sold .............................................. $772,200 Add: Increase in inventory ............................... 111,600 Cost of goods purchased ................................... 883,800 Less: Increase in accounts payable.................. (40,500) $843,300 (3) Cash payments for operating expenses Operating expenses ............................................ $265,500 Less: Depreciation expense* .............................. (69,300) $196,200 (4) Cash payments for income tax Income tax expense ............................................ $25,200 Add: Decrease in income tax payable ............. 3,600 $28,800 (5) Cash from sale of equipment Carrying amount of equipment .................................... $16,200 Less: Loss on sale....................................................... (3,600) Cash received ............................................................... $12,600 *Depreciation expense Accumulated depreciation, end of year ................... $292,500 Plus: Accumulated depreciation of equipment sold ($45,000 – $16,200)................................. 28,800 Accumulated depreciation, beg. of year....... (252,000) Depreciation expense ............................................... $ 69,300

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PROBLEM 17-9B (Continued)

Taking It Further: The decrease in cash during the year has been caused primarily by the purchase of the long-term investment. Cash from operating activities yielded a positive amount although substantially less than profit. This could be cause for concern, in particular since a large portion of the difference is due to a large increase in inventory during the year. The purchase of a long-term investment may be cause for concern since the investment amount is large compared to the company’s balance sheet. The rationale for the purchase is important since the company may be setting aside funds for a future capital project.

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PROBLEM 17-10B (a) GALENTI INC. Cash Flow Statement—Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $90,310 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense ............................... $58,700 Gain on sale of equipment ........................... (8,750) Loss on sale of short-term investments ...... 7,500 Proceeds from sale of short-term investments, net of purchases ............ 5,000 (1) Increase in accounts receivable ................ (43,800) Increase in inventory.................................... (9,250) Decrease in prepaid expenses ..................... 6,000 Increase in accounts payable ....................... 8,420 Decrease in accrued expenses payable .. (6,730) 17,090 Net cash provided by operating activities ................ 107,400 Investing activities Sale of equipment ........................................ $15,550 (2) Purchase of equipment (Note X) .................... (71,000) Net cash used by investing activities........................ (55,450) Financing activities Sale of common shares .................................. $50,000 Retirement of note payable .............................(10,000) (3) Payment of cash dividends .............................(36,500) (4) Net cash provided by financing activities ............. 3,500 Net increase in cash......................................................... 55,450 Cash, January 1................................................................ 47,250 Cash, December 31 .......................................................... $102,700 Note X: During the year, the company acquired equipment with a cost of $141,000 by paying $71,000 cash and incurring a note payable.

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PROBLEM 17-10B (Continued) Calculations: (1) Short-term investments, end of year ........................ $94,500 Plus: Carrying value of investments sold ($15,000 + $7,500).......................................... 22,500 Less: Short-term investments, beginning of year .. (107,000) Payment for purchase of short-term investments ... $ 10,000 Proceeds from the sale of short-term investments . $ 15,000 Cash transactions involving short-term investments for the year shown net ($15,000 – $10,000) ... $5,000 (2)

Accumulated depreciation for equipment sold removed from accounts = $40,000 − ($49,500 − $58,700 depreciation expense) = $49,200 Carrying amount of equipment sold = Cost $56,000 − Accumulated depreciation $49,200 = $6,800 Cash proceeds = Carrying amount $6,800 + Gain on sale $8,750 = $15,550 Cash .......................................................... Accumulated Depreciation—Equipment Gain on Disposal ................................. Equipment ............................................

15,550 49,200

(3) Retirement of note payable Note payable, beginning of year............................... Note issued to purchase equipment ........................ Less: Note payable, end of year .............................. Retirement of note payable.......................................

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8,750 56,000

$ 80,000 70,000 (140,000) $ 10,000

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PROBLEM 17-10B (Continued) Calculations: (Continued) (4) Payment of cash dividends Retained earnings, beginning of year ........................$121,790 Add: Profit.................................................................. 90,310 Less: Retained earnings, end of year........................ (175,600) Dividends declared and paid .......................................$ 36,500 (b) GALENTI INC. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts From customers ........................... $263,700 (1) From trading investments .......... 5,000 $268,700 Cash payments To suppliers................................. $(100,290) (2) For operating expenses .............. (25,400) (3) For income tax............................. (32,670) For interest .................................. (2,940) (161,300) Net cash provided by operating activities ....... 107,400 Calculations: (1)

(2)

Cash receipts from customers Sales ............................................................ Less: Increase in accounts receivable .....

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$307,500 (43,800) $263,700 $ 99,460 9,250 108,710 (8,420) $100,290

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PROBLEM 17-10B (Continued) Calculations: (Continued) (3)

Cash payments for operating expenses Operating expenses ................................... Less: Decrease in prepaid expenses ....... Add: Decrease in accrued expenses payable

$24,670 (6,000) 6,730 $25,400

Taking It Further: Galenti’s management should consider investing excess cash in short-term investments that are low risk and easily liquidated to earn a return on the excess cash.

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PROBLEM 17-11B MILK RIVER LTD. Cash Flow Statement – Indirect Method Year Ended December 31, 2017

Operating activities Profit ................................................................................ $29,750 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense* ........................... $ 9,500 Gain on sale of equipment .................... (2,000) Impairment loss on goodwill ................. 11,000 Increase in accounts receivable ........... (8,000) Increase in inventory ............................. (13,000) Increase in accounts payable................ 3,000 Decrease in income taxes payable ....... (2,000) (1,500) Net cash provided by operating activities .............. 28,250 Investing activities Sale of equipment ............................................... 10,500 Purchase of equipment (Note X) ........................ (8,000) Net cash provided by investing activities 2,500 Financing activities Issue of common shares ................................. 4,000 Repayment of notes payable ** ....................... (26,750) Net cash used by financing activities ....................... (22,750) Net increase in cash ................................................................ 8,000 Cash, January 1 ................................................................... 5,000 Cash, December 31.............................................................. $13,000 Note X: During the year, the company acquired equipment with a cost of $24,000 by paying $8,000 cash and incurring a note payable of $16,000.

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PROBLEM 17-11B (Continued) *Depreciation expense Cost of equipment...................................................... $12,000 Accumulated depreciation (calculated) .................... (3,500) Carrying amount ....................................................... $ 8,500 Accumulated depreciation, beginning...................... $24,000 Less: depreciation for equipment sold..................... (3,500) Add: depreciation expense (calculated) ................... 9,500 Accumulated depreciation, ending ........................... $30,000 ** Repayment of note payable Notes payable, beginning ......................................... $52,750 Add: notes issued for purchase of equipment....... 16,000 68,750 Less: repayment of notes (calculated) .................... (26,750) Notes payable, ending .............................................. $42,000

Taking It Further: Purchases and sales of equipment should be shown separately. The usefulness of the information is enhanced by showing sources of cash from selling equipment separately from cash used to purchase equipment. Purchases of equipment indicate reinvestment in the productive capacity of the company; whereas, sales of equipment indicate disposal of old equipment and/or selling capital assets to generate cash. If the purchases and sales are netted, the detail of this type of information is lost.

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PROBLEM 17-12B MILK RIVER LTD. Cash Flow Statement – Direct Method Year Ended December 31, 2017

Cash flows from operating activities Cash receipts from customers (1) ... Cash payments To suppliers (2)............................. $(150,000) For operating expenses (3).......... (54,500) For interest ................................... (4,000) For income tax (4) ........................ (11,250) Net cash provided by operating activities

$248,000

(219,750) 28,250

Investing activities Sale of equipment ............................. 10,500 Purchase of equipment (Note X) ...... (8,000) Net cash provided by investing activities

2,500

Financing activities Issue of common shares .................. 4,000 Repayment of notes payable............ (26,750) Net cash used by financing activities

(22,750)

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

8,000 5,000 $ 13,000

Note X During the year, the company acquired equipment with a cost of $24,000 by paying $8,000 cash and incurring a note payable of $16,000.

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PROBLEM 17-12B (Continued) Calculations: (1)

Cash receipts from customers Sales ............................................................. Less: Increase in accounts receivable ....... Cash receipts from customers ....................

$256,000 (8,000) $248,000

(2) Cash payments to suppliers Cost of goods sold....................................... Add: Increase in inventory ......................... Cost of goods purchased ............................ Less: Increase in accounts payable .......... Cash payments to suppliers .......................

$140,000 13,000 153,000 (3,000) $150,000

(3) Cash payments for operating expenses Accumulated depreciation, beginning........ Less: depreciation for equipment sold....... Add: depreciation expense ......................... Accumulated depreciation, ending .............

$24,000 (3,500) 9,500 $30,000

Operating expenses ..................................... Less: Depreciation expense ...................... Cash payments for operating expenses.....

$64,000 (9,500) $54,500

(4) Cash payments for income tax Income tax expense ..................................... Add: Decrease in income tax payable ........ Cash payments for income tax ...................

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$ 9,250 2,000 $11,250

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PROBLEM 17-12B (Continued)

Taking It Further: Payments for purchases of equipment need to be shown as uses of cash in the investing activities section. If equipment is purchased, but financed with debt or shares, there is no cash flow involved. These transactions can be omitted from the cash flow statement since they did not affect the company’s cash position. Users still need to reconcile the changes in equipment, debt, and share capital. Noncash transactions are, therefore disclosed, in the notes to the financial statements.

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PROBLEM 17-13B (a)

Net cash provided (used) by operating activities − net cash (provided) used by investing activities = free cash flow ($ in U.S. millions) The Gap: $2,129 − $596 = $1,533 lululemon: $314 - $120 = $194

(b)

The Gap appears to be in the stronger financial position. It generates strong cash from operating activities to expand and invest as well as repay debt.

Taking it Further: Due to the differing sizes of the two businesses being compared, it is difficult to assess if either are growing or downsizing. Neither business appears to be downsizing. Both have substantial amounts of cash and cash equivalents at the end of the year compared to their profit earned for the year.

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BYP17-1 FINANCIAL REPORTING PROBLEM (a)

For the purpose of its cash flow statement, Corus uses cash and cash equivalents, which consist of cash and short-term deposits with maturities of less than three months at the date of purchase.

(b) Per Corus’ 2014 cash flow statement, cash and cash equivalents decreased by $69,681,000. (c)

The one significant investing activity reported in Corus’ cash flow statement was a business combination in the amount of $497,393,000 involving Teletoon Canada Inc.

(d) The most significant financing activity on Corus’ cash flow statement was the increase in bank loans in the amount of $333,243,000. (e)

As indicated by note 24 to the financial statements, Corus had no significant noncash investing and financing activities in 2014.

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BYP17-2 INTERPRETING FINANCIAL STATEMENTS (a)

Cash from operating activities Cash used in investing activities Cash from financing activities Increase in cash for the year

$25.0 (11.1) (13.9) $ 0

(b) Andrew Peller Limited’s creditors should not be too worried about the absence of cash on the balance sheet. This is a perfectly normal situation for a large number of businesses who use operating lines of credit instead of cash to deal with the cash demands of day-to-day operations. The company generated far less ($13.3 million) in cash from operating activities in 2013. The fact that operating activities are generating a significant greater amount cash flow from operations in 2014 means there is less cause for concern. (c) The profit for the year was calculated using accrual accounting. Increases in noncash current assets and decreases in noncash current liabilities can result in cash provided from operations that is higher than the amount of profit reported in the income statement. As well, profit is calculated using some expenses, which do not involve cash, such as depreciation expense. (d) Free Cash Flow = Cash provided by operating activities − Cash used in investing activities = $25.0 million − $11.1 million = $13.9 million Free cash flow indicates the amount of discretionary cash flow that Andrew Peller Limited has at its disposal. In this case, free cash flow is equal to the net cash outflows for financing activities for the 2014 fiscal year.

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BYP17-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

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BYP 17-4 COMMUNICATION ACTIVITY MEMO To:

Investors

From:

Accountant

Re:

Cash flow statement

It is more difficult to manipulate cash-based data than accrualbased data, but it is not impossible. It is possible to manipulate cash flows from operating activities by reclassifying operating cash flows as investing or financing activities. As well, it is possible to manipulate cash balances. For example, management could delay payment of accounts payable. This would improve operating cash flows from operating activities. Which statement provides a better measure of the company’s performance will depend upon the investor. For example, shareholders investing in the company’s common shares for the long-term will find the accrual-based income statement more useful as it provides a better indication of the long-term profitability of the company. Short-term creditors will find the cash flow statement more useful as it provides a better indication of the company’s ability to generate cash and repay its current obligations. The cash flow statement can sometimes provide an early warning of liquidity or solvency problems.

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BYP17-5 “ALL ABOUT YOU” ACTIVITY (a)

Your cash position at August 31, 2017 is close to half of the cash you had at September 1, 2016. If you were to maintain the same spending patterns over the next year you could be completely out of cash by August 31, 2017.

(b) My Cash Flow Statement Year Ended August 31, 2018 Operating activities Cash received from summer job Cash contribution from parents Cash paid for rent, utilities, cable, Internet Cash paid for groceries Cash paid for clothes Cash paid for gas, insurance, parking Cash paid for miscellaneous Cash paid for interest on credit card Cash used in operating activities Investing activities Tuition and books Laptop and printer Cash used in investing activities

2017

$ 8,000 4,000 (4,000) (3,600) (3,000) (4,600) (500) 0 (3,700)

$ 8,000 3,600 (4,000) (3,200) (3,000) (4,420) (500) (180) (3,700)

(7,500)

(7,000) (1,200) (8,200)

(7,500)

Financing activities Student loan Loan from parents Repayment of credit card Purchases on credit card Cash provided from financing activities Decrease in cash Cash, September 1 Cash, August 31 Solutions Manual .

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7,500

7,500 1,500

(1,000) 6,500

1,000 10,000

(4,700) 2,100 $(2,600)

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BYP17-5 (Continued) (c)

The projected cash flow statement indicates that without any additional loans from your parents, you will have a cash deficiency of $2,600.

(d) The projected cash flow statement and the resulting ending cash deficiency indicate that you will need to borrow the additional $1,500 from your parents. (e)

Unless there are reductions in the level of spending, it is not realistic at this time to expect that you will be able to pay off your credit card debt immediately. This means that additional interest charges will have to be added to a revised projected cash flow statement.

(f)

Actions to improve your cash flow could include: 1. Getting a part-time job while at school. 2. Curtailing some expenses, particularly those that are somewhat discretionary, such as clothes. 3. Taking the bus instead of using a car.

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BYP17-6 Santé Smoothie Saga Santé Smoothies & Sweets Ltd. Year Ended May 31, 2018

(a)

Cash provided by operating activities Cash used by investing activities Cash (used) provided by financing activities Increase in cash Cash at the end of the year Cash at the beginning of the year

Net cash provided by operating activities Net cash (used) by investing activities Free cash flow

(c)

$235,279 (157,833)

$1,137,650 (4,545,728)

(37,071) 40,375 199,443 $ 159,068

7,406,647 3,998,569 4,469,552 $ 470,983

Santé Smoothies & Sweets Ltd. Year Ended May 31, 2018

(b)

Coffee Beans Ltd. Year Ended December 31, 2017

$235,279 (157,833) $ 77,446

Coffee Beans Ltd. Year Ended December 31, 2017

$1,137,650 (4,545,728) $(3,408,078)

Santé’s and Coffee Bean’s cash performance, although not similar, are both very strong. Santé’s cash provided by operating activities exceeds cash used in investing activities by 49%. In comparison, Coffee Beans’ cash used in investing activities exceed cash obtained from operating activities by 300%. On the other hand, Coffee Beans was able to obtain cash from financing activities 63% greater than the amount of the cash used in investing activities. The financing activities of Santé were modest in comparison.

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BYP17-6 (Continued) (c) (Continued) Coffee Beans’ long-term liabilities increased by close to $3.2 million in 2017 from 2016. At the same time the cash provided from financing activities totalled $7.4 million. This means there has been a substantial equity or debt investment into Coffee Beans in the last year. In spite of that, no dividends were paid during the year. It appears that with its strong cash position Coffee Beans is in a good position to expand and diversify. (d)

Santé is a profitable company that generated $235,279 cash from operations which was greater than the profit reported by the company. The cash generated from operating activities was more than the amount required for both investing activities and financing activities. While meeting its investing requirements Santé was able to pay a dividend of $120,000 to its shareholders and still increase its cash. Investing in Santé will provide Coffee Beans the opportunity to diversify while increasing the company’s cash flow.

(e)

Before selling shares and/or becoming employed by Coffee Beans Ltd., the Koebels should obtain a full set of financial statements. The financial statements and accompanying notes to the financial statements might give some insights as to what were the main activities and transactions that lead to such a substantial increase in cash and debt, yet only marginally improved profit performance. If the Koebels sell their business, they should insist on getting paid in cash instead of in shares of Coffee Beans, as their share ownership in the combined business would be far too small to have any meaningful influence over the whole operations. Given the fact that no dividends were paid by Coffee Beans in the past two years, it would be difficult for the Koebel’s to get a return on their investment as shareholders.

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Accounting Principles, Seventh Canadian Edition

CHAPTER 18 Financial Statement Analysis ASSIGNMENT CLASSIFICATION TABLE Exercises

1, 2, 3

Brief Exercises 1, 2

Problems Set A 2, 5, 7

Problems Set B 2, 5, 7

2. Explain and apply horizontal analysis.

3, 4, 5

1, 2, 4

1, 3

3. Explain and apply vertical analysis.

5, 6, 7

6, 7

3, 4, 5

2, 3

4. Identify and use ratios to analyze liquidity.

8, 9, 10, 11, 17

6, 7, 8, 9, 15, 16, 17, 18

4, 5, 6, 7, 8, 9, 10, 11

5. Identify and use ratios to analyze solvency.

12, 13, 14, 17

6. Identify and use ratios to analyze profitability.

15, 16, 17

4, 5, 6, 7, 8, 9, 10, 11 2, 4, 5, 6, 7, 8, 9, 10, 11

18, 19, 20

10, 11, 15, 16, 17, 18 12, 13, 14, 15, 16, 17, 18, 19 19

4, 5, 6, 7, 8, 9, 10, 11 2, 4, 5, 6, 7, 8, 9, 10, 11

7. Recognize the limitations of financial statement analysis.

8, 9, 10, 11, 19, 20, 21, 22 12, 13, 14, 19, 20 15, 16, 17, 18, 19, 20, 21 22

1, 3, 8

Learning Objectives

Questions

1. Identify the need for, and tools of, financial analysis.

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare horizontal analysis and identify changes.

Moderate

25-35

Prepare vertical analysis, calculate profitability ratios, and compare.

Moderate

45-55

Interpret horizontal and vertical analysis.

Moderate

25-30

Calculate ratios.

Moderate

45-55

Calculate and evaluate ratios.

Moderate

45-55

Calculate ratios.

Moderate

45-55

Calculate and evaluate ratios.

Moderate

50-60

Calculate and evaluate ratios.

Moderate

50-60

Evaluate ratios.

Moderate

25-35

10A

Evaluate ratios.

Simple

20-25

11A

Calculate missing information.

Complex

25-35

Prepare horizontal analysis and identify changes.

Moderate

25-35

Prepare vertical analysis, calculate profitability ratios, and compare.

Moderate

45-55

Interpret horizontal and vertical analysis.

Moderate

25-30

Calculate ratios.

Moderate

45-55

Calculate and evaluate ratios.

Moderate

45-55

Calculate ratios.

Moderate

45-55

Calculate and evaluate ratios.

Moderate

50-60

Calculate and evaluate ratios.

Moderate

50-60

Evaluate ratios.

Moderate

25-35

10B

Evaluate ratios.

Simple

20-25

11B

Calculate missing information.

Complex

25-35

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objectives Identify the need for, and tools of, financial analysis. 2. Explain and apply horizontal analysis.

Knowledge Comprehension Q18-1 Q18-2 BE18-1 Q18-3 BE18-2 E18-15

Application P18-2A P18-2B

Analysis P18-5A P18-7A P18-5B P18-7B

Q18-4

Q18-5

BE18-3 BE18-4 BE18-5 E18-1

E18-2 E18-4 P18-1A P18-3A

P18-1B P18-3B

Explain and apply vertical analysis.

Q18-6

Q18-5 Q18-7

E18-4 E18-5

P18-3A P18-3B

Identify and use ratios to analyze liquidity.

Q18-8 Q18-10 BE18-16 BE18-19

Q18-11 Q18-17 BE18-8 BE18-20 BE18-21 E18-14

BE18-6 BE18-7 E18-3 P18-2A P18-2B BE18-10 BE18-11 E18-7 E18-17 P18-4A P18-6A P18-4B P18-6B

Q18-9 BE18-22 E18-6 E18-8 E18-9 E18-15 E18-16 E18-18 P18-5A P18-7A

P18-8A P18-9A P18-10A P18-11A P18-5B P18-7B P18-8B P18-9B P18-10B P18-11B

Identify and use ratios to analyze solvency.

Q18-12 BE18-19

Q18-13 Q18-14 Q18-17 BE18-12 BE18-20 E18-14

BE18-13 E18-10 E18-17 P18-4A P18-6A P18-4B P18-6B

BE18-14 E18-11 E18-16 E18-18 P18-5A P18-7A P18-8A P18-9A

P18-10A P18-11A P18-5B P18-7B P18-8B P18-9B P18-10B P18-11B

Identify and use ratios to analyze profitability.

Q18-15 Q18-16 BE18-19

Q18-17 Q18-19 BE18-15 BE18-20 BE18-21

BE18-16 BE18-17 E18-12 E18-13 E18-17 P18-2A P18-4A P18-6A P18-4B P18-6B

Q18-17 Q18-18 BE18-18 E18-14 E18-16 E18-18 E18-19 P18-3A P18-5A P18-7A P18-8A

P18-9A P18-10A P18-11A P18-3B P18-5B P18-7B P18-8B P18-9B P18-10B P18-11B

Recognize the limitations of financial statement analysis.

Q18-19 BE18-22 E18-19 P18-1A P18-3A

P18-8A P18-1B P18-3B P18-8B

BYP18-1 BYP18-2 BYP18-3

BYP18-6

Broadening Your Perspective

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Q18-18 Q18-20

BYP18-4

BYP18-5

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Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

Short-term creditors and long-term creditors are interested in short-term liquidity and long-term solvency of a company. They look at the ability of the lender to pay obligations when they become due. On the other hand, the primary focus of shareholders is the company’s profitability to assess the likelihood of dividends and growth potential of the share price.

(a) An intracompany basis of comparison compares the same item with prior periods, or with other financial items in the same period, for one company. A store may compare this year’s sales to last year’s sales, for example. (b) An intercompany basis of comparison compares the same item with one or more other company’s financial statements. A store may compare its current year’s sales with another company’s sales for the same period, for example. The intercompany basis of comparison can provide insight into a company's competitive position in relation to other companies.

The three common tools used in analysis are: horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis is used mainly in intracompany comparisons. Vertical analysis is used in both intra- and intercompany comparisons. Ratio analysis can be used in both types of comparisons.

The percentage change for a base year is the amount for the period in question divided by the base-year amount, and the result is multiplied by 100 to express the answer as a percentage. For the calculation of the percentage change for a period, the previous period amount is subtracted from the current period amount. The result is divided by the amount from the previous period and then multiplied by 100 to express the answer as a percentage.

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 financial statement is compared with the amount of that same item on one or more earlier financial statements. Vertical analysis (also called common size analysis) expresses each item within a financial statement in terms of a percent of a relevant total or other common basis within the same statement, for the same time period. Horizontal and vertical analysis differ in that horizontal analysis compares data across more than one year, while vertical analysis compares data within the same year. Horizontal and vertical analyses are similar in that they both use percentages to demonstrate numerical relationships.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 6.

(a) On a balance sheet, total assets and total liabilities plus shareholders’ equity are both assigned a value of 100%. (b) On an income statement, the figure for net sales or revenue is assigned a value of 100%.

Yes, it can. By converting the accounting numbers to percentages, companies of vastly different sizes can be more readily compared.

(a) Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. (b) Short-term creditors such as suppliers would be the type of users who would be most interested in liquidity ratios.

A high current ratio might be hiding liquidity problems with regards to inventory or accounts receivable. For example, a high level of inventory will cause the current ratio to increase. Increases in inventory can be due to the fact that 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.

10.

The difference between the current ratio and acid-test ratio is that the current ratio includes inventory, prepayments, and supplies in the assets for the numerator, while the acid-test ratio does not.

11.

From the list of liquidity ratios given in the textbook, three ratios provide a calculation where a lower result is considered a better result. The three ratios include the collection period, days sales in inventory, and the operating cycle. The operating cycle adds the number of days for the collection period and the number of days sales in inventory. The fewer the number of days in the cycle, the better off the business can be from the point of view of liquidity.

12.

(a) Solvency ratios measure the ability of the company to survive over a long period of time and be able to pay off all of its debt. (b) Long-term lenders such as banks, mortgage companies, and leasing companies would be the most interested users of solvency ratios.

13.

Wong’s solvency is better than that of its competitor. It is carrying a slightly lower percentage of debt than its competitor (37% versus 39%) and has a higher interest coverage ratio (3 versus 2.5).

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 14.

One of the solvency ratios, the debt to total assets ratio, generates a percentage which, when the result is low, it is interpreted as a desired result. Since fewer of the business’ assets are financed with debt and instead financed with equity, the business is not burdened to service the debt and meet the deadlines for repayments on large amounts of debt.

15.

(a) Profitability ratios measure the profit or operating success of a company for a specific period of time. (b) Shareholders and potential investors would be most interested in profitability ratios.

16.

Investors have a higher expectation of future earnings from Microsoft than from General Motors. Investors favour Microsoft, which has a higher earnings multiple in its price-earnings ratio.

17.

(a) Asset turnover (b) Acid-test ratio (c) Operating cycle (d) Return on equity (e) Interest coverage

18.

Alternative accounting policies. Differences in accounting policies can make intercompany comparisons difficult and misleading.

Other comprehensive income. Other comprehensive income, if significant, should not be ignored in financial analysis yet few, if any, ratios include it.

Quality of information. The information used for financial analysis is only good if it is of high quality— relevant, transparent, and easily understood.

Economic factors. It is important to understand the impact of the economy on the financial results and to separate, where possible, changes resulting from general economic conditions and those resulting from management influences.

19.

McCain Foods has chosen to adopt IFRS, although this adoption was not mandatory. McCain Foods’ management likely wishes to report financial results which have been prepared using the accounting policies that are consistent with its global competitors. Cavendish, on the other hand, might not perceive any additional benefit in adopting IFRS and so it chooses to follows ASPE as do the vast majority of private companies. Certain accounting policies differ under ASPE and IFRS, which may lead to distortions for comparative purposes.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 20.

Other comprehensive income is the gains and losses that are not included in profit, but still affect shareholders’ equity. Other comprehensive income is added to profit to determine comprehensive income. Most financial analysis ratios exclude other comprehensive income. For example, profitability ratios generally use data from the income statement and not the statement of comprehensive income. In fact, there are no standard ratio formulas incorporating comprehensive income. In cases where other comprehensive income is significant, and depending on the source of the income, some analysts will adjust profitability ratios to incorporate the effect of total comprehensive income.

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18-1 1. 2. 3. 4. 5.

Intracompany Intercompany Horizontal analysis Vertical analysis Ratio analysis

(e) (c) (d) (b) (a)

BRIEF EXERCISE 18-2 (a) Analysis of a company's dividend history (b) Comparison of differentsized companies (c) Comparison of gross profit to net sales among competitors (d) Calculation of a company’s sales growth over time

Basis of Comparison

Tool of Analysis

intracompany

horizontal

intercompany

vertical

intercompany

vertical

intracompany

horizontal

BRIEF EXERCISE 18-3 Cash Accounts receivable Inventory Prepaid expenses Total current assets

Solutions Manual .

2017 120%

2016 225%

2015 150%

2014 100%

179% 154% 100% 157%

151% 148% 0% 146%

131% 122% 45% 122%

100% 100% 100% 100%

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BRIEF EXERCISE 18-4 2017 (47%) 18% 4% n/a 8%

2016 50% 15% 22% (100%) 19%

2015 50% 31% 22% (55%) 22%

2017

2016

Change

as a %

(a) Net Income

$450,000

$500,000

$(50,000)

-10%

(b) Net Income

2018 $522,000

2017 $450,000

Change $72,000

as a % 16%

Cash Accounts receivable Inventory Prepaid expenses Total current assets

BRIEF EXERCISE 18-5

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BRIEF EXERCISE 18-6 2017 Current assets Property, plant, and equipment Goodwill Total assets

Amount $1,530,000 3,130,000

Percentage 32.8% 67.0%

10,000 $4,670,000

0.2% 100.0% 2016

Current assets Property, plant, and equipment Goodwill Total assets

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Amount $1,175,000

Percentage 28.9%

2,800,000 90,000 $4,065,000

68.9% 2.2% 100.0%

2015 Amount Percentage $1,225,000 30.1% 2,850,000 $4,075,000

69.9% 0.0% 100.0%

Chapter 18

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-7 Income Statement Amount Percent $1,934 100.0% 1,612 83.4% 322 16.6% 218 11.3% 104 5.4% 31 1.6% $ 73 3.8%

Net sales Cost of goods sold Gross profit Operating expenses Profit before income tax Income tax expense Profit

Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place.

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Chapter 18

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-8 (a)

Deterioration: A decrease in the receivables turnover would be viewed as deterioration. It is taking longer to collect the accounts receivable.

(b) Improvement: A decrease in the collection period would be viewed as an improvement. It takes fewer days to collect accounts receivable. (c)

Deterioration: The increase in the days sales in inventory would be viewed as deterioration. It is taking the company longer to sell the inventory and consequently there is a greater chance of inventory obsolescence, delays in obtaining cash inflows, and higher carrying costs.

(d) Improvement: An increase in the inventory turnover would be viewed as an improvement. It takes fewer days to sell inventory. (e)

Deterioration: A decrease in the acid-test ratio would be viewed as deterioration because the company has fewer liquid assets to pay off liabilities in the very near future.

(f)

Deterioration: An increase in the operating cycle would be viewed as deterioration because it is taking longer for the business to purchase inventory, sell it on account, and collect the cash.

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Chapter 18

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-9 1.

(a) Current ratio

Acid-test ratio

$40,918,000 $18,644,000

$8,041,000 + $4,947,000 + $6,545,000 $18,644,000

2.2

1.05

(b) Underwood’s current ratio is a little more than the recommended 2:1. Given the steep decline in the acid-test ratio, it appears a large portion of its liquidity is tied up in inventory. If they have an issue with slow moving inventory, the acid-test ratio indicates they may run into liquidity issues.

BRIEF EXERCISE 18-10 (a) 2017 Receivables (1) turnover Collection (2) period

$3,960,000 [($550,000 + $520,000) ÷ 2]

7.4

times

7.4

49.3

days

$3,100,000 [($520,000 + $480,000) ÷ 2]

6.2

times

58.9

days

365

2016 Receivables (1) turnover Collection (2) period

365

6.2

(b) The management of accounts receivable has improved substantially by decreasing the collection period by almost ten days.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-11 (a) Beginning Inventory Purchases Ending Inventory Cost of Goods Sold

(1)

Inventory turnover

365 ÷

4.3

2016 $4,581,000 = = ($860,000 + $940,000) ÷ 2

(2) Days sales in = inventory

(b)

2016 $860,000 4,661,000 (940,000) $4,581,000

2017 $4,260,000 = = ($940,000 + $1,020,000)÷2

(2) Days sales = in inventory

(1)

2017 $940,000 4,340,000 (1,020,000) $4,260,000

365 ÷

5.1

4.3

times

days

5.1

times

days

The management of inventory is deteriorating as days sales in inventory has increased by almost two weeks.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-12 (a)

Improvement: The decrease in debt to total assets would be viewed as an improvement because it means that the company has reduced its obligations to creditors and has raised its equity "buffer."

(b) Deterioration: A decrease in interest coverage would be viewed as deterioration because it means that the company's ability to meet interest payments as they come due has weakened. (c)

Improvement: An increase in free cash flow would be viewed as an improvement because it means that the company has more flexibility in using cash for capital expenditures.

(d) Improvements: A decrease in debt to total assets combined with an increase in interest coverage would be viewed as improvements because the company has reduced its obligations to creditors, has raised its equity "buffer,” and the company's ability to meet interest payments as they come due has strengthened.

BRIEF EXERCISE 18-13 ($ in thousands) Debt to (a) total assets

Interest (b) coverage =

$960,358 $1,700,838 $422,561*

56.5%

21.2 times

$19,956 *$422,561 = $295,410 + $19,956 + $107,195

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-14 (a)

The debt to total assets ratio for Culleye Corporation has deteriorated, because there is proportionately more debt compared to total assets than there was in 2016. Culleye’s interest coverage ratio has improved. The business can pay its interest expense more times in 2017 than it could in 2016.

(b) While interest coverage is important, it is a reflection of a single year’s performance. On the other hand, debt, especially non-current debt carries over from year to year. The improvement in the interest coverage ratio is overshadowed by the deterioration in the debt to total assets ratio. Consequently, the overall solvency of Culleye has deteriorated in 2017.

BRIEF EXERCISE 18-15 (a)

Improvement: An increase in the gross profit margin would be viewed as an improvement because it means that a greater percentage of net sales is going towards profit.

(b) Deterioration: A decrease in asset turnover would be viewed as deterioration because it means the company has become less efficient at using its assets to generate sales. (c)

Improvement: An increase in the return on equity would be viewed as an improvement because it means more profit was generated per dollar of equity investment.

(d) Deterioration: A decrease in earnings per share would be viewed as deterioration because the profit for each share is a smaller amount. (e)

Deterioration: A decrease in profit margin would be viewed as deterioration because there is less profit as a percentage of net sales compared to the previous year.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-16 ($ in millions) (a) 2014 (1) Gross profit margin (2)

Profit margin

$53

= 24.8%

= 0.12%

$42,611

2013 (1) Gross profit margin (2)

$42,611 – $32,063 $42,611

Profit Margin

= =

$32,371 – $24,701 $32,371 $627 $32,371

= 23.7% 1.9%

(b) While gross profit improved slightly, the profit margin decreased to close to nil. The 2014 performance indicates that operating costs appeared to have increased.

BRIEF EXERCISE 18-17 Asset (a) turnover Return on (b) assets

$750,000

1.4

times

$550,000* =

$60,000 $550,000

10.9%

$60,000 $380,000**

15.8%

Return on (c) equity

*Average total assets ($600,000 + $500,000) ÷ 2 =$550,000 **Average shareholders’ equity ($450,000 + $310,000) ÷ 2 = $380,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-18 Ignoring all other factors, if an investor wants to purchase shares for growth, Apple would be the better choice of the two as indicated by the higher price-earnings ratio. Although Apple pays out a lower percentage of profits as dividends, it is viewed to have more future earnings potential than Chevron since Apple has a higher price-earnings ratio. If instead, the investor is looking for income, Chevron, an oil company, would be a better choice since it pays close to 40% of its profits as dividends. In addition, Chevron is considered a less risky investment as it has a lower price-earnings ratio.

BRIEF EXERCISE 18-19 Ratio Acid-test Asset turnover Collection period Debt to total assets Gross profit margin Interest coverage Inventory turnover Operating cycle Profit margin Return on equity

(a) Classification L P L S P S L L P P

(b) Direction Higher Higher Lower Lower Higher Higher Higher Lower Higher Higher

BRIEF EXERCISE 18-20 (a) (b) (c) (d) (e)

Asset turnover Acid-test ratio Operating cycle Return on equity Interest coverage

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-21 (a)

2017

Average accounts receivable

$1,090 + $965 2

= $1,027.50

2016

Average accounts receivable

$965 + $880 2

2017

Average total assets

$27,510 + $26,760 2

2016

Average total assets

$26,760 + $23,815 = $25,287.50 2

2017

Average shareholders' equity

2016

Average shareholders' equity

$922.50

= $27,135.00

$12,830 + $12,575 2

$12,702.50

$11,752.50

$12,575 + $10,930 2

(b)

The averages calculated in part (a) could be used in the following ratios: 1. Receivables turnover 2. Asset turnover 3. Return on assets 4. Return on equity

(c)

Averages are used in certain ratio calculations. When a figure from the income statement is compared with a figure from the balance sheet in a ratio, the balance sheet figure is averaged by adding together the beginning and ending balances and dividing them by 2. That is because income statement figures cover a period of time (i.e., a year) and balance sheet figures are at a point in time—in this case, the beginning and the end of the year. Comparisons of end-ofperiod figures with end-of-period figures, or period figures with period figures, do not require averaging.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 18-22 (a) Stirling Corporation $200,000 Inventory = = 20 turnover $10,000

Inventory turnover

Bute Inc. $180,000 $12,000

times

(b) In times of falling prices, FIFO will result in a higher cost of goods sold than if the average cost formula were used. As well, the ending inventory under FIFO will be based on the newest inventory purchased at the lower price. This could result in the inventory turnover ratio being higher simply because of the choice of the FIFO cost formula, all other factors being equal. Without converting the inventory turnover ratio to the same cost formula, or fully understanding the effects of the different cost formulas on this ratio, a true comparison of inventory turnover could be difficult.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 18-1 DRESSAIRE INC. Balance Sheet

Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings (a) Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings (b) Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings

Solutions Manual .

2017 $120,000 400,000 90,000

2016 $ 80,000 350,000 70,000

2015 $100,000 300,000 65,000

145,000 150,000 135,000

125,000 115,000 120,000

150,000 100,000 85,000

2017 120%

2016 80%

2015 100%

133%

117%

100%

138%

108%

100%

97% 150% 159%

83% 115% 141%

100% 100% 100%

2017

2016

50% 14% 29%

(20%) 17% 8%

16% 30% 13%

(17%) 15% 41%

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EXERCISE 18-2 Net sales increased by 10% in 2016 but then fell back within 1% of the level of net sales of 2015. Cost of goods sold had essentially the same trend as net sales over the three-year period. Operating expenses grew by a larger percentage in 2016 than sales but declined in 2017 below the 2015 level. This means that operating expenses were brought under control in 2017, compared to sales, as they should not rise at a faster rate than sales. As a result, profit from operations (sales less cost of goods sold less operating expenses) also increased over the three-year period. Income tax expense increased faster than sales over the total of the three years. However, many factors can affect income tax that are beyond the control of the company and it is hard to draw any further interpretations from this change. Given that profit from operations has grown, we can conclude that profit likely increased as well, despite the increase in income tax expense, which is a fraction of income before income tax. It may help to make up numbers to better understand the direction of the changes over the three years. One possible set of hypothetical numbers follows. Note that the percentages are taken from the text; the subtotals and 2016 and 2017 numbers are calculated based on the hypothetical numbers from 2015 and the percentages. Net sales Cost of goods sold Gross profit Operating expenses Profit from operations and before income tax Income tax expense Profit

2017 101% $2,020 100% 1,200 820 99% 495 325

2016 110% $2,200 111% 1,332 868 112% 560 308

2015 100% $2,000 100% 1,200 800 100% 500 300

106%

105%

100%

48 $ 277

47 $ 261

45 $ 255

It would be possible to show that profit could go down, but it would take assumptions like extremely high tax rates and low operating costs to arrive at such a result.

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EXERCISE 18-3 FLEETWOOD CORPORATION Income Statement Year Ended December 31

Sales Cost of goods sold Gross profit Operating expenses Profit before income tax Income tax expense Profit

2017 Amount Percent $800,000 100.0% 550,000 68.8% 250,000 31.3% 175,000 21.9% 75,000 18,750 $ 56,250

9.4% 2.3% 7.0%

2016 Amount Percent $600,000 100.0% 375,000 62.5% 225,000 37.5% 125,000 20.8% 100,000 25,000 $ 75,000

16.7% 4.2% 12.5%

Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 18-4 (a) BLACKBERRY LIMITED Balance Sheet February 28, 2015 and March 1, 2014 (in U.S. millions)

Assets Current assets Non-current assets Total assets Liabilities and Shareholders' Equity Current liabilities Non-current liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity

Solutions Manual .

Increase (Decrease) Amount Percent

2015

2014

$4,167 2,382 $6,549

$4,848 2,704 $7,552

$(681) (322) $(1,003)

-14.0% -11.9% -13.3%

$1,363 1,755 3,118 3,431

$2,268 1,659 3,927 3,625

$ (905) 96 (809) (194)

-39.9% 5.8% -20.6% -5.4%

$6,549

$7,552

$(1,003)

-13.3%

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EXERCISE 18-4 (Continued) (b) BLACKBERRY LIMITED Balance Sheet February 28, 2015 and March 1, 2014 (in U.S. millions)

(c)

2015 Amount Percent $4,167 63.6% 2,382 36.4% $6,549 100.0%

2014 Amount $4,848 2,704 $7,552

Percent 64.2% 35.8% 100.0%

$1,363

20.8%

$2,268

30.0%

1,755 3,118 3,431

26.8% 47.6% 52.4%

1,659 3,927 3,625

22.0% 52.0% 48.0%

$6,549

100.0%

$7,552

100.0%

The two most significant changes from 2014 to 2015 include the proportion of the business that is financed with debt compared to equity, and the decrease in current liabilities. While debt made up 52% of the financing in 2014, the percentage declined to 47.6% in 2015. The decline in current liabilities makes up most of the total decline in liabilities and shareholders’ equity. There were corresponding large decreases in current assets in 2015, but the liquidity of the business remained in a strong position.

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EXERCISE 18-5 If we make the assumption that there are no other factors impacting the income statement than those stated in the data provided, then we can determine the vertical percentage of profit for each year as follows: 2017: 100.0% – 59.4% – 19.6% – 4.2% = 16.8% 2016: 100.0% – 60.5% – 20.4% – 3.8% = 15.3% 2015: 100.0% – 60.0% – 20.0% – 4.0% = 16.0% It would appear that profit declined as a percentage of net sales between 2015 and 2016, and increased from 2016 to 2017.

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EXERCISE 18-6 (a) (1) and (2) Receivables turnover Collection period

Receivables turnover Collection period

2017 $6,420,000 = = ($850,000 + $750,000) ÷ 2 =

365 ÷

8.0

2016 $6,240,000 = = ($750,000 + $650,000) ÷ 2 =

365 ÷

8.9

8.0

times

days

8.9

times

days

4.5

times

days

5.0

times

days

(3) and (4)

Inventory turnover

2017 $4,540,000 = = ($1,020,000 + $980,000)÷2

Days sales in = inventory

Inventory turnover

365 ÷

4.5

2016 $4,550,000 = = ($980,000 + $840,000) ÷ 2

Days sales in = inventory

365 ÷

5.0

(5) Operating cycle = Days sales in inventory + Collection period 2017: 127 days = 81 days + 46 days 2016: 114 days = 73 days + 41 days Solutions Manual .

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EXERCISE 18-6 (Continued) (b) Management should be concerned with the fact that inventory is moving more slowly in 2017 than it did in 2016, by an extra 8 (81 – 73) days. As for receivables turnover, it is taking an extra 5 (46 – 41) days to collect accounts. Taken together, the company’s operating cycle has increased (deteriorated) by 13 (127 – 114) days in 2017. The decrease in the receivables turnover ratio could be caused by taking on bad credit risks or because less attention is being paid to collecting accounts. The decrease in inventory turnover may be because of poor pricing decisions or because the company has obsolete inventory. Or the company may have decided to increase the amount of inventory that is kept on hand. Management needs to review and address each of these.

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EXERCISE 18-7 ($ in millions) (a) 2017

2016

Current ratio = 1.30:1 ($2,465  $1,890)

= 1.59:1 ($1,314  $825)

Acid-test ratio = 0.81:1 [($795 + $55 + $676)  $1,890]

= 0.89:1 [($91 + $60 + $586)  $825]

Receivables turnover = 13.1 times ($8,258  [($676 + $586) ÷ 2])

= 7.3 times ($3,940  [($586 + $496) ÷ 2])

Collection period = 28 days (365 ÷ 13.1 times)

= 50 days (365 ÷ 7.3 times)

Inventory turnover = 7.5 times ($5,328  [($898 + $525) ÷ 2])

= 4.8 times ($2,650  [($525 + $575) ÷ 2])

Days sales in inventory = 49 days (365 ÷ 7.5 times)

= 76 days (365 ÷ 4.8 times)

Operating cycle = 77 days (49 + 28)

= 126 days (76 + 50)

(b) 1. 2. 3. 4. 5. 6. 7.

Solutions Manual .

Current ratio Worse Acid-test ratio Worse Receivables turnover Better Collection period Better Inventory turnover Better Days sales in inventory Better Operating cycle Better

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EXERCISE 18-8 (a)

The company’s collection of its accounts receivable has deteriorated over the past three years. It is taking the company longer to collect its outstanding receivables as evidenced by the decrease in the receivables turnover.

(b) The company is selling its inventory more slowly since the inventory turnover is declining. (c)

Overall, the company’s liquidity has deteriorated. The increase in the current ratio is most likely caused by the increase in inventory and receivables due to the slowdown in the movement of these assets. The acid-test ratio is also likely inflated because of the slow moving receivables. In total, the increase in the operating cycle indicates deteriorating liquidity.

EXERCISE 18-9 From an overall perspective, Hakim’s liquidity is deteriorating. Although the current and acid-test ratios are improving in the current year over the previous year, the drop in both the receivable and inventory turnovers is more worrisome. Slow moving inventory and slow collections will ultimately hurt the business’ ability to meet its current obligations in the future.

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EXERCISE 18-10 (a)

Debt to total = assets Free cash flow

Interest coverage

Debt to total = assets Free cash flow

Interest coverage

(b)

2017 $2,177 $3,886

56.0%

$475

$450

($406 + $27 + $174) $27

22.5 times

2016 $1,959 $3,708

52.8%

– $300

$280

($375 + $17 + $152) $17

32.0 times

$925

= $580

Debt to total assets Free cash flow Interest coverage

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–

Worse Better Worse

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EXERCISE 18-11 (a)

The debt to total assets has gradually improved over the past three years.

(b)

The interest coverage has deteriorated over the past three years.

(c)

The company’s solvency initially appears to be improving as evidenced by its decreased reliance on debt. However, its interest coverage ratio is dropping significantly in spite of the reduced reliance on debt. This is likely caused by decreasing profits. Overall, its solvency appears to be relatively stable given the differing directions of the company’s debt to total assets and interest coverage ratios.

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EXERCISE 18-12 ($ in thousands) 2017 (a) Gross profit margin

(b) Profit margin

$750 – $480 = 36.0% $750

$60 $750

= 8.0%

Asset (c) turnover

$750 1.4 = times ($600 + $500) 2

(d) Return on assets

$60 = 10.9% ($600 + $500) 2

(e) Return on shareholders’ equity

$60 = 15.8% ($450 + $310) 2

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EXERCISE 18-13 (a) ($ in thousands) 2017 Gross profit margin

2016

$500 – $375 = 25.0% $500

Profit margin

$33.5 $500

= 6.7%

$400 – $290 $400

= 27.5%

$30.0 $400

= 7.5%

Asset turnover

$500 1.6 = times ($350 + $275) 2

$400 1.5 = times ($275 + $274.467) 2

Return on assets

$33.5 = 10.7% ($275 + $350) 2

$30.0 = 10.9% ($275 + $274.467) 2

Return on $33.5 = 28.7% equity ($133.5 + $100) 2

(b)

Gross profit margin Profit margin Asset turnover Return on assets Return on equity

Solutions Manual .

$30.0 ($100 + $50) 2

= 40.0%

Worse Worse Better Worse Worse

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EXERCISE 18-14 (a)

Potash Corporation of Saskatchewan Inc. (Potash) is far more profitable than Agrium Inc. (Agrium). Its profit margin of 21.6% is significantly higher than that of Agrium’s, at 4.5%. On the other hand, Potash’s return on equity is lower at 8.3% compared to that of Agrium at 10.7%. This inconsistency is likely due to varying capital structures of the two fertilizer companies. Note that earnings per share are not comparable between companies because of differing capital structures.

(b)

Investors favour Potash, but not by a large margin. Potash has a higher price-earnings ratio of 22.4 times earnings compared to Agrium’s 20.0 times. Potash’s higher profitability picture in the current period leads investors to believe it has a better opportunity for future profitability than Agrium.

(c)

Investors would purchase shares in Potash for dividend income. The payout ratio is higher with Potash.

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EXERCISE 18-15 (a) Ratio Acid-test ratio Asset turnover Current ratio Debt to total assets Gross profit margin Interest coverage Inventory turnover Operating cycle Profit margin Receivables turnover Return on assets Return on equity (c)

Classification L P L S P S L L P L P P

(b) Long compared to Circular B B W B B B B B B B B W

The comparison that was done in part (b) was an intercompany comparison.

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EXERCISE 18-16 ($ in thousands except for share price) (a)

(b)

Asset turnover

Current ratio

$1,234,716 ($1,609,416 + $1,591,378) ÷ 2

= .77 times

$151,909

= 0.45

$335,930 3.

Debt to total assets

$877,567 $1,609,416

= 54.5%

Earnings per share

$76,271 62,973

= $180,258 –

Free cash flow

Interest coverage

Priceearnings ratio P

$106,712

$76,271 + $21,948 + $21,144 $21,948 $44.83

$1.21

= $73,546

5.4 times

37 times

$1.21 8.

Profit margin P

$76,271 $1,234,716

6.2%

$76,271 ($1,609,416 + $1,591,378) ÷ 2

4.8%

$76,271 ($731,849 + $748,272) ÷ 2

10.3%

Return on assets

Return on 10. equity

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EXERCISE 18-17 (a) Current ratio

$35,500*

$10,370 *$ 5,300 + $21,200 + $9,000 = $35,500

= 3.4

Acid-test (b) ratio

$ 5,300 + $21,200 $10,370

= 2.6

Receivables (c) turnover

$120,000 ($21,200 + $23,400) ÷ 2

= 5.4

Times

5.4

= 68

Days

$70,000 ($9,000 + $7,000) ÷ 2

= 8.8

Times

= 41

Days

Collection (d) period =

365

Inventory (e) turnover (f)

Days sales in inventory

365

(g)

Profit margin

(h)

Asset turnover

$14,000 $120,000

= 11.7%

(i)

Return on assets

$120,000 ($110,500 + $120,100) ÷ 2

= 1.0 times

(j)

Return on equity

$14,000 ($110,500 + $120,100) ÷ 2

= 12.1%

(k)

Debt to total assets =

$14,000 ($100,130* + $89,000**) ÷ 2

= 14.8%

$10,370 $110,500

8.8

= 9.4%

*($75,000 + $25,130) = $100,130 **($69,000 + $20,000) = $89,000

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EXERCISE 18-18 (a)

Receivables turnover is calculated as net sales ÷ average accounts receivable. Net credit sales of $1,950,000 ÷ 13 = accounts receivable of $150,000.

(b)

Inventory turnover is calculated as cost of goods sold ÷ average inventory. So cost of goods sold of $1,267,500 ÷ 6.5 = $195,000. Or total current assets of $365,000 – cash of $20,000 – accounts receivable of $150,000 = inventory of $195,000.

(c)

Current assets of $365,000 + non-current assets of $435,000 = total assets of $800,000.

(d)

Current ratio is current assets ÷ current liabilities = 2:1. So current assets of $365,000 ÷ 2 = current liabilities $182,500.

(f)

Debt to total assets ratio = 70% so total assets of $800,000 × 70% = $560,000.

(e)

Non-current liabilities = total liabilities of $560,000 less current liabilities of $182,500 = $377,500.

(h)

Total liabilities and shareholders’ equity = total assets of $800,000.

(g)

Shareholders’ equity = Total liabilities and shareholders’ equity of $800,000 – total liabilities (f) above of $560,000 = $240,000.

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EXERCISE 18-18 (Continued) Summary of results: MAIN RIVER CORP. Balance Sheet December 31, 2017 Assets Current assets Cash Accounts receivable Inventory Total current assets Non-current assets Total assets

$ 20,000 150,000 195,000 365,000 435,000 $800,000

Liabilities and Shareholders’ Equity Current liabilities Non-current liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity

$182,500 377,500 560,000 240,000 $800,000

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EXERCISE 18-19 Most financial analysis ratios exclude other comprehensive income. There are no standard ratio formulas incorporating comprehensive income. Nevertheless, other comprehensive income (loss) should not be ignored in assessing the profitability performance of a company. If we analyze the change in the profit, we can see that over the three-year period it has declined, although it has seen a small increase in 2017. If, however, we analyze the change in the total comprehensive income, we see a significant increase in 2016, compared to a significant decrease in profit in 2015. Total comprehensive income declined significantly in 2017 while profit increased slightly. By its nature, other comprehensive income is often volatile. Consequently, further analysis as to the sources of comprehensive income and reasons for the changes between years would be worthwhile.

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SOLUTIONS TO PROBLEMS PROBLEM 18-1A (a)

WESTJET AIRLINES LTD. Income Statement Horizontal Analysis Year Ended December 31 2014 2013 Revenue 129% 119% Operating expenses 124% 116% Profit from operations 185% 155% Other expenses 173% 55% Profit before income taxes 188% 179% Income tax expense 180% 175% Profit 191% 181%

2012 112% 108% 146% 71% 163% 166% 162%

2011 100% 100% 100% 100% 100% 100% 100%

2012

2011

107% 128% 119%

115% 103% 108%

100% 100% 100%

149% 99% 121% 116%

126% 94% 108% 107%

100% 100% 100% 100%

119%

108%

100%

WESTJET AIRLINES LTD. Balance Sheet Horizontal Analysis December 31 2014 2013 Assets Current assets 121% Non-current assets 142% Total assets 134% Liabilities & Shareholders’ Equity Current liabilities 142% Non-current liabilities 132% Total liabilities 136% Shareholders' equity 130% Total liabilities and shareholders' equity 134%

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PROBLEM 18-1A (Continued) (b) In a horizontal analysis of the income statement over the past

four years, WestJet’s 29% increase in revenue has translated into an even greater percentage increase in profit. Although the 73% increase in other expenses is large, the increase is modest considering the absolute amounts involved each year. In a horizontal analysis of the balance sheet, current assets have increased 21%, but were outpaced by the 42% increase in current liabilities over the same period. There would have been large distributions of dividends in the period because the percentage increase in profit is far greater than the percentage increase in shareholders’ equity (the absolute numbers for shareholders’ equity far exceed the profit of course). (c) Similar to a horizontal analysis of the base-year amount, a

horizontal analysis of the percentage change for each year is limited to condensed information available on the financial statements. While these percentages can show a number of meaningful facts and indicators, the detailed composition of each category and the interrelationship between these various percentages would also be of importance. Trend analysis is the most useful.

Taking It Further: The horizontal analysis for fiscal years prior to those provided in part (a) above would be interpreted with additional information and disclosure. This additional information would have been provided in the notes to the financial statements concerning the impact the implementation of IFRS had on financial statement elements. Without this in hand, the user of the analysis risked drawing conclusions from information that had not been prepared using consistent accounting practices and standards, which could in turn lead to faulty conclusions.

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PROBLEM 18-2A (a)

CHEN INC. AND CHUAN LTD. Income Statements Year Ended December 31, 2017

Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Interest expense Profit before income tax Income tax expense Profit

Chen Amount Percent $1,849,035 100.0% 1,060,490 57.4% 788,545 42.6%

Chuan Amount Percent $539,038 100.0% 338,006 62.7% 201,032 37.3%

502,275

27.2%

89,000

16.5%

286,270 6,800

15.5% 0.4%

112,032 1,252

20.8% 0.2%

279,470 83,841 $ 195,629

15.1% 4.5% 10.6%

110,780 27,695 $ 83,085

20.6% 5.1% 15.4%

Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place.

(b) Gross Profit Margin: Gross profit ÷ Net sales Chen = $788,545 ÷ $1,849,035 = 42.6%

Chuan = $201,032 ÷ $539,038 = 37.3%

Profit Margin: Profit ÷ Net sales Chen = $195,629 ÷ $1,849,035 = 10.6%

Solutions Manual .

Chuan = $83,085 ÷ $539,038 = 15.4%

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PROBLEM 18-2A (Continued) (b) (Continued) Asset Turnover: Net sales ÷ Average total assets Chen Asset turnover = $1,849,035 ÷ $894,750 = 2.1 times

Chuan Asset turnover = $539,038 ÷ $251,313 = 2.1 times

Return on Assets: Profit ÷ Average total assets Chen = $195,629 ÷ $894,750 = 21.9%

Chuan = $83,085 ÷ $251,313 = 33.1%

Return on Equity: Profit ÷ Average shareholders’ equity Chen Return on Equity = $195,629 ÷ $724,430 = 27.0% (c)

Chuan Return on Equity = $83,085 ÷ $186,238 = 44.6%

Chuan is the more profitable company. Although Chen has a higher gross profit margin, Chuan has a better profit margin, which means it can generate more profit per dollar of sales. Chuan’s assets are returning more even though the asset turnover is the same as Chen’s. Finally Chuan’s investors are enjoying a much better return on their investment.

(d) The analysis in (c) is an intercompany comparison, which involves comparing ratios for different companies.

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PROBLEM 18-2A (Continued)

Taking It Further: Ratio analysis helps us compare companies of differing sizes. However, we should be able to see Chen enjoying some economies of scale being the larger business of the two. This does not appear to be the case. The operating expenses as a percentage of sales are much higher in the case of Chen. On the other hand, being a larger company helps it obtain lower prices for the goods that are sold, as is demonstrated by its gross profit margin percentage.

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PROBLEM 18-3A (a)

The horizontal and vertical analysis statements demonstrate that the company’s control over its cost of goods sold was relatively steady in 2015 and 2016. However, cost of goods sold increased significantly as a percentage of net sales in 2017, and is increasing faster than net sales. Operating expenses also increased, and at a faster pace than that exhibited by cost of goods sold. The trend of increasing costs faster than increasing sales is worrisome.

(b)

Interest expense has reduced substantially over the fouryear period. This reduction is likely due to the reduction in interest rates charged and the amount of the debt on the balance sheet. Although the horizontal analysis draws attention to a major increase in the other revenues, that attention is later diminished when inspecting the vertical analysis income statement. That statement reveals that in absolute terms, the amount of other revenue involved is very small and so a major increase of 140% over the four-year period turns out to have a modest effect on the profit.

(c)

Horizontal and vertical analysis of the balance sheet, as well as the financial statements themselves, would also be useful in assessing the company’s performance and financial position. In addition, ratio analysis would help complete the picture. Finally, understanding any external economic or other factors that may be affecting costs would also be useful.

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PROBLEM 18-3A (Continued)

Taking It Further: (a) Percentage of base-period amount: The amount for the period in question is divided by the base-year amount, and the result is multiplied by 100 to express the answer as a percentage. If an item has no value in a base year and a value in the next year, no percentage change can be calculated. (b) Percentage change for a period: The amount from the previous period is subtracted from the current period amount. The result is divided by the amount from the previous period and then multiplied by 100 to express the answer as a percentage. If a negative amount appears in the base and there is a positive amount the following year, or vice versa, no percentage change can be calculated.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-4A (a) 2017 1.

Gross profit = margin

Profit margin

5. 6.

Earnings per share Receivables turnover

* D

$886,750 $2,055,750

= 43.1%

$807,000 $1,818,500

= 44.4%

$251,475 $2,055,750

= 12.2%

$203,000 $1,818,500

= 11.2%

$251,475 57,000

$ 4.41

$203,000 55,000

$ 3.69

14.2

times

25.7

days

Collection period Inventory turnover

2016

$2,055,750 $181,600 + $107,800 2 365

= =

14.2

$1,169,000 $216,800 + $133,000 2

= 6.7

times

$1,818,500 $107,800 + $102,800 2 365

17.3

21.1

days

8.1

times

$1,011,500 $133,000 + $115,500 2

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-4A (Continued) 2017 Days sales = in inventory Return on 8. shareholders’ = equity 7.

Return on assets

10. Current ratio =

365

6.7

54.5

days

365

$251,475

8.1

45.1

days

$618,175 + $566,700 2

$566,700 + $465,400 2

$251,475 = 23.9% $1,136,350 + $970,200 2

$203,000 $970,200 + $852,800 2

$ 485,650 $ 328,175

1.48

$ $

0.82

$369,900 - $133,000 $208,500

11.

Acid-test ratio

$485,650 - $216,800 $328,175

12.

Asset turnover

$2,055,750 = $1,136,350 + $970,200 2

13.

Debt to total = assets

1.95

times

369,900 208,500

$1,818,500 $970,200 + $852,800 2 $403,500 $970,200

= 45.6%

39.3%

22.3%

1.77

1.14

2.00

times D

= 41.6%

* (b) D denotes deterioration, while I denotes improvement _ Solutions Manual

18-50 .

$203,000 = 42.4%

$518,175 $1,136,350

2016

Chapter 18

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-4A (Continued)

Taking It Further: As calculated in ratio no. 5, the collection period for Pristine Interiors is 25.7 days in 2017. Ratio No. 7. shows the business has days sales in inventory of 54.5 days in 2017. Combined (25.7 + 54.5) is 80.2 days for the operating cycle. This result is worse than the 75-day operating cycle of the nearest competitor. On the surface, this ratio would indicate that Pristine has a liquidity problem. An investigation into such policies as the terms provided to customers may explain the worse performance.

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Chapter 18

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-5A (a) 2017 1.

Profit margin

Asset turnover

Earnings per share

Payout ratio

Debt to total assets

Gross profit margin

$700,000

6.4%

1.13

times

$640,000 + $600,000 2 =

Price4. earnings ratio = 5.

$45,000 $700,000

2016

$45,000 32,000

$650,000

$1.41

5.67

55.6%

$30,000 31,000

$45,000

4.6%

1.15

times

= $0.97

$5.00

$1.41 *$25,000

$600,000 + $533,000 2

$8.00

$30,000 $650,000

times

5.15 times

60.0%

27.5%

38.5% _

$0.97 **$18,000

$30,000

= $155,000 $640,000

24.2%

40.0%

$165,000 $600,000

= $280,000 $700,000

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18-52 .

$250,000 $ 650,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-5A (Continued) (a) (Continued) The amount of dividends paid were calculated from the statement of income and the retained earnings balances on the balance sheet: Retained Earnings Dec. 31, 2016 Add Net income for 2017 Less Retained Earnings Dec. 31, 2017 Dividends declared and paid in 2017 Retained Earnings Dec. 31, 2015 Add Net income for 2016 Less Retained Earnings Dec. 31, 2016 Dividends declared and paid in 2016 (b)

$125,000 45,000 170,000 145,000 *$25,000 $113,000 30,000 143,000 125,000 **$18,000

Based on the results of the comparative ratio analysis for Landwehr Corporation, we can see that profitability has improved based on the gross profit margin, the profit margin, and the earnings per share ratios. By the end of 2017 the financial position of the company has improved in that there is less debt compared to total assets. In spite of the fact that the dividend payout has reduced slightly as a percentage of net income, shareholders have bid up the market price of the shares, making the price-earnings ratio increase. The priceearnings ratio remains modest.

Taking It Further: Julie is correct. Profitability is only one area of concern when managing the success and well-being of a business. Liquidity and solvency issues are also important. By using the three common tools of financial analysis: horizontal analysis, vertical analysis, and ratio analysis, Roberto Landwehr will get a better understanding of the business’ performance and will be able to detect areas that need his further attention.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-6A Liquidity Ratios 1.

Current ratio

Acid-test ratio

Receivables turnover

$318,900 $208,500 $68,100 + $107,800 $208,500

1.5

0.8

$1,948,500 = ($113,200* + $107,900**)÷2 * $113,200 = $107,800 + $5,400 ** $107,900 = $102,800 + $5,100 =

Collection period

Inventory turnover

Days sales in inventory =

365

17.6

17.6 times

21 days

$1,025,500 = ($143,000 + $115,500) ÷ 2

7.9 times

365

7.9

46 days

21 days

67 days

Operating cycle

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-6A (Continued) Solvency Ratios Debt to 8. total assets

Interest coverage

$312,500 $998,200

$407,000*

31.3%

14.5 times

$28,000 * $407,000 = $265,300 + $113,700 + $28,000 cash 10. Free flow

$154,900

$923,000 $1,948,500

47.4%

$265,300 $1,948,500

13.6%

$1,948,500 = ($998,200 + $852,800) ÷ 2

Profitability Ratios Gross profit 11. margin = Profit 12. margin Asset 13. turnover

14. Return on assets

Solutions Manual .

$ 316,200 –

$161,300

$265,300 = ($998,200 + $852,800) ÷ 2 =

18-55

2.1 times

28.7%

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-6A (Continued) Profitability Ratios (Continued) 15.

Return on = shareholders’ equity

$265,300 = 46.1% ($685,700 + $465,400) ÷ 2

Earnings per 16. share

$265,300 [60,000 − (4,000 ÷ 2)]

= $4.57

17. Payout ratio

$5,000

= 1.9%

$265,300

Taking It Further: The Cable Company’s liquidity appears to be strong mainly because of the high receivables and inventory turnover ratios. Its operating cycle of 67 days is likely reasonable, depending on what the norm is among its competitors. With respect to solvency, since a significant percentage of its assets are financed with equity, the debt to total assets and interest coverage ratios are strong. Finally, profitability also appears to be very good mainly because of the high gross profit margin and return on equity ratios. Industry averages would be useful to confirm this assessment, as would comparative ratios for The Cable Company for prior years.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-7A (a) and (b) 2017

Liquidity Ratios

2016

Current 1. ratio

$364,000* $187,000

Acid-test 2. ratio

$209,000* = 1.1 $187,000 * $209,000 = $95,000 + $114,000

Receivables 3. turnover =

Collection 4. period

(b) Change

$343,000** $182,000

= 1.9

$675,000*** = 5.8 ($118,000* + $115,000**)÷2

= 1.9

$195,000* = 1.1 $182,000 *$195,000 = $85,000 + $110,000 times

*$118,000 = $114,000 + $4,000 **$115,000 = $110,000 + $5,000

$630,000*** = 5.6 ($115,000* + $111,000**)÷2 *115,000 = $110,000 + $5,000 **$111,000 = $108,000 + $3,000

times

days

= 365

5.8

= 63

days

365

5.6

= 65

*$754,000 - $390,000 **$648,000 - $305,000 ***Net Credit Sales 2017= $900,000 x .75 = $675,000 ***Net Credit Sales 2016= $840,000 x .75= $630,000

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-7A (Continued) (a) and (b) (Continued) Liquidity Ratios (Continued) Inventory 5. = turnover

Days sales in inventory

Operating = cycle

(b) Change

2017

2016

$625,000 = 4.9 times ($130,000 + $125,000) ÷ 2

$575,000 = 5.2 times ($125,000 + $97,000) ÷ 2

365

4.9

74 days

63 days

= 74

days

= 137 days

365

5.2

70 days

65 days

= 70

days

= 135 days

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-7A (Continued) (a) and (b) (Continued)

2017 Solvency Ratios Debt to 8. total assets = Interest coverage

Free cash 10. flow

$377,000 $754,000

(b) Change

2016 = 50.0%

$332,000 $648,000

51.2%

$111,000* $105,000* = 3.2 times = 5.3 times $35,000 $20,000 *$111,000 = $57,250 + $35,000 + $18,750 *$105,000 = $65,000 + $20,000 + $20,000 $103,500 – $115,500

= $(12,000)

$129,000 – $35,000 =

$94,000

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-7A (Continued) (a) and (b) (Continued) 2017 Profitability Ratios Gross profit 11. margin = Profit 12. margin

Asset 13. turnover

Return on 14. assets Return on 15. equity

(b) Change

2016

$275,000 $900,000

= 30.6%

$265,000 $840,000

= 31.5%

$57,250 $900,000

= 6.4%

$65,000 $840,000

= 7.7%

$900,000 = 1.3 ($754,000 + $648,000) ÷ 2

times

$840,000 = 1.3 times NC ($648,000 + $630,000) ÷ 2

= $57,250 = 8.2% ($754,000 + $648,000) ÷ 2

$65,000 = 10.2% ($648,000 + $630,000) ÷ 2

$57,250 ($377,000 + $316,000) ÷ 2 = 16.5%

$65,000 ($316,000 + $259,000) ÷ 2 = 22.6%

= U

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-7A (Continued) (a) and (b) (Continued) Profitability Ratios (Continued) Earnings 16. per share =

2017 $57,250 20,000

17. Payout ratio =

$3,000 ÷

(b) Change

2016 = $2.86

$65,000 20,000

$57,250 = 5.2%

$8,000

$65,000

= $3.25

= 12.3%

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-7A (Continued) (c) (1) Liquidity: Stayed essentially the same The overall liquidity of Click and Clack is slightly better with respect to the receivables turnover, but worse for inventory turnover than the previous year, but the changes are small. (2) Solvency: Deteriorated Although the debt to total assets ratio improved slightly, the interest coverage ratio worsened. A large amount of cash was used in investing activities during 2017 which in turn increased the debt and corresponding interest charges. Free cash consequently turned negative and the interest coverage ratio has deteriorated. (3) Profitability: Deteriorated Profitability has decreased slightly. Profit was mostly affected by the large increase in interest charges. This explains why the gross profit margin decreased slightly but the return on equity decreased dramatically. The return on assets declined correspondingly.

Taking It Further: The problem is employing intracompany comparison. It is hard to say which is more useful—intercompany or intracompany comparisons—as both provide valuable information. When two companies in the same industry are compared, then intercompany comparisons can be very useful. A business might obtain feedback that they are doing well from an intracompany analysis, but may not be doing as well on an intercompany comparison, possibly failing to keep pace with pricing increases or cost control opportunities that the company’s competitors are taking advantage of.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-8A (a) ($ in thousands) Big Rock Brewery Inc.

Liquidity Ratios

Brick Brewing Co. Ltd.

Current ratio

$9,680 $4,958

= 2.0

Receivables turnover

$36,755 $1,413

= 26

times

Collection period

365

= 14.0

days

Inventory turnover

$18,930 $3,398

= 5.6

times

Days sales in inventory

Operating cycle

$10,838 $6,335

= 1.7

$36,333 $6,179

= 5.9

times

= 61.9

days

= 7.1

times

365

5.9

$26,136 $3,676

365

= 65.2

days

365

= 51.4

days

65.2

+ 14.0 = 79.2

days

51.4

+ 61.9 = 113.3

days

5.6

7.1

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-8A (Continued) (a) (Continued) Solvency Ratios Debt to total 5. assets

Interest coverage

Profitability Ratios Gross profit 7. = margin 8. 9.

Profit margin

Asset turnover

Brick Brewing Co. Ltd. $10,552 = 23.5% $44,934

N/A no interest expense

$1,395 + $535 +$627

4.8

times

$535 $17,825 $36,755

= 48.5 %

$10,197 $36,333

= 28.1%

$624 $36,755

= 1.7%

$1,395 $36,333

= 3.8%

$36,755

0.8

times

$36,333

0.8

times

$45,651

$45,412

Return on 10. assets 11.

Big Rock Brewery Inc. $9,724 = 20.2% $48,167

Return on equity

$624 $45,412

= 1.4%

$1,395 $45,651

= 3.1%

$624 $34,200

= 1.8%

$1,395 $33,447

= 4.2%

_ Solutions Manual

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-8A (Continued) (b)

Liquidity: When looking at the liquidity ratios, one can conclude that Big Rock is more liquid than Brick. Where there is a larger discrepancy in the performance is in the collection of accounts receivable. It is taking Brick more than four times as much time to collect accounts receivable compared to Big Rock. Big Rock has also outpaced Brick for its inventory turnover. Solvency: The debt to total assets ratio is similar between Big Rock and Brick. Where Big Rock is noticeably better, is in its absence of any interest expense. Profitability: In spite of a much better gross profit margin, Big Rock realizes very little profit. Brick is more profitable and has a better return on assets and return on equity although the ratios are an indication of poor overall profitability performance.

Taking It Further: Most financial analysis ratios exclude other comprehensive income. There are no standard ratio formulas incorporating comprehensive income. Nevertheless, other comprehensive income (loss) should not be ignored in assessing the profitability of a company. Key profitability ratios should be recalculated including other comprehensive income if it is significant and depending on its composition.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-9A (a) Fournitures Ltée’s accounts receivable management can be assessed by reviewing the company’s receivables turnover, which indicates how often the company is “turning” over its receivables; that is, how long the company is taking to collect its accounts receivable. Fournitures Ltée’s receivables turnover of 11.8 times can also be expressed as an average collection period of 31 days (365 ÷ 11.8). This receivables turnover is reasonable when compared to its credit terms of 30 days. This can be compared to Supplies Unlimited’s average collection period of 40.1 days (365 ÷ 9.1), which indicates collections for Supplies Unlimited are taking longer than the 30-day credit terms. As well, Fournitures Ltée’s receivables turnover is better than Supplies Unlimited, indicating that Fournitures Ltée’s management is doing a better job at controlling the collection of the company’s receivables. (b) Fournitures Ltée’s ability to manage its inventory can be measured by the inventory turnover ratio. Currently Fournitures Ltée is turning over its inventory 6 times per year which can also be expressed as approximately every 61 days (365 ÷ 6 times). Supplies Unlimited is turning over its inventory 3.1 times per year or approximately every 118 days (365 ÷ 3.1 times). It appears that Fournitures Ltée is turning over its inventory much faster than its competitor. (c) Supplies Unlimited’s current ratio could be higher than Fournitures Ltée’s because of its slower accounts receivable and inventory turnovers. It could also have a higher level of prepaid expenses or similar type of current assets.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-9A (Continued) (d) Fournitures Ltée is the less solvent company of the two companies as it has a higher proportion of assets financed with debt, as demonstrated by its debt to total asset ratio of 35% (compared to Supplies Unlimited’s debt to total assets ratio of 30.3%). This percentage is still very good in general. The other ratio that pinpoints solvency is the interest coverage ratio. In this case, since Fournitures Ltée has proportionately more debt, it is not surprising to note that it has a lower interest coverage ratio. (e) Fournitures Ltée’s lower gross profit margin may be attributable to a number of factors:  The company may be selling its products at a lower price hoping to increase its sales volume and hence profit.  The company may be paying more for the cost of its inventory than the competition. This may occur if, for example, Fournitures Ltée is not able to purchase inventory in the same quantity for the same price as its competition.  Fournitures Ltée might not be able to take advantage of reduced costs from bulk purchases because it has overextended its credit and is unable to obtain additional debt financing. Fournitures’ higher profit margin could be the result of lower operating expenses or more other income than Supplies Unlimited. (f)

The price-earnings ratio reflects investors’ assessment of the future prospects of a company. As indicated by the higher price-earnings ratio, investors appear to believe that Fournitures Ltée has the better possibility for growing its profit.

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PROBLEM 18-9A (Continued) Taking It Further: Financial leverage is said to be positive if a company is able to earn a higher return on equity by using borrowed money in its operations than it has to pay on the borrowed money. A quick measure of leverage is calculated by comparing the amount the percentage of return on equity exceeds return on assets. Fournitures Ltée’s return on equity exceeds its return on assets by a 5.2% return while Supplies Unlimited has an excess of 3.5% return.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-10A (a) DavidsTea is more liquid, with a much better current ratio than that of Starbucks. On the other hand, DavidsTea turns over inventory more slowly than Starbucks. The operating cycles of the two companies are similar in total. (b) The debt to total assets of 100% for DavidsTea means there is no equity. On the other hand Starbucks has about half of its assets financed with debt and half with equity. Starbucks is also able to cover its interest 50 times. Starbucks has excellent solvency when compared to DavidsTea. (c) Although the gross profit of the two companies is similar, the profit margin percentage for Starbucks is almost three times that of DavidsTea. Similarly the return on assets is much stronger with Starbucks. Overall profitability is better with Starbucks. The only ratio that is not in support of Starbucks’s superior profitability is its asset turnover.

Taking It Further: Based only on its higher price-earnings ratio, investors favour DavidsTea over Starbucks. This is inconsistent with Starbucks’s superior profitability. The price-earnings ratio of DavidsTea is more a reflection on its low profit (earnings, in the price-earnings ratio) than it is about good financial performance.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-11A (a)

Gross profit margin is 40% so gross profit of $500,000 (c) ÷ 40% = net sales of $1,250,000.

(b) Net sales of $1,250,000 less gross profit of $500,000 = cost of goods sold of $750,000. (c)

Profit from operations of $166,250 plus operating expenses of $333,750 = gross profit of $500,000.

(d) Profit before income taxes $155,750 plus interest expense $10,500 = profit from operations of $166,250. (e)

Income tax rate is 20%. Profit after income tax is $124,600 so profit before income tax $124,600 ÷ .8 (100% – 20%) = $155,750.

(f)

Income tax is profit before income taxes of (e) $155,750 × 20% = $31,150 or profit after income tax is $124,600 × .25 = $31,150, or more simply profit before income taxes of (e) $155,750 less profit of $124,600 given = $31,150.

Summary of results: SCHWENKE CORPORATION Income Statement Year Ended December 31, 2017 Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Interest expense Profit before income taxes Income tax expense Profit

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$1,250,000 750,000 500,000 333,750 166,250 10,500 155,750 31,150 $ 124,600

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-11A (Continued) (g) Current assets of $190,000 less cash of $7,500 less inventory of $93,750 = accounts receivable of $88,750. (h) Inventory turnover is 8 times and so cost of goods sold of $750,000 ÷ 8 = inventory of $93,750. (i)

Current ratio is 3:1 so current liabilities of $63,333 × 3 = current assets of $190,000(rounded).

(j)

Total assets of $833,333 less current assets of $190,000 = property, plant, and equipment of $643,333.

(k)

Asset turnover is 1.5 times so net sales of $1,250,000 ÷ 1.5 = total assets and (n) total liabilities and shareholders’ equity of $833,333.

(l)

Total liabilities of $183,333 less non-current liabilities of $120,000 = current liabilities of $63,333.

(m) Total liabilities and shareholders’ equity of $833,333 less shareholders’ equity of $650,000 = total liabilities of $183,333.

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PROBLEM 18-11A (Continued) Summary of results: SCHWENKE CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash Accounts receivable Inventory Total current assets Property, plant, and equipment Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders’ Equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

7,500 88,750 93,750 190,000 643,333 $833,333

$ 63,333 120,000 183,333 250,000 400,000 650,000 $833,333

Taking it Further: Because of the large number of figures that are omitted at the beginning of each of the financial statements, it is necessary to work backwards, using totals and sub-totals along with the ratios given.

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PROBLEM 18-1B (a)

LULULEMON ATHLETICA INC. Income Statement Year Ended December 31

Revenue Operating expenses Profit from operations Other expenses Profit before income taxes Income tax expense Profit

2015 180% 205% 161% 190% 132% 137% 129%

2014 159% 174% 148% 159% 137% 111% 151%

2013 137% 141% 134% 137% 131% 105% 146%

2012 100% 100% 100% 100% 100% 100% 100%

LULULEMON ATHLETICA INC. Balance Sheet Horizontal Analysis Feb. 1 2015 Assets Current assets 180% Non-current assets 166% Total assets 176% Liabilities and Shareholders’ Equity Liabilities Current liabilities 155% Non-current liabilities 188% Total liabilities 162% Shareholders’ equity 179% Total liabilities and equity 176%

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Feb. 2 2014

Feb. 3 2013

Jan. 29 2012

179% 148% 170%

149% 127% 143%

100% 100% 100%

113% 156% 121% 181% 170%

129% 124% 128% 146% 143%

100% 100% 100% 100% 100%

Chapter 18

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PROBLEM 18-1B (Continued) (b)

lululemon athletica has seen some significant revenue growth over the four-year period. The increase in operating expenses, grouped with cost of goods sold, has outpaced the increase in revenue. Revenue increased 80% but operating expenses doubled in the period. This is not a positive trend and costs and pricing may need to be carefully reviewed. Further analysis to determine the composition of this increase (what is cost of goods sold and other operating expenses) would be helpful. Other expenses is not a significant dollar amount and by its nature can be expected to vary over the years. Income tax expense increased dramatically in 2015, causing a larger decline in profit in that year The horizontal analysis of the balance sheet adds additional insight into lululemon’s financial performance and position. Current assets have increased at the exact same rate as revenues. The shareholders’ equity increase generally has exceeded the trend of profit. Coinciding with the decrease in profit is the increase in non-current liabilities, in 2015. The increase in assets over the period is similar to the increase in liabilities and does not raise a liquidity or solvency concern. Non-current liabilities are small in comparison to non-current assets, which enhances lululemon’s financial flexibility. Shareholders’ equity experienced a decrease in 2015, likely from the repurchase of shares.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-1B (Continued) (c)

Similar to a horizontal analysis of the base-year amount, a horizontal analysis of the percentage change for each year is limited to condensed information available on the financial statements. While these percentages can show a number of meaningful facts and indicators, the detailed composition of each category and the interrelationship between these various percentages would also be of importance. Trend analysis is the most useful.

Taking It Further: Because operating expenses are growing faster than the revenues, lululemon should examine both expenses and revenue to turn this trend around. For example, it should review the items included in the operating costs and determine where they may be able to reduce costs. Alternatively, lululemon could look at ways to increase their revenues or at increasing prices as a means to improve the revenue figure.

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PROBLEM 18-2B (a)

Income Statement Year Ended June 30, 2017 Manitou Muskoka Amount Percent Amount Percent Net sales $360,000 100.0% $1,400,000 100.0% Cost of goods sold 200,000 55.6% 720,000 51.4% Gross profit 160,000 44.4% 680,000 48.6% Operating expenses 60,000 16.7% 272,000 19.4% Profit from operations 100,000 27.8% 408,000 29.1% Rental income 12,000 3.3% 24,000 1.7% Profit before income tax 112,000 31.1% 432,000 30.9% Income tax expense 22,400 6.2% 95,040 6.8% Profit $ 89,600 24.9% $ 336,960 24.1% Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place. (b) Gross Profit Margin as indicated above: Gross profit ÷ Net sales Manitou = $160,000 ÷ $360,000 = 44.4%

Muskoka = $680,000 ÷ $1,400,000 = 48.6%

Profit Margin: Profit ÷ Net sales Manitou = $89,600 ÷ $360,000 = 24.9%

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Muskoka = $336,960 ÷ $1,400,000 = 24.1%

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PROBLEM 18-2B (Continued) (b) (Continued) Asset Turnover: Net sales ÷ Average total assets Manitou: Asset Turnover $360,000 ÷ $457,500 = 0.8 times

Muskoka Asset Turnover $1,400,000 ÷ $1,725,000 = 0.8 times

Return on Assets: Profit ÷ Average total assets Manitou: $89,600 ÷ $457,500 = 19.6%

Muskoka $336,960 ÷ $1,725,000 = 19.5%

Return on Equity: Profit ÷ Average shareholders’ equity Manitou: Return on Equity $89,600 ÷ $204,800 = 43.8% (c)

Muskoka Return on Equity $336,960 ÷ $743,480 = 45.3%

Muskoka is slightly more profitable. Muskoka has a better gross profit margin, but a slightly lower profit margin than does Manitou. Manitou has lower operating expenses, compared to Muskoka. Muskoka’s return on equity is also slightly better. Its asset turnover is the same and its return on assets slightly lower than that of Manitou.

(d) The comparison in (c) above is an intercompany comparison, which involves comparing ratios for different companies.

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PROBLEM 18-2B (Continued)

Taking It Further: Ratio analysis helps us compare companies of differing sizes. However, we should be able to see Muskoka enjoying some economies of scale being the larger business of the two. This does not appear to be the case. The operating expenses as a percentage of sales are higher in the case of Muskoka compared to Manitou. On the other hand, Muskoka has better buying power and can obtain lower prices for the goods that it purchases, as is demonstrated by its gross profit percentage.

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PROBLEM 18-3B (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 in spite of the fact that the absolute amounts are greater over time, their proportion as a percentage of revenue is smaller, demonstrating that the company has control over the operating expenses.

(b)

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 balance sheet. Although the horizontal analysis draws attention to a major increase in the other revenues, that attention is later diminished when inspecting the vertical analysis income statement. That statement reveals that in absolute terms, the amount of other revenue involved is very small and so an increase of 240% over a four-year period turns out to have a modest effect on the profit.

(c)

Horizontal and vertical analysis of the balance sheet, as well as the financial statements themselves, would be useful in assessing the company’s performance and financial position. In addition, ratio analysis would help complete the picture. Finally, understanding any external economic or other factors would also be useful.

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PROBLEM 18-3B (Continued) Taking It Further: For a new public company, historical financial information is not as readily available to perform meaningful analysis. Although some historical financial information would be found in the prospectus, it would not be useful in assessing comparisons under the new capital structure which includes all of the cash financing obtained from the initial public offering. Consequently, meaningful horizontal or vertical analysis cannot be prepared for its first full year of operations.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-4B (a) 2017

2016

$1,033,750 $2,153,650

= 48.0%

$818,000 $1,828,500

= 44.7%

Profit margin

$203,085 $2,153,650

= 9.4%

$199,000 $1,828,500

= 10.9%

Earnings per share

$203,085 57,000

$ 3.56

$199,000 57,000

$ 3.49

Receivables turnover

16.23 times

16.21

times

Collection period

16.23

22.5

days

22.5

days

N C

Inventory turnover

$1,119,900 $170,000 + $113,000

7.91

times

8.84

times

Gross profit margin

$2,153,650 $142,600 + $122,800 2 365

$1,828,500 $122,800 + $102,800 2 365

16.21

$1,010,500 $113,000 + $115,500 2

* D denotes deterioration, while I denotes improvement, NC denotes no change

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PROBLEM 18-4B (Continued) 2016

2017 Days sales g in inventory = Return on = h common shareholders’ equity i

365

7.91

$203,085 $609,700 + $556,700

days

365

8.84 =

$199,000 $556,700 + $465,400

= 34.8%

days

38.9%

21.8%

1.79

1.24

Return on assets

$203,085 = 20.2% $1,040,950 + $970,200 2

$199,000 $970,200 + $852,800 2

Current ratio

$ 435,650 $211,250

2.06

$ $

Acid-test ratio

$435,650 - $170,000 $211,250

1.26

$364,900 - $113,000 $203,500

Asset turnover

$2,153,650 = $1,040,950 + $970,200 2

Debt to total = assets

$431,250 $1,040,950

2.14

times

364,900 203,500

$1,828,500 $970,200 + $852,800 2 $413,500 $970,200

= 41.4%

2.01

times

= 42.6%

I _

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PROBLEM 18-4B (Continued)

Taking It Further: As calculated in ratio no. 5, the collection period for Andy’s Art Company is 22.5 days in 2017. Ratio No. 7. shows the business has days sales in inventory of 46 days in 2017. Combined (22.5 + 46) is 68.5 days for the operating cycle. This result is worse than the 60-day operating cycle of the nearest competitor. On the surface, this ratio would indicate that Andy’s Art Company has a liquidity problem. An investigation into such policies as the terms provided to customers may explain the worse performance.

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PROBLEM 18-5B (a) 2017 1.

Gross profit margin

Asset turnover

$290,000 $710,000

2016 =

$710,000

40.8%

1.15

times

$640,000 + $600,000 2 3.

Earnings per share

= $55,000 32,000

Price4. earnings ratio = 5.

Payout ratio

Debt to total assets

Profit margin

$660,000

$40,000 31,000

$1.72

$55,000

39.4%

1.17

times

= $1.29

$5.00

$1.72 *$35,000

$600,000 + $533,000 2

$8.00

$260,000 $660,000

4.65

63.6%

times

3.88 times

70.0%

$1.29 **$28,000

$40,000

= $145,000 $640,000

$55,000 $710,000 Solutions Manual

22.7%

$165,000 $600,000

27.5%

7.7%

$40,000 $ 660,000

6.1%

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PROBLEM 18-5B (Continued) (a) (Continued) The amount of dividends paid were calculated from the statement of income and the retained earnings balances on the balance sheet: Retained Earnings Dec. 31, 2016 Add Net income for 2017 Less Retained Earnings Dec. 31, 2017 Dividends declared and paid in 2017 Retained Earnings Dec. 31, 2015 Add Net income for 2016 Less Retained Earnings Dec. 31, 2016 Dividends declared and paid in 2016 (b)

$125,000 55,000 180,000 145,000 *$35,000 $113,000 40,000 153,000 125,000 **$28,000

Based on the results of the comparative ratio analysis for Lauer Corporation, we can see that profitability has improved based on the gross profit margin, the profit margin, and the earnings per share ratios. By the end of 2017 the financial position of the company has improved in that there is less debt compared to total assets. In spite of the fact that the dividend payout has reduced as a percentage of net income, shareholders have bid up the market price of the shares, making the price-earnings ratio increase. The price-earnings ratio remains modest.

Taking It Further: Brittany is correct. Profitability is only one area of concern when managing the success and well-being of a business. Liquidity and solvency issues are also important. By using the three common tools of financial analysis: horizontal analysis, vertical analysis, and ratio analysis, Mr. Lauer will get a better understanding of the business’ performance and will be able to detect areas that need his further attention.

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PROBLEM 18-6B Liquidity Ratios

Current ratio

Acid-test ratio

Receivables turnover

Collection period

Inventory turnover

Days sales in inventory

Operating cycle

$250,500 $180,150

= 1.4

$154,100* $180,150 *$154,100 = $49,380 + $104,720

= 0.9

$790,000 = 7.6 ($110,220* + $98,300**)÷2 * $110,220 = $104,720 + $5,500 ** $98,300 = $93,800 + $4,500

Solutions Manual .

365

7.6

$540,000 ($96,400 + $74,000) ÷ 2

times

= 48

days

= 6.3

times

365

6.3

= 58

days

= 106

days

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PROBLEM 18-6B (Continued) Solvency Ratios Debt to total 8. assets 9.

Interest coverage

cash 10. Free flow

$73,270 + $12,930 + $3,200 = 27.9 times $3,200

$116,780

$51,660

$65,120

= 31.6%

$73,270 $790,000

= 9.3%

$790,000 ($715,800 + $672,000) ÷ 2

= 1.1 times

$73,270 ($715,800 + $672,000) ÷ 2

= 10.6%

$73,270 ($445,650 + $396,000) ÷ 2

= 17.4%

Return on 14. assets

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–

$250,000 $790,000

Asset 13. turnover

Return on 15. equity

= 37.7%

Profitability Ratios Gross profit 11. margin = Profit 12. margin

$270,150 $715,800

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PROBLEM 18-6B (Continued) Profitability Ratios (Continued) 16.

Earnings per share

$73,270 15,000

Payout ratio

$23,620

= $4.88 ÷

$73,270

= 32.2%

Taking It Further: The Rose Packing’s liquidity appears to be a bit weak, based primarily on its collection period of 48 days. However, it is hard to assess its collection period without knowing the company’s credit terms. Its inventory turnover ratio may be reasonable, depending on what the norm is among its competitors and the packing industry. With respect to solvency, since a significant percentage of its assets are financed with equity, the debt to total assets and interest coverage ratios are strong. Finally, profitability also appears to be reasonable based on ratios. Industry averages would be useful to confirm this assessment, as would comparative ratios for the company for prior years.

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PROBLEM 18-7B (a) and (b)

2017

Liquidity Ratios

Current 1. ratio

Acid-test 2. ratio

Receivables 3. turnover =

Collection 4. period

$415,000 $337,750

2016

$360,000 $315,000

= 1.2

$50,000 + $100,000 $337,750

Change

$42,000 + $87,000 $315,000

= 0.4

$1,000,000 = 10.2 times ($105,000* + $91,000**)÷2 * $105,000 = $100,000 + $5,000 ** $91,000 = $87,000 + $4,000

= 1.1

= 0.4

$940,000 = 11.0 ($91,000* + $80,000**)÷2) * $91,000 = $87,000 + $4,000 ** $80,000 = $77,000 + $3,000

times

days

= 365

10.2

= 36

days

365

11.0

= 33

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-7B (Continued) Liquidity Ratios (Continued) 2017 5.

Inventory turnover

Days sales in inventory =

Operating cycle

Chan -ge

2016

$650,000 = 3.0 ($240,000 + $200,000) ÷ 2

times

$635,000 = 3.6 ($200,000 + $150,000) ÷ 2

times

365

3.0

= 122

days

365

3.6

= 101

days

122

= 158

days

101

= 134

days

_ Solutions Manual

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PROBLEM 18-7B (Continued) Solvency Ratios 2017 8.

Debt to total assets

Interest coverage

Free cash 10. flow

$437,750 $1,240,000

Chan -ge

2016 = 35.3%

$415,000 $1,135,000

= 36.6%

$150,000* $125,000* = 4.3 times = 3.6 times $35,000 $35,000 *$150,000 = $97,750 + $17,250 + $35,000 *$125,000 = $76,500 + $13,500 + $35,000 $133,500 –

$110,000 = $23,500

$180,500 –

$56,000

= $124,500

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PROBLEM 18-7B (Continued) Profitability Ratios 2017 Gross 11. profit margin

$350,000 $1,000,000

Profit 12. margin

$97,750 $1,000,000

Asset 13. turnover

= 35.0%

$305,000 $940,000

= 32.4%

= 9.8%

$76,500 $940,000

= 8.1%

=0.9 times

= 6.9%

$1,000,000 =

0.8 times

($1,240,000 + $1,135,000)÷2 Return on 14. assets

Change

2016

$97,750 = 8.2% ($1,240,000 + $1,135,000)÷2

$940,000 ($1,135,000 + $1,075,000)÷2 $76,500 ($1,135,000 + $1,075,000)÷2

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PROBLEM 18-7B (Continued) Profitability Ratios (Continued)

Return on 15. equity

2017 $97,750 = 12.8% = ($802,250 + $720,000) ÷ 2

Earnings 16. per share

$97,750 100,000

2016 $76,500 ($720,000 + $659,000) ÷ 2 $76,500 100,000

= $0.98

Chan -ge

= 11.1%

= $0.77

= 20.3%

17. Payout ratio = $15,500

$97,750

= 15.9%

$15,500

$76,500

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PROBLEM 18-7B (Continued) (c) (1) Liquidity: Deteriorated Track’s overall liquidity has deteriorated in 2017 compared to 2016 in spite of a modest improvement in the current ratio. Both the receivables and inventory turnover ratios have deteriorated and consequently the operating cycle worsened by 24 days. (2) Solvency: Improved The debt to total assets ratio improved slightly. The interest coverage ratio improved even more so; consequently, overall solvency improved. A larger amount of cash was used in investing activities during 2017 compared to 2016 which resulted in a large decrease in free cash flow. (3) Profitability: Improved Profitability, with the exception of the asset turnover ratio which decreased slightly, has improved overall.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-8B (a) ($ in millions) Hudson’s Bay

Liquidity Ratios 1.

Current ratio

Receivables = turnover

Inventory turnover

Days sales = in inventory 4.

Operating cycle

$2,829 $2,144

= 1.32

$8,169 $281

= 29.1

times

= 13

days

$4,893 $2,199

= 2.2

times

365

2.2

= 166

days

365

166

= 179

days

Collection period

Nordstrom

365

29.1

$5,224 $2,800

= 1.87

$13,506 $2,242

= 6.0

times

= 61

days

= 5.2

times

÷ 5.2

= 70

days

= 131

days

365 ÷

6.0

$8,406 $1,632

= 70

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-8B (Continued) (a) (Continued) Solvency Ratios 5. 6.

Hudson’s Bay

Debt to total assets = Interest coverage

$6,580 $9,072

Profit margin

Asset turnover

Return on 10. assets Return on 11. equity

$6,805 $9,245

= 72.5%

$238 + $262 - $19 $262

= 1.8

$3,276 $8,169

Profitability Ratios: 7. Gross profit = margin

Nordstrom

times

$5,100 $13,506

40.1%

$238 $8,169

= 2.9%

$8,169 $8,507

= 1.0

$238 $8,507 $238 $2,268

$720 + $138+$465 $138

= 73.6%

37.8%

$720 $13,506

= 5.3%

$13,506 $8,910

= 1.5

= 2.8%

$720 $8,910

= 8.1%

= 10.5%

$720 $2,260

= 31.9%

times

= 9.6

times

= =

_ Solutions Manual

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PROBLEM 18-8B (Continued) (b) Liquidity: Nordstrom is the better performer. Nordstrom has a much stronger current ratio than Hudson’s Bay. Hudson’s Bay collects its receivables more quickly than Nordstrom, likely because most of their sales are cash or bank credit cards. Nordstrom’s inventory turnover is more than double that of Hudson’s Bay. Solvency: Nordstrom is the better performer. Although the source of financing from debt as a percentage of assets is similar between the two companies, Nordstrom is in a far better position to pay its interest. Profitability: Nordstrom is the better performer. Although Hudson’s Bay has a higher gross profit margin, it is not translating into a higher profit margin. Both the return on assets and return on equity for Hudson’s Bay are a fraction of the Nordstrom returns.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-9B (a) Accounts receivable management can be assessed by reviewing each company’s receivables turnover ratio and average collection period. Refresh’s average collection period of 35 days (365 ÷ 10.4) days is reasonable when compared to its credit terms of 30 days. Flavour’s average collection period of 37 days (365 ÷ 9.8) days is marginally worse than that of Refresh. (b) Each company’s ability to manage its inventory can be measured by the inventory turnover ratio. Currently Refresh is turning over its inventory 5.8 times per year, which can also be expressed as days in inventory of approximately 63 days (365 ÷ 5.8 times). When compared to the turnover of 9.9 or 37 days (365 ÷ 5.8 times) times for Flavour, it appears that Refresh is turning over its inventory at a much slower rate than its competitor. (c) Refresh’s current ratio could be higher than Flavour’s because of its slower inventory turnover. It could also have a higher level of prepaid expenses or similar type of current assets. (d) Refresh is the more solvent of the two companies. Refresh has a much 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 interest coverage ratio indicating that Refresh has a better ability to service its debt as interest payments become due.

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PROBLEM 18-9B (Continued) (e) Refresh’s higher gross profit margin may be attributable to a number of factors:  The company may be selling its products at a higher price.  The company may be paying less for the cost of its inventory than the competition. This may occur if, for example, Refresh is able to purchase inventory in large volumes and receives purchase discounts.  Flavour might not be able to take advantage of reduced costs from bulk purchases because it has overextended its credit and is unable to obtain additional debt financing. Refresh’s lower profit margin is most likely the result of higher operating expenses or less other income. (f)

The price-earnings ratio reflects investors’ assessment of the future prospects of a company. As indicated by the higher price-earnings ratio, investors appear to believe that Refresh has the better possibility for growing its profit.

Taking It Further: Financial leverage is said to be positive if a company is able to earn a higher return on equity by using borrowed money in its operations than it has to pay on the borrowed money. A quick measure of leverage is calculated by comparing the amount the percentage of return on equity exceeds return on assets. Flavour Corp’s return on equity exceeds its return on assets by an excellent 19.7% return while Refresh Ltd. has an excess of 14.5% return.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 18-10B (a)

Both Rogers and Shaw seem to have extremely low current ratios. This should not be considered alarming as there are likely large customer deposits as current liabilities which will be used for payments on account. When compared to each other, Shaw has the better liquidity as evidenced by all three liquidity ratios. A detailed composition of the current assets and current liabilities of each company would help confirm this initial assessment.

(b) As for solvency, Shaw is again the better performer of the two companies. Shaw has less debt compared to total assets and also has a much better ability to cover its interest. (c)

Likely due to the different capital structures of the two companies, the conclusions concerning profitability have mixed results. From the profit margin, Shaw’s performance is far stronger than Rogers. Asset turnover is similar between companies, but where opposite trends are revealed is in the return on assets and equity. Rogers has lower equity as a percentage of total assets and the return on equity is considerably stronger than that of Shaw and that of its own return on assets. A detailed composition of the equity of each company would help confirm this initial assessment

Taking It Further: Investors seem to favour Rogers as it has a higher priceearnings ratio. This is consistent with (c) as investors would likely favour a company with a better return on equity.

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PROBLEM 18-11B (a)

Cost of goods sold is net sales of $11,000,000 less gross profit of $4,400,000 = $6,600,000 or 60% of net sales.

(b) Gross profit is 40% of net sales of $11,000,000 or $4,400,000. (c)

Gross profit of $4,400,000 less operating expenses of $1,600,000 equals profit from operations of $2,800,000.

(d) Profit from operations of $2,800,000 less profit before income taxes of $2,357,000 equals interest expense of $443,000. (e)

Profit of $1,650,000 plus income tax expense of $707,000 equals profit before income taxes of $2,357,000.

(f)

Profit margin is 15% of sales. Net sales × 15% equals profit of $1,650,000.

Summary of results: VIEUX CORPORATION Income Statement Year ended December 31, 2017 Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Interest expense Profit before income taxes Income tax expense Profit

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$11,000,000 6,600,000 4,400,000 1,600,000 2,800,000 443,000 2,357,000 707,000 $ 1,650,000

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PROBLEM 18-11B (Continued) (g) Total current assets of $2,650,000 less accounts receivable (h) of $1,100,000 and inventory (i) of $825,000 equals cash of $725,000. (h) Receivables turnover is 10 times and so net sales of $11,000,000 ÷ 10 = accounts receivable of $1,100,000. (i)

Inventory turnover is 8 times and so cost of goods sold of $6,600,000 ÷ 8 = inventory of $825,000.

(j)

Total assets of $7,500,000 less property, plant, and equipment of $4,420,000 and long-term investments of $430,000 equal current assets of $2,650,000.

(k)

Return on assets is 22% so profit of $1,650,000 ÷ 22% equals total assets of $7,500,000.

(l)

Current ratio is 2:1 and so current assets (g) of $2,650,000 ÷ 2 equals current liabilities of $1,325,000.

(m) Total liabilities of $4,100,000 less current liabilities (l) of $1,325,000 equals non-current liabilities of $2,775,000. (n) Total liabilities and shareholders’ equity of $7,500,000 less shareholders’ equity of $3,400,000 equals total liabilities of $4,100,000. (o) Total liabilities and shareholders’ equity is equal to total assets of $7,500,000.

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PROBLEM 18-11B (Continued) Summary of results: VIEUX CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash Accounts receivable Inventory Total current assets Long-term investments Property, plant, and equipment Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders’ Equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

$ 725,000 1,100,000 825,000 2,650,000 430,000 4,420,000 $7,500,000 $1,325,000 2,775,000 4,100,000 1,500,000 1,900,000 3,400,000 $7,500,000

Taking It Further: Because of the large number of figures that are omitted at the beginning of each of the financial statements, it is necessary to work backwards, using totals and sub-totals along with the ratios given.

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BYP18-1 FINANCIAL REPORTING PROBLEM (a) CORUS ENTERTAINMENT INC. Consolidated Statement of Financial Position (in thousands) August 31, 2014 August 31, 2013 Amount Percentage Amount Percentage Current Cash and cash equivalents Accounts receivable Promissory notes receivable Income taxes recoverable Prepaid expenses and other Total current assets Other assets and investments Property, plant and equipment Program and film rights Film investments Broadcast licenses Goodwill Deferred tax assets Total assets

$11,585 183,009

0.4% 6.6%

9,768 13,032 217,394 76,674 143,618 330,437 63,455 979,984 934,859 38,161 $2,784,582

0.4% 0.5% 7.8% 2.8% 5.2% 11.9% 2.3% 35.2% 33.6% 1.4% 100.0%

$81,266 164,302 47,759 351 16,392 310,070 210,470 151,192 232,587 62,274 515,036 646,045 39,463 $2,167,137

3.7% 7.6% 2.2% 0.0% 0.8% 14.3% 9.7% 7.0% 10.7% 2.9% 23.8% 29.8% 1.8% 100.0%

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BYP18-1 (Continued) (a) (Continued) CORUS ENTERTAINMENT INC. Consolidated Statement of Financial Position (in thousands) August 31, 2014 Amount Percentage LIABILITIES Current Accounts payable and accrued liabilities Provisions Total current liabilities Long-term debt Other long-term liabilities Deferred tax liabilities Total liabilities SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Equity - Non-controlling interest Total shareholders' equity Total liabilities and shareholders' equity BYP18-1 (Continued)

August 31, 2013 Amount Percentage

$170,411 5,314 175,725 874,251 171,793 252,687 1,474,456

6.1% 0.2% 6.3% 31.4% 6.2% 9.1% 53.0%

$164,443 3,941 168,384 538,966 93,241 145,713 946,304

7.6% 0.2% 7.8% 24.9% 4.3% 6.7% 43.7%

967,330 8,385 313,361 3,767 17,283 1,310,126 $2,784,582

34.7% 0.3% 11.3% 0.1% 0.6% 47.0% 100.0%

937,183 7,221 256,517 1,653 18,259 1,220,833 2,167,137

43.2% 0.3% 11.8% 0.1% 0.8% 56.3% 100.0% _

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BYP18-1 (Continued) (a) (Continued) CORUS ENTERTAINMENT INC. Consolidated Statements of Income Years Ended August 31 (in thousands) 2014 Amount Percentage Revenues Direct cost of sales, general and administrative expenses Depreciation and amortization Interest expense and debt financing Broadcast license and goodwill impairment Business acquisition, integration and restructuring costs Gains, losses and other expenses Income before income taxes Income tax expense Net income

2013 Amount Percentage

$833,016

100.0%

$751,536

100.0%

543,378

65.2%

500,562

66.6%

24,068 48,320 83,000

2.9% 5.8% 10.0%

26,812 69,828 5,734

3.6% 9.3% 0.8%

46,792 (122,144) 209,602 53,433 $156,169

5.6% -14.7% 25.2% 6.4% 18.7%

7,343 (58,954) 200,211 34,462 $165,749

1.0% -7.8% 26.6% 4.6% 22.1%

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BYP18-1 (Continued) (b) The focus of interest on the Corus statement of financial position is not on current assets or liabilities as they make up a very small portion of the totals. Liquidity is not an issue of concern. Rather the attention should be given to the large portion of the assets made up of broadcast licenses and goodwill, which together make up 68.8% of total assets in 2014. In the previous year, these assets made up 53.6% of the total assets. The large increase is explained by an acquisition during 2014 which generated a gain on acquisition close in amount to the size of the net income. Long-term debt increased 62% from the acquisition, while share capital increased modestly. Solvency would not appear to an issue in spite of total liabilities representing 53% of total assets in 2014, up from 43.7% in 2013, due to the acquisition. On the income statement, as mentioned earlier, the unusual gain from acquisition sustained the profitability of Corus to its prior year level. The major charges representing 10% of total revenues came from broadcast license and goodwill impairment. Business acquisition, integration and restructuring costs were also incurred that are unusual and likely not recurring in the future.

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BYP18-2 INTERPRETING FINANCIAL STATEMENTS (a) In terms of liquidity, both companies have low current ratios and identical acid-test ratios. CN’s receivables turnover is higher than those of CP and so overall, CN’s liquidity is slightly better than CP’s. (b) CN has less free cash flow than CP but both have enough to maintain financial flexibility. Since CP has more debt to total assets, this explains in part why it is worse off concerning its ability to pay its interest costs. (c) CN is more profitable. All of its ratios are better than those of CP, except the asset turnover which is the same.

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BYP18-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

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BYP18-4 COMMUNICATION ACTIVITY Memorandum Re: Limitations of financial statement analysis In evaluating the financial performance of a company, it is important to understand the limitations of financial statement analysis. I have identified the following questions to raise at the audit committee:  Alternative accounting policies: What significant judgements and estimates were required in the choice of IFRS policies by EasyMix? Which key accounting policies have changed in the transition from ASPE to IFRS? Has the effect of the recent implementation to IFRS been adequately explained in the MD&A and notes to the financial statements? How do the policies of this company compare to those used by its key competitors in the cement industry?  Comparability of data: What efforts have been made to explain the impact of the transition from ASPE to IFRS in the ratios reported to the audit committee and the board? Has there been any impact on the calculation or choice of ratios used to meet debt covenants, in particular?  Economic factors: How have the changing prices of commodities and foreign exchange affected this industry? Has the decrease in demand for the construction industry affected this company significantly, and if so, how? Risk assessment: Have all business risks been properly assessed and disclosed?

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BYP18-5 “ALL ABOUT YOU” ACTIVITY (a)

When evaluating the financial statement ratios, a reading of the Management’s Discussion and Analysis (MD&A) will provide some key information for interpreting trends and explaining possible anomalies in the ratio performance for the period. MD&A gives context to the financial information in order to draw more informed conclusions. The purpose of the MD&A of Canadian Tire’s is to provide a description of the economic, financial, and other factors behind the business, usually broken down by its main products, services, or departments. It provides management’s perspective on such topics as the company’s past plans, current performance, and future goals. This section of the annual report is not audited, and is prepared from the point of view of management. It is not intended to be used in isolation.

(b)

The quoted closing price for CTC.a on the TSX Composite Index was as follows at the given dates: January 2, 2015 $122.22 December 27, 2013 $99.84

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Current Ratio

Inventory turnover

Debt to total assets

Interest coverage = Gross profit margin

Return on assets

5.4

$8,922.4 $14,553.2

61.3%

$639.3 + $108.9 + $238.9 $108.9

9.1

$8,416.9 $1,623.8 + $1,481.0 2

times

32.5%

$639.3 $12,462.9

5.1%

4.5%

11.5%

16.0

$604.0 =

25.5%

Return on equity =

Price-earnings = ratio

10.

Payout ratio

Solutions Manual .

1.9

$4,046.0 $12,462.9

= 8.

= Profit margin

$ 8,510.2 $ 4,578.8

$639.3 $14,553.2 + $13,630.0 2 $639.3 $5,630.8 + $5,449.9 2 $122.22 $7.65

$154.1

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BYP18-5 (Continued) (c) (Continued) 2013 1.

Current ratio

Inventory turnover

Debt to total assets

Interest coverage

1.8

5.4

$8,180.1 $13,630.0

60.0%

$564.4 + $105.8 + $220.2 $105.8

8.4

$3,722.3 $ 11,785.6

31.6%

$564.4 $11,785.6

4.8%

4.2%

11.1%

14.3

$561.2 =

21.3%

Gross profit margin

Profit margin

Return on assets

= Return on equity

Price-earnings = ratio

10.

Payout ratio

Solutions Manual .

$ 7,977.8 $ 4,322.1

$8,063.3 $1,481.0 + $1,503.3 2

$564.4 $13,630.0 + $13,228.6 2 $564.4 $5,449.9 + $4,764.3 2 $99.84 $6.96

$119.6

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BYP18-5 (Continued) (c) (Continued) Ratio 1. Current ratio 2. Inventory turnover 3. Debt to total assets 4. Interest coverage 5. Gross profit margin 6. Profit margin 7. Return on assets 8. Return on equity 9. Price-earnings ratio 10. Payout ratio

2014 1.9:1 5.4 times 61.3% 9.1 times 32.5% 5.1% 4.5% 11.5% 16.0 times 25.5%

2013 Comparison 1.8:1 Better 5.4 times Same 60.0% Worse 8.4 times Better 31.6% Better 4.8% Better 4.2% Better 11.1% Better 14.3 times Better 21.3% Better

(d)

The five-year stock chart showing the closing price of the CTC.a stock performance over the past five years demonstrates a fairly smooth climb in the stock price over that period, with few noticeable declines.

(e)

Ratios and stock performance show positive trends.

(f)

Both tools are helpful in assessing some financial considerations in an investment choice. The history of the business and the means that it has taken to grow its operations would be a major factor in explaining it increased earnings and profits. Mark’s Workwear and Forzani acquisitions of the recent past explain much of the growth of the business.

(g)

Message boards may alert a potential investor to some information that could not be found in the annual report. An investor would be well advised to do their own research as well as read analysts’ reports on the current status of the business. Analysts follow the company carefully and provide ratings and recommendations as well as expectations of the performance of the stock in the future.

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BYP18-6 Santé Smoothie Saga (a)

Santé Smoothies & Sweets Ltd. is far more liquid than the public company Okanagan Fruit & Vegetable Corp. Of course, its current ratio is very high, consistent with the excess cash it has on hand. Its receivables turnover is much higher than Okanagan Fruit & Vegetable Corp.; however, it is unlikely that Sante’s has as many receivables as the larger, public company. Its inventory turnover is much lower, but it likely only produces what it can sell most days. A larger bakery would be expected to have more inventory to meet its larger distribution requirements.

(b) Both companies have good debt to total asset ratios, and correspondingly strong times interest earned ratios. Overall, Santé Smoothies & Sweets Ltd. Ltd. remains in the better solvency position. (c)

From a profitability point of view, Santé Smoothies & Sweets Ltd.’s performance is far better than that of Okanagan Fruit & Vegetable Corp. Santé’s gross profit margin, profit margin, return on common shareholders’ equity, and return on assets ratios are multiples of those experienced by Okanagan. Again, this is not unusual as Santé’s business model is quite different than that of Okanagan. It can adjust its pricing as more of a specialty baker and is likely also doing less volume. Its families’ salaries and other expenses also might not be reflective of those of a much larger, public company such as Okanagan Fruit & Vegetable Corp.

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BYP18-6 (Continued) (d) Compared to 2017, Okanagan Fruit & Vegetable Corp.’s ratios in 2018 are generally worsening. All three liquidity ratios have declined. The debt to total assets ratio has deteriorated slightly, but the times interest earned ratio has improved significantly, leading to an overall improvement in solvency. As for profitability, all profitability ratios are declining, with the exception of the dividend payout ratio and the price earnings ratio. Investors may be bidding up the market value of Okanagan Fruit & Vegetable Corp.’s common shares because of the increase in the dividend payout ratio. (e)

Overall, Santé’s is stronger than Okanagan in liquidity, solvency, and profitability. This is likely because of differences in the size and flexibility of the company’s business model as outlined in parts (a) and (c).

(f)

Because of market volatility, it is possible that the market price of the Okanagan Fruit & Vegetable Corp. common shares could decline at a time when Santé’s needs the cash for operations and is forced to sell the investment at a loss. Consequently, considering an equity investment by investing in the shares of another company for a shortterm return may not be the most appropriate option. To maintain liquidity and reduce its risk, Santé’s should instead consider investing in a debt (fixed income) investment to ensure that they don’t experience a loss on their investment.

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APPENDIX B Sales Taxes SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE B-1 There are two main types of sales taxes in Canada, the federal Goods and Services Tax (GST) or Harmonized Sales Tax (HST) and the Provincial Sales Tax (PST) sometimes called the Retail Sales Tax. For a business that is a registrant which charges GST/HST to its customers, all GST/HST paid by the business on all purchases is recovered and does not represent a cost to the business. On the other hand, the PST is not recoverable and the amount paid by the business is included as a cost of purchasing an asset or paying for a service. From the perspective of a consumer, the two types of taxes are viewed as the same because neither tax is fully recoverable.

BRIEF EXERCISE B-2 Accounts Receivable .................................... 1,839.60 Sales......................................................... GST Payable ($1,600 × 5%) .................... QST Payable ($1,600 × 9.975%)............. Cost of Goods Sold ....................................... Merchandise Inventory ..........................

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1,600.00 80.00 159.60

900.00 900.00

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BRIEF EXERCISE B-3 Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. QST Payable ($800 × 9.975%)...................... Accounts Receivable ............................

800.00 40.00 79.80

Merchandise Inventory ................................ Cost of Goods Sold ...............................

450.00

919.80

450.00

BRIEF EXERCISE B-4 Accounts Receivable ................................... 1,839.60 Sales........................................................ GST Payable ($1,600 × 5%) ................... QST Payable ($1,600 × 9.975%)............ Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. QST Payable ($800 × 9.975%)...................... Accounts Receivable ............................

1,600.00 80.00 159.60

800.00 40.00 79.80 919.80

BRIEF EXERCISE B-5 Accounts Receivable .................................... Service Revenue .....................................

450 450

BRIEF EXERCISE B-6 Accounts Receivable .................................... Service Revenue ..................................... GST Payable ($700 × 5%) .......................

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735 700 35

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BRIEF EXERCISE B-7 Merchandise Inventory ................................. GST Recoverable ($4,100 × 5%) ................... Accounts Payable...................................

4,100 205 4,305

BRIEF EXERCISE B-8 Accounts Payable .......................................... GST Recoverable ($500 × 5%) ............... Merchandise Inventory ..........................

525 25 500

BRIEF EXERCISE B-9 Merchandise Inventory ................................. HST Recoverable ($4,100 × 13%) ................. Accounts Payable...................................

4,100 533 4,633

BRIEF EXERCISE B-10 Accounts Payable .......................................... HST Recoverable ($500 × 13%) ............. Merchandise Inventory ..........................

565 65 500

BRIEF EXERCISE B-11 Supplies ($600 × 1.05) ................................... GST Recoverable ($600 × 5%) ...................... Cash .........................................................

630 30 660

BRIEF EXERCISE B-12 Supplies .......................................................... HST Recoverable ($600 × 15%) .................... Cash .........................................................

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600 90 690

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BRIEF EXERCISE B-13 Vehicles .......................................................... HST Recoverable ($32,000 × 14%) ............... Accounts Payable...................................

32,000 4,480 36,480

BRIEF EXERCISE B-14 Vehicles ($32,000 × 1.07) .............................. GST Recoverable ($32,000 × 5%) ................. Accounts Payable...................................

34,240 1,600 35,840

BRIEF EXERCISE B-15 Merchandise Inventory ................................. Supplies ($300 × 1.08) ................................... GST Recoverable ($5,300 × 5%) ................... Accounts Payable...................................

5,000 324 265 5,589

BRIEF EXERCISE B-16 GST Payable ................................................... GST Recoverable .................................... Cash .........................................................

6,120

PST Payable ................................................... Cash .........................................................

8,570

940 5,180

8,570

BRIEF EXERCISE B-17 Cash ................................................................ HST Payable ................................................... HST Recoverable ....................................

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690 3,920 4,610

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SOLUTIONS TO EXERCISES EXERCISE B-1 Province of Manitoba GENERAL JOURNAL Account Titles and Explanation May

Rent Expense ............................................ GST Recoverable ($7,300 × 5%).............. Cash ....................................................

Debit

Credit

7,300 365 7,665

3 Accounts Receivable—Marvin ................ 28,250 Sales .................................................... GST Payable ($25,000 × 5%) ............. PST Payable ($25,000 × 8%) .............

25,000 1,250 2,000

Cost of Goods Sold .................................. 18,600 Merchandise Inventory......................

18,600

Sales Returns and Allowances ............... GST Payable ($800 × 5%)......................... PST Payable ($800 × 8%) ......................... Accounts Receivable—Marvin .........

800 40 64 904

Merchandise Inventory ............................ 11,000 GST Recoverable ($11,000 × 5%)............ 550 Accounts Payable—Macphee........... Furniture ($600 × 1.08) ............................. GST Recoverable ($600 × 5%)................. Cash ...................................................

648 30

31 GST Payable.............................................. GST Recoverable ............................... Cash ...................................................

7,480

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11,550

678 1,917 5,563

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EXERCISE B-2 Province of Alberta GENERAL JOURNAL Account Titles and Explanation

Date May

1 Rent Expense ............................................. GST Recoverable ($7,300 × 5%) ............... Cash ..................................................

Debit

Credit

7,300 365 7,665

3 Accounts Receivable—Marvin ................. 26,250 Sales.................................................. 25,000 GST Payable ($25,000 × 5%) ........... 1,250 Cost of Goods Sold ................................... 18,600 Merchandise Inventory ................... 18,600 5 Sales Returns and Allowances ................ GST Payable ($800 × 5%) .......................... Accounts Receivable—Marvin .......

800 40 840

7 Merchandise Inventory.............................. 11,000 GST Recoverable ($11,000 × 5%) ............. 550 Accounts Payable—Macphee.......... 11,550 12 Furniture ..................................................... GST Recoverable ($600 × 5%) .................. Cash ...................................................

600 30

31 GST Payable ............................................... GST Recoverable .............................. Cash ...................................................

7,480

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EXERCISE B-3 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date May

Debit

1 Rent Expense ..................................... HST Recoverable ($7,300 × 13%) ..... Cash ..............................................

7,300 949

3 Accounts Receivable—Marvin ......... Sales.............................................. HST Payable ($25,000 × 13%) .....

28,250

Cost of Goods Sold ........................... Merchandise Inventory ...............

18,600

5 Sales Returns and Allowances ........ HST Payable ($800 × 13%) ................ Accounts Receivable—Marvin ...

800 104

7 Merchandise Inventory ..................... HST Recoverable ($11,000 × 13%) ... Accounts Payable—Macphee .....

11,000 1,430

12 Furniture ............................................. HST Recoverable ($600 × 13%) ........ Cash ..............................................

600 78

31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................

7,480

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Credit

8,249 25,000 3,250

18,600

904

12,430

678 1,917 5,563

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EXERCISE B-4 Province of Manitoba GENERAL JOURNAL Account Titles and Explanation

Date Nov.

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Debit

Rent Expense ........................................... GST Recoverable ($5,500 × 5%) ............. Cash ....................................................

5,500 275

Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................

8,000 400

Accounts Payable—Comet ..................... Purchase Returns and Allowances GST Recoverable ($500 x 5%)

525

Credit

5,775

8,400 500 25

Accounts Receivable—Solar Star ......... 11,300 Sales ................................................... GST Payable ($10,000 × 5%)............. PST Payable ($10,000 × 8%) .............

10,000 500 800

Computer Equipment ($1,200 × 1.08)..... GST Recoverable ($1,200 × 5%) ............. Cash ....................................................

1,296 60 1,356

GST Payable ............................................. GST Recoverable ............................... Cash ....................................................

2,520

B-8

985 1,535

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EXERCISE B-5 Province of Alberta GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Debit

1 Rent Expense ............................................. GST Recoverable ($5,500 × 5%) ............... Cash ..................................................

5,500 275

4 Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................

8,000 400

6 Accounts Payable—Comet ..................... Purchase Returns and Allowances... GST Recoverable ($500 x 5%) ..........

525

Credit

5,775

8,400 500 25

7 Accounts Receivable—Solar Star ............ 10,500 Sales.................................................. 10,000 GST Payable ($10,000 × 5%) ........... 500 12 Computer Equipment ................................ GST Recoverable ($1,200 × 5%) ............... Cash ...................................................

1,200 60

30 GST Payable ............................................... GST Recoverable .............................. Cash ...................................................

2,520

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EXERCISE B-6 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Debit

Rent Expense ..................................... HST Recoverable ($5,500 × 13%) ..... Cash ..............................................

5,500 715

4 Purchases........................................... HST Recoverable ($8,000 × 13%) ..... Accounts Payable—Comet..........

8,000 1,040

6 Accounts Payable—Comet............... Purchase Returns and Allowance HST Recoverable ($500 x 13%) ..

565

7 Accounts Receivable—Solar Star ... Sales............................................... HST Payable ($10,000 × 13%) ......

11,300

12 Computer Equipment ........................ HST Recoverable ($1,200 × 13%) ..... Cash ..............................................

1,200 156

31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................

2,520

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B-10

Credit

6,215

9,040 500 65 10,000 1,300

1,356 985 1,535

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EXERCISE B-7 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 1 Freight Out ($200 × 1.07) .................. GST Recoverable ($200 × 5%) ......... Cash ..............................................

214.00 10.00

5 Repairs Expense ($800 × 1.07) ....... GST Recoverable ($800 × 5%) ......... Cash ..............................................

856.00 40.00

10 Supplies ($250 × 1.07) ...................... GST Recoverable ($250 × 5%) ......... Accounts Payable........................

267.50 12.50

Credit

224.00

896.00

280.00

13 Accounts Receivable ........................ 5,264.00 Service Revenue .......................... GST Payable ($4,700 × 5%)......... PST Payable ($4,700 × 7%) ......... 15 Cash ................................................... Accounts Receivable ..................

896.00

22 Travel Expense ($720 × 1.07) ........... GST Recoverable ($720 × 5%) ......... Cash ..............................................

770.40 36.00

30 Telephone Expense ($150 × 1.07) ... GST Recoverable ($150 × 5%) ......... Accounts Payable........................

160.50 7.50

4,700.00 235.00 329.00 896.00

806.40

168.00

30 GST Payable ...................................... 1,890.50 GST Recoverable ......................... Cash ..............................................

741.60 1,148.90

30 PST Payable ...................................... 2,640.00 Cash ..............................................

2,640.00

Solutions Manual .

B-11

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-8 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 8 Equipment ................................................. HST Recoverable ($1,500 × 15%) ............ Accounts Payable ..............................

1,500.00 225.00

10 Supplies..................................................... HST Recoverable ($100 × 15%) ............... Cash......................................................

100.00 15.00

12 Accounts Receivable ............................... Service Revenue ................................. HST Payable ($1,250 × 15%) ..............

1,437.50

18 Repairs Expense ...................................... HST Recoverable ($220 × 15%) ............... Cash......................................................

220.00 33.00

22 Cash ........................................................... Accounts Receivable ..........................

1,437.50

30 HST Payable .............................................. HST Recoverable ................................ Cash......................................................

2,520.60

Solutions Manual .

B-12

Credit

1,725.00

115.00 1,250.00 187.50

253.00

1,437.50 820.45 1,700.15

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-9 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 8 Equipment ................................................. GST Recoverable ($1,500 × 5%).............. Accounts Payable ..............................

1,500.00 75.00

10 Supplies..................................................... GST Recoverable ($100 × 5%)................. Cash......................................................

100.00 5.00

12 Accounts Receivable ............................... Service Revenue ................................. GST Payable ($1,250 × 5%) ................

1,312.50

18 Repairs Expense ...................................... GST Recoverable ($220 × 5%)................. Cash......................................................

220.00 11.00

22 Cash ........................................................... Accounts Receivable.........................

1,312.50

30 GST Payable.............................................. GST Recoverable ................................ Cash......................................................

970.50

Solutions Manual .

B-13

Credit

1,575.00

105.00 1,250.00 62.50

231.00

1,312.50 315.55 654.95

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM B-1 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov 2 Merchandise Inventory ($900 × 3) ............ HST Recoverable ($2,700 × 13%) ............. Accounts Payable—Fender Supply ....

2,700 351

4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ...............

2,938

Cost of Goods Sold ($675 × 2) .................. Merchandise Inventory ........................

1,350

5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Merchandise Inventory .........................

791

7 Sales Returns and Allow.($2,600 ÷ 2) ...... HST Payable ($1,300 × 13%) ..................... Cash.......................................................

1,300 169

Merchandise Inventory .............................. Cost of Goods Sold .............................

675

8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash.......................................................

200 26

Solutions Manual .

B-14

Credit

3,051 2,600 338 1,350 91 700

1,469

675

226

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-1 (Continued) GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov. 10 Accounts Receivable—Regional Band.... Sales ...................................................... HST Payable ($5,100 × 13%) ...............

5,763

Cost of Goods Sold ................................... Merchandise Inventory........................

2,850

13 Merchandise Inventory ($1,900 × 2) ......... HST Recoverable ($3,800 × 13%) ............. Accounts Payable—Yamaha Canada .

3,800 494

14 Cash ............................................................ Accounts Receivable...........................

4,150

16 Accounts Payable—Yamaha Canada ...... HST Recoverable ($1,900 × 13%) ........ Merchandise Inventory.........................

2,147

20 Accounts Payable—Fender Supply ......... Cash ......................................................

3,051

Solutions Manual .

B-15

Credit

5,100 663

2,850

4,294

4,150

247 1,900

3,051

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-2 Province of British Columbia GENERAL JOURNAL Account Titles and Explanation

Date Nov

Debit

2 Merchandise Inventory ($900 × 3) ............ GST Recoverable ($2,700 × 5%) ............... Accounts Payable—Fender Supply ....

2,700 135

4 Cash ............................................................. Sales ...................................................... GST Payable ($2,600 × 5%) ................. PST Payable ($2,600 × 7%)..................

2,912

Cost of Goods Sold.................................... Merchandise Inventory ........................

1,350

5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Merchandise Inventory .........................

735

7 Sales Returns and Allow.($2,600 ÷ 2) ...... GST Payable ($1,300 × 5%) ....................... PST Payable ($1,300 × 7%) ........................ Cash.......................................................

1,300 65 91

Merchandise Inventory .............................. Cost of Goods Sold..............................

675

8 Supplies ($200 × 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash.......................................................

214 10

Solutions Manual .

B-16

Credit

2,835 2,600 130 182 1,350 35 700

1,456

675

224

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-2 (Continued) GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov. 10 Accounts Receivable—Regional Band.... Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%) .................

5,712

Cost of Goods Sold ................................... Merchandise Inventory........................

2,850

13 Merchandise Inventory ($1,900 × 2) ......... GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada .

3,800 190

14 Cash ............................................................ Accounts Receivable...........................

4,150

16 Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Merchandise Inventory.........................

1,995

20 Accounts Payable—Fender Supply ......... Cash ......................................................

2,835

Solutions Manual .

B-17

Credit

5,100 255 357

2,850

3,990

4,150

95 1,900

2,835

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-3 Province of Ontario Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov 2 Purchases ($900 × 3) ................................. HST Recoverable ($2,700 × 13%) ............. Accounts Payable—Fender Supply ....

2,700 351

4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ...............

2,938

5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Purchase Returns and Allowances .....

791

7 Sales Returns and Allow.($2,600 ÷ 2) ...... HST Payable ($1,300 × 13%) ..................... Cash.......................................................

1,300 169

8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash....................................................... 10 Accounts Receivable—Regional Band Sales ...................................................... HST Payable ($5,100 × 13%) ...............

200 26

13 Purchases ($1,900 × 2) .............................. HST Recoverable ($3,800 × 13%).............. Accounts Payable—Yamaha Canada .

Solutions Manual .

B-18

Credit

3,051 2,600 338 91 700

1,469

226 5,763 5,100 663 3,800 494 4,294

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-3 (Continued)

Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov. 14 Cash ............................................................ Accounts Receivable...........................

4,150

16 Accounts Payable—Yamaha Canada ...... HST Recoverable ($1,900 × 13%) ........ Purchase Returns and Allowances.....

2,147

20 Accounts Payable—Fender Supply ......... Cash ......................................................

3,051

Solutions Manual .

B-19

Credit

4,150

247 1,900

3,051

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-4 Province of British Columbia GENERAL JOURNAL Account Titles and Explanation

Date Nov

Debit

2 Purchases ($900 × 3) ................................. GST Recoverable ($2,700 × 5%) ............... Accounts Payable—Fender Supply ....

2,700 135

2,912

5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Purchase Returns and Allowances .....

735

1,300 65 91

8 Supplies ($200 × 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash.......................................................

214 10

10 Accounts Receivable—Regional Band Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%)..................

5,712

Solutions Manual .

B-20

Credit

2,835 2,600 130 182 35 700

1,456

224

5,100 255 357

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-4 (Continued)

Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov. Purchases ($1,900 × 2) .............................. GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada .

3,800 190

14 Cash ............................................................ Accounts Receivable...........................

4,150

16 Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Purchase Returns and Allowances.....

1,995

20 Accounts Payable—Fender Supply ......... Cash ......................................................

2,835

Solutions Manual .

B-21

Credit

3,990

4,150

95 1,900

2,835

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-5 (a)

Province of Alberta

Date May 1

18 19

Solutions Manual .

GENERAL JOURNAL Account Titles and Explanation

Debit

Rent Expense ....................................... Prepaid Rent ......................................... GST Recoverable ($3,300 × 5%) ......... Cash ................................................

1,650 1,650 165

Furniture ............................................... GST Recoverable ($4,100 × 5%) ......... Accounts Payable—George’s ......

4,100 205

Accounts Payable—George’s ............ GST Recoverable ($800 × 5%) ....... Furniture ..........................................

840

Cash ...................................................... Service Revenue ............................ GST Payable ($2,500 × 5%) ...........

2,625

Supplies ................................................ GST Recoverable ($300 × 5%) ............ Cash ................................................

300 15

Accounts Receivable—Manson ......... Service Revenue ............................ GST Payable ($1,100 × 5%) ...........

1,155

Accounts Payable—George’s ............ Cash ($4,305 − $840) .....................

3,465

Office Expense ..................................... Cash ................................................

B-22

Credit

3,465

4,305 40 800 2,500 125

315 1,100 55 3,465 22

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-5 (Continued) (a) (Continued)

Date May 21

GENERAL JOURNAL Account Titles and Explanation

Debit

Utilities Expense .............................. Accounts Payable ....................

150

Cash .................................................. Accounts Receivable—Manson

1,155

27 Accounts Receivable—Pedneault . Service Revenue........................ GST Payable ($600 × 5%)..........

630

(b) Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27

GST Recoverable $165 205 (40)

Credit

150

1,155 600 30

GST Payable

$125 15 55 30 $210

$345

A refund from the Receiver General would be received and recorded as follows: Cash .................................................. GST Payable..................................... GST Recoverable.......................

Solutions Manual .

B-23

135 210 345

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-6 (a)

Province of Ontario

Date May 1

18 19

Solutions Manual .

GENERAL JOURNAL Account Titles and Explanation

Debit

Rent Expense ....................................... Prepaid Rent ......................................... HST Recoverable ($3,300 × 13%) ...... Cash ................................................

1,650 1,650 429

Furniture .............................................. HST Recoverable ($4,100 × 13%) ....... Accounts Payable—George’s ......

4,100 533

Accounts Payable—George’s ............ HST Recoverable ($800 × 13%) ..... Furniture ..........................................

904

Cash ...................................................... Service Revenue ............................ HST Payable ($2,500 × 13%) .........

2,825

Supplies ................................................ HST Recoverable ($300 × 13%) .......... Cash ................................................

300 39

Accounts Receivable—Manson ......... Service Revenue ............................ HST Payable ($1,100 × 13%) .........

1,243

Accounts Payable—George’s ............ Cash ($4,633 − $904) .....................

3,729

Office Expense ..................................... Cash ................................................

B-24

Credit

3,729

4,633 104 800 2,500 325

339 1,100 143 3,729 22

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-6 (Continued) (a) (Continued)

Date May 21

GENERAL JOURNAL Account Titles and Explanation

Debit

Utilities Expense .............................. Accounts Payable ....................

150

Cash .................................................. Accounts Receivable—Manson

1,243

27 Accounts Receivable—Pedneault . Service Revenue........................ HST Payable ($600 × 13%) ........

678

(b) Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27

HST Recoverable $429 533 (104)

Credit

150

1,243 600 78

HST Payable

$325 39 143 78 $546

$897

A refund from the Receiver General would be received and recorded as follows: Cash .................................................. HST Payable ..................................... HST Recoverable .......................

Solutions Manual .

B-25

351 546 897

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

APPENDIX C Subsidiary Ledgers and Special Journals SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE C-1 (a)

Date

(b) Accounts Receivable Subsidiary Ledger

General Ledger

Chiu Co.

Accounts Receivable

Ref.

Jan. 7 17

Debit

Credit Balance

1,800 700

Date

Ref.

1,800 Jan.31 1,100 31

Debit

Credit Balance

11,5001 2

6,400

11,500 5,100

Elbaz Inc. Date

Ref.

Debit Credit

Balance

6,000

Jan.15 24

6,000 4,000

2,000 Lewis Co.

Date

Ref.

Jan.23 29 1 2

Debit Credit Balance 3,700

3,700 0

3,700

$1,800 + $6,000 + $3,700 = $11,500 $700 + $2,000 + $3,700 = $6,400

BRIEF EXERCISE C-2 1. General ledger 2. Subsidiary ledger 3. General ledger 4. General ledger Solutions Manual .

5. 6. 7. 8.

General ledger Subsidiary ledger General ledger General ledger C-1

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE C-3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Sales Journal Cash Payments Journal General Journal Cash Receipts Journal Cash Payments Journal Cash Receipts Journal General Journal Purchases Journal Purchases Journal Cash Payments Journal

BRIEF EXERCISE C-4 (a) Journal

(b) Journal Columns

General Journal

Sales Returns and Allowances (Dr.), Accounts Receivable (Cr.), Inventory (Dr.), Cost of Goods Sold (Cr.) *

Cash Receipts

Cash (Dr.), Accounts Receivable (Cr.)

Cash Payments

Cash (Cr.), Merchandise Inventory (Dr.)

Cash Payments

Cash (Cr.), Accounts Payable (Dr.)

Cash Payments

Cash (Cr.), Merchandise Inventory (Dr.)

Cash Payments

Cash (Cr.), Other Accounts (Equipment) (Dr.)

Cash Receipts

Cash (Dr.), Merchandise Inventory (Cr.)

Cash Payments

Cash (Cr.), Other Accounts (Drawings) (Dr.)

Cash Receipts

Cash (Dr.), Sales (Cr.), Cost of Goods Sold (Dr.), Merchandise Inventory (Cr.)

* There are no column titles in the general journal, but these are the account titles that would be used in journalizing. Solutions Manual .

C-2

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE C-5 Journal

Column Titles

Cash Receipts

Cash (Dr.), Sales (Cr.)

Sales

Accounts Receivable (Dr.), Sales (Cr.)

General

*Sales Returns and Allowances (Dr.), Accounts Receivable (Cr.)

Cash Receipts

Cash (Dr.), Other Accounts (Cr.) (Purchase Returns)

Cash Payments

Other Accounts (Dr.) (Freight Out), Cash (Cr.)

Cash Payments

Other Accounts (Dr.) (Purchases), Cash (Cr.)

Purchases

Supplies (Dr.), Accounts Payable (Cr.)

Cash Payments

Other Accounts (Dr.) (Freight In), Cash (Cr.)

* There are no column titles in the general journal, but these are the account titles that would be used in journalizing.

Solutions Manual .

C-3

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE C-6 General Journal Date

Account Titles and Explanations

Apr. 30

J1 Ref.

Debit

Service Revenue ........................................ Rent Revenue............................................. Income Summary................................

53,800 12,000

Income Summary....................................... Depreciation Expense ........................ Salaries Expense ................................ Supplies Expense...............................

30,900

Income Summary....................................... B. Willis, Capital .................................

34,900

B. Willis, Capital......................................... B. Willis, Drawings.............................

18,000

Credit

65,800 8,000 19,400 3,500

34,900 18,000

BRIEF EXERCISE C-7 General Journal Date

Account Titles and Explanations

J1 Ref.

Nov. 30 Depreciation Expense ............................... Accumulated Depreciation—Furniture

Debit

Credit

6,800 6,800

BRIEF EXERCISE C-8 General Journal Date

Account Titles and Explanations

Feb. 28 Accounts Payable ($960 – $690)............... Cash ..................................................

Solutions Manual .

C-4

J1 Ref.

Debit

Credit

270 270

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE C-1 1. 2. 3. 4. 5. 6. 7.

General Journal Cash Payments Journal Cash Receipts Journal General Journal Purchases Journal Purchases Journal Cash Payments Journal

8. 9. 10. 11. 12. 13.

Cash Payments Journal General Journal Cash Receipts Journal General Journal Sales Journal Cash Receipts Journal

EXERCISE C-2 (a) and (b) Date

Account Debited

Sept. 2 T. Lu 26 M. Gafney

Solutions Manual .

WONG COMPANY Sales Journal S1 Invoice Accounts Receivable Cost of Goods Sold Dr. Dr. Merchandise Inventory No. Ref. Cr. Sales Cr.  321 2,720 1,960 322  890 570

C-5

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-2 (Continued) (a) and (c) (Continued)

Date

Purchases Journal Accounts Merchandise Supplies Payable Inventory Account Credited Terms Ref. Cr. Dr Dr.

Sept. 3 Berko Co. 10 Leonard Co. 12 Wells Co.

n/30

Solutions Manual

  

175 800 7,700

Other Accounts Account Debited

Ref. Amount

Equipment

7,700

175 800

C-6 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-3

(a) and (b)

WONG COMPANY Cash Receipts Journal

Account Credited

Date

Sept. 16 L. Maille 25 T. Lu

Ref.

Cash Dr.

 

860 2,720

(a) and (c)

Ch. No.

Date Sept. 11 18 24 26 30 30 30

Solutions Manual .

Payee

Accounts Receivable Cr.

Sales Cr. 860

CR1 Cost of Goods Sold Dr. Other Merchandise Accounts Inventory Cr. Cr. 490

2,720

WONG COMPANY Cash Payments Journal Merch. Accounts Cash Inventory Payable Account Cr. Dr. Dr. Debited

A&F Shippers Leonard Co. Leonard Co. Freight Co. Employees names

90 450 800 75 2,360

V. Wong Berko Co.

1,250 175

CP1 Other Accounts Ref. Dr.

90 450 800 Freight Out Salaries Expense V. Wong, Drawings

75 2,360 1,250

175

C-7

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-3 (Continued) (a) and (d) WONG COMPANY General Journal Date

Account Titles and Explanations

Sept. 11

J1 Ref.

Debit

Accounts Payable—Leonard Co. ............... Merchandise Inventory........................

200

20 Sales Returns and Allowances................... Cash......................................................

860

Inventory ...................................................... Cost of Goods Sold .............................

490

Credit 200

860 490

EXERCISE C-4 (a) and (b) Account Debited Date Sept. 2 T. Lu 26 M. Gafney

Solutions Manual .

WONG COMPANY Sales Journal S1 Invoice Accounts Receivable Dr. No. Ref. Sales Cr. 321  2,720 890 322 

C-8

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-4 (Continued) (a) and (c) (Continued)

Date

Purchases Journal Accounts Payable Purchases Account Credited Terms Ref. Cr. Dr

Sept. 3 Berko Co. 10 Leonard Co. 12 Wells Co.

n/30

Solutions Manual

  

175 800 7,700

Supplies Dr.

Other Accounts Account Debited

Ref. Amount

Equipment

7,700

175 800

C-9 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-5 (a) and (b) WONG COMPANY Cash Receipts Journal Account Credited

Ref.

Cash Dr.

Sept. 16 L. Maille 25 T. Lu

 

860 2,720

Date

(a) and (c)

Ch. No.

Date Sept. 11 18 24 26 30 30 30

Solutions Manual .

Payee

Accounts Receivable Cr.

CR1 Sales Cr.

Other Accounts Cr.

860 2,720

WONG COMPANY Cash Payments Journal Pur- Accounts Cash chases Payable Account Cr. Dr. Dr. Debited

A&F Shippers Leonard Co. Leonard Co. Freight Co. Employees names

90 450 800 75 2,360

V. Wong Berko Co.

1,250 175

CP1 Other Accounts Ref. Dr.

Freight In

Freight Out Salaries Expense V. Wong, Drawings

450 800 2,360 1,250

175

C-10

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-5 (Continued) (a) and (d) WONG COMPANY General Journal Date

Account Titles and Explanations

J1 Ref.

Debit

Sept. 11 Accounts Payable—Leonard Co. ............... Purchase Returns and Allowances ....

200

20 Sales Returns and Allowances................... Cash......................................................

860

Credit 200 860

EXERCISE C-6 (a) Oct.

5 Accounts Payable—Lyden Company ........ Merchandise Inventory .......................

720

7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........

600

Merchandise Inventory ............................... Cost of Goods Sold ............................

375

720

600 375

Note: The purchase of the equipment from Lifelong Inc. on Oct. 2, for $13,200 would be recorded in the purchases journal.

Solutions Manual .

C-11

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-6 (Continued) (b) Oct.

5 Accounts Payable—Lyden Company ........ Purchase Returns and Allowances ...

720

7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........

600

720 600

Note: The purchase of the equipment from Lifelong Inc. on Oct. 2, for $13,200 would be recorded in the purchases journal. (c) To:

President, Lee Ltd.

From:

Student

Subject:

Posting to Control and Subsidiary Accounts

The posting to the control and subsidiary ledger accounts varies with the journals used in recording the transactions. Sales and purchases journals—the totals for the month are posted to the control accounts. The individual entries are posted daily to the subsidiary accounts receivable and accounts payable accounts (also to the subsidiary inventory accounts, if maintained). Cash receipts and cash payments journals—the totals for the month are posted to the control account. The individual entries are posted daily to the subsidiary accounts receivable and accounts payable accounts (also to the subsidiary inventory accounts, if maintained). General journal—the individual entries are posted daily. Each entry that pertains to a control and a subsidiary account is dualposted. That is, it is posted to both the control account and the subsidiary account. I hope this memo answers your questions about posting.

Solutions Manual .

C-12

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-7 (a) Debit balance of $156,790. Beginning balance of $137,800 plus $98,670 debit from sales journal less $79,680 credit from cash receipts journal. (b) Credit balance of $141,600. Beginning balance of $144,200 plus $39,700 credit from purchases journal less $42,300 debit from cash payments journal. (c) The column total of $98,670 in the sales journal would be posted to the credit side of the Sales account and the debit side of the Accounts Receivable account in the general ledger. The column total of $56,440 in the sales journal would be posted to the debit side of the Cost of Goods Sold account and the credit side of the Merchandise Inventory account in the general ledger. (d) The accounts receivable column total of $79,680 in the cash receipts journal would be posted to the credit side of the Accounts Receivable account in the general ledger.

Solutions Manual .

C-13

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-8 (a) and (b) General Ledger Accounts Receivable Date Sept.

1 30 30 30

Explanation

Ref.

Balance

 S1 CR1 J1

Debit

Credit

Balance

7,030 190

10,960 15,150 8,120 7,930

4,190

Accounts Receivable Subsidiary Ledger Zhang Date Sept.

1 30 30 30

Explanation

Ref.

Balance

 S1 CR1 J1

Debit

Credit

800 2,300 190

Balance 3,820 4,620 2,320 2,130

Cavanaugh Date Sept.

1 30 30

Explanation

Ref.

Balance

 S1 CR1

Debit

Credit

1,100 1,310

Balance 2,060 3,160 1,850

Iman Date

Explanation

Ref.

Sept. 30 30

Solutions Manual .

S1 CR1

C-14

Debit

Credit

1,030 380

Balance 1,030 650

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-8 (Continued) (a) and (b) (continued) Accounts Receivable Subsidiary Ledger Jana Date Sept.

1 30 30

Explanation

Ref.

Balance

 S1 CR1

Debit

Credit

Balance 2,440 3,700 2,460

1,260 1,240

London Date

Explanation

Ref.

Sept. 1 30

Balance

 CR1

Debit

Credit

Balance 2,640 840

1,800

(c) MAC COMPANY Schedule of Customers September 30 Zhang................................................................................. Cavanaugh ........................................................................ Iman ................................................................................... Jana ................................................................................... London .............................................................................. Total ...........................................................................

$2,130 1,850 650 2,460 840 $7,930

Accounts Receivable (per general ledger account) .......

$7,930

Solutions Manual .

C-15

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM C-1 (a), (b), and (c) Sales Journal

Date Jan.

Account Debited

4 Wong 9 Tops Corp. 17 NFQ Co. 31 Wong

Invoice No. Ref. 371 372 373 374

   

Accounts Receivable Dr. Sales Cr.

S1 Cost of Goods Sold Dr. Merchandise Inventory Cr.

6,500 2,600 7,500 7,380 23,980 (112)/(401)

3,900 1,560 4,500 4,428 14,388 (505)/(120)

General Journal Date Jan.

Account Titles and Explanations

J1 Ref.

5 Accounts Payable—Sun Distributors....... 201/ Merchandise Inventory ...................... 120

Solutions Manual .

C-16

Debit

Credit

1,450 1,450

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-1 (Continued) (a), (b) and (c) (Continued) Cash Receipts Journal

Account Credited

Date

Ref.

Jan. 6 13 15 Tops Corp. 17 Wong 20 27 30 NFQ Co.

Cash Dr.

2,650 5,290  2,600  6,500 1,400 4,370  7,500 30,310 (101)

Accounts Receivable Sales Cr. Cr.

CR1 COGS Dr. Merch. Other Inventory Accounts Cr. Cr.

2,650 5,290 2,600 6,500

7,500 16,600 (112)

1,400 840 4,370 2,622 _ _ 13,710 8,226 (401) (505)/(120)

Cash Payments Journal

Date

Ch. No.

Jan. 13 15 20 31

Solutions Manual .

Payee Sun Dist.

Merch. Accounts Cash Inv. Payable Cr. Dr. Dr.

6,350 11,300 Irvine Co. 5,400 11,000 34,050 (101)

1,590 3,174

Account Debited

CP1 Other Accounts Ref. Dr.

 6,350 Sun Dist. Salaries Exp. 729 11,300  5,400 Irvine Co. Salaries Exp. 729 11,000 11,750 22,300 (201) (X)

C-17

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-1 (Continued) (a), (b) and (c) (Continued)

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.

P1 Other Accounts Account Debited

Jan. 4 4 8 11 19 23 24

Sun Distributors Moon Inc. Irvine Co. Lewis Co. Mark Corp Sun Distributors Levine Corp.

Solutions Manual

      

7,800 480 5,400 4,300 6,600 4,800 4,690 34,070 (201)

7,800 480 5,400 4,300 Equipment 157 4,800 4,690 26,990 (120)

C-18 .

Ref. Amount

480 (126)

6,600

6,600 X

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-2 (a), (b), and (c) Sales Journal

Account Debited

Date Oct.

4 Petro Corp. 17 Trudeau Co. 25 Golden Corp. 30 Trudeau Co.

Invoice No. Ref. 204 205 206 207

Accounts Receivable Dr. Sales Cr.

S1 Cost of Goods Sold Dr. Merchandise Inventory Cr.

8,600 5,530 5,520 5,200 24,850 (112)/(401)

5,590 3,595 3,588 3,380 16,153 (505)/(120)

   

General Journal Date

Account Titles and Explanations

J1 Ref.

Oct. 13 Accounts Payable—Chen Corp. ............ 201/ Merchandise Inventory ................... 120

Solutions Manual .

C-19

Debit

Credit

260 260

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-2 (Continued) (a), (b), and (c) (Continued) Cash Receipts Journal

Date

Account Credited

Oct. 7 12 Petro Corp. 14 16 Land 21 25 Trudeau Co. 28

Ref.

Cash Dr.

A/R Cr.

CR1

Sales Cr.

9,610  8,600 8,600 8,810 45,000 140 8,640  5,530 5,530 9,320 95,510 14,130 (101) (112)

COGS Dr. Other Merch. Inventory Accounts Cr. Cr.

9,610

6,247

8,810

5,727 45,000

8,640

5,616

9,320 6,058 36,380 23,648 (401) (505)/(120)

Cash Payments Journal

Date

Payee

Cash Cr.

Oct. 9 Madison Co. 5,800 18 2,215 23 Chen Corp. 4,640 26 45,000 26 30 The Gazette 600 58,255 (101)

Solutions Manual .

Merch. Accts. Invent. Payable Dr. Dr.

45,000 (X)

CP1 Account Debited

5,800 Madison Co.

Other Accts. Ref Dr. 

2,215  4,640 Chen Corp. 140 26,000 Land 145 19,000 Buildings Advertising 610 600 2,215 10,440 45,600 (120) (201) (X)

C-20

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-2 (Continued) (a), (b) and (c) (Continued)

Account Credited

Date

Terms Ref.

Purchases Journal Merchandise Accounts Inventory Supplies Payable Cr. Dr Dr.

P1 Other Accounts Account Debited Ref. Amount

Oct. 2 5 10 25 27 30

     

Madison Co. Frey Co. Chen Corp. Frey Co. Schmid Co. Madison Co.

Solutions Manual

5,800 315 4,900 260 9,000 16,200 36,475 (201)

C-21 .

5,800 315 4,900 260 9,000 16,200 35,900 (120)

575 (126)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (b) Sales Journal

Account Debited

Date Jan.

3 24

Cost of Goods Sold Dr. Accounts Invoice Receivable Dr. Merchandise No. Ref. Sales Cr. Inventory Cr.  

B. Rohl B. Lu

3,000 7,800 10,800 (112)/(401)

1,250 3,300 4,550 (505)/(120)

Cash Receipts Journal

Date

Account Credited

Other Accounts COGS Dr. Cash Receivable Sales Merch. Accounts Ref. Dr. Cr. Cr. Inv. Cr. Cr.

Jan. 7 S. Armstrong  4,000  3,000 13 B. Rohl 23 7,700 115 35,000 29 Notes Rec. 49,700 (101)

Solutions Manual .

CR1

4,000 3,000 7,700 7,000 (112)

C-22

4,840

7,700 4,840 (401) (505)/(120)

35,000 35,000 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (b) (Continued)

Date

Purchases Journal Accounts Merchandise Supplies Payable Inventory Account Credited Terms Ref. Cr. Dr Dr.

P1 Other Accounts Account Debited

Jan. 5 Warren Parts 17 Voyer Co.

Solutions Manual

 

2,900 4,900 7,800 (201)

2,900 4,900 7,800 (120)

C-23 .

Ref. Amount

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ROBLEM C-3 (Continued) (b) (Continued) Cash Payments Journal

Date

Payee

Cash Cr.

Jan. 11 15 18 27

Lindon Co. Harms Dist. Employees Warren Parts

350 16,000 3,900 1,150

M. Perrault

1,300 22,700 (101)

Merc. Inv. Dr.

Accts. Payable Dr.

CP1 Account Debited

Other Accts. Dr. Ref

350 16,000 Harms Dist. Salaries Exp. 1,150 Warren Parts M. Perrault, Drawings 350 17,150 (120) (201)

 725 3,900  310

General Journal Date

Account Titles and Explanations

J1 Ref.

Debit

Jan. 14 Sales Returns and Allowances.................... 410 Accounts Receivable—R. Goge...........  /112

6,000

20 Accounts Payable—Watson & Co. ..............  /201 Notes Payable ....................................... 200

14,000

30 Accounts Payable—Voyer Co. ....................  /201 Merchandise Inventory......................... 120

400

Solutions Manual .

C-24

1,300 5,200 (X)

Credit

6,000

14,000 400

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c)

General Ledger Cash

Date Jan.

1 31 31

No. 101

Explanation

Ref.

Balance



CR1 CP1

Debit

Credit

Balance

22,700

17,900 67,600 44,900

49,700

Accounts Receivable Date Jan.

1 14 31 31

Explanation

Ref.

Balance



J1 S1 CR1

No. 112 Debit

Credit 6,000

10,800 7,000

Notes Receivable Date Jan.

1 31

Explanation

Ref.

Balance



Debit

CR1

Jan.

1 30 31 31 31 31

Solutions Manual .

Explanation

Ref.

Balance



J1 S1 P1 CR1 CP1

C-25

38,000 32,000 42,800 35,800 No. 115

Credit

Balance

35,000

45,000 10,000

Merchandise Inventory Date

Balance

No. 120 Debit

Credit 400 4,550

7,800 4,840 350

Balance 22,600 22,200 17,650 25,450 20,610 20,960

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Land Date Jan.

No. 140

Explanation

Ref.

Balance



Debit

Credit

25,000

Building Date Jan.

No. 145

Explanation

Ref.

Balance



Debit

Credit

Jan.

Explanation

Ref.

Balance



Debit

No. 146 Credit

Jan.

No. 157

Explanation

Ref.

Balance



Debit

Credit

Jan.

Explanation

Ref.

Balance



Debit

No. 158 Credit

No. 200

Explanation

Ref.

Jan. 20

Solutions Manual .

Balance 1,950

Notes Payable Date

Balance 6,450

Accumulated Depreciation—Equipment Date

Balance 38,800

Equipment Date

Balance 75,000

Accumulated Depreciation—Building Date

Balance

C-26

Debit

Credit

Balance

14,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Payable Date Jan.

1 20 30 31 31

Explanation

Ref.

Balance



J1 J1 P1 CP1

No. 201 Debit

Credit

14,000 400 7,800 17,150

Mortgage Payable Date Jan.

Explanation

Ref.

Balance



Jan.

Date

Debit

Credit

67,400 No. 301

Ref.

Balance



87,600

M. Perrault, Drawings

No. 310

Explanation

Debit

Ref.

Debit

CP1

1,300

Credit

Ref.

Debit

S1 CR1

Credit

Balance

10,800 7,700

10,800 18,500

Sales Returns and Allowances Explanation

Jan. 14

Solutions Manual .

Balance

No. 401

Explanation

Jan. 31 31

Balance

1,300

Sales

Date

Balance

Explanation

Jan. 31

Date

34,200 20,200 19,800 27,600 10,450 No. 275

M. Perrault, Capital Date

Balance

C-27

Ref.

Debit

6,000

No. 410 Credit

Balance 6,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Cost of Goods Sold Date

Explanation

Jan. 31 31

No. 505

Ref.

Debit

S1 CR1

4,550 4,840

Credit

4,550 9,390

Salaries Expense Date Jan.

Explanation 31

Solutions Manual .

C-28

Balance

No. 725

Ref.

Debit

CP1

3,900

Credit

Balance 3,900

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Receivable Subsidiary Ledger S. Armstrong Date Jan.

1 7

Explanation

Ref.

Balance

 CR1

Debit

Credit

Balance

4,000

6,500 2,500

Credit

Balance

6,000

30,000 24,000

Credit

Balance

R. Goge Date Jan.

1 14

Explanation

Ref.

Balance

 J1

Debit

B. Lu Date Jan.

1 24

Explanation

Ref.

Debit

Balance

 S1

7,800

Ref.

Debit

S1 CR1

3,000

1,500 9,300

B. Rohl Date Jan.

Explanation 3 13

Solutions Manual .

C-29

Credit

Balance

3,000

3,000 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Payable Subsidiary Ledger Denomme Corp. Date Jan.

Explanation

Ref.

Balance



Debit

Credit

Balance 4,000

Harms Distributors Date Jan.

1 15

Explanation

Ref.

Debit

Balance

 CP1

16,000

Ref.

Debit

Credit

Balance 16,000 0

Voyer Co. Date Jan.

Explanation 17 30

P1 J1

400

Ref.

Debit

Credit

Balance

4,900

4,900 4,500

Credit

Balance

2,900

2,900 1,750

Credit

Balance

Warren Parts Date Jan.

Explanation 5 27

P1 CP1

1,150

Explanation

Ref.

Debit

Balance

 J1

Watson & Co. Date Jan.

1 20

Solutions Manual .

C-30

14,000

14,200 200

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (d) PERRAULT MUSIC CO. Trial Balance January 31, 2017 Debit Cash ..................................................................... Accounts receivable ........................................... Notes receivable .................................................. Merchandise inventory ....................................... Land ..................................................................... Building................................................................ Accumulated depreciation—building ................ Equipment............................................................ Accumulated depreciation—equipment ............ Notes payable ...................................................... Accounts payable................................................ Mortgage payable ................................................ M. Perrault, capital .............................................. M. Perrault, drawings .......................................... Sales..................................................................... Sales returns and allowances ............................ Cost of goods sold .............................................. Salaries expense .................................................

Solutions Manual .

C-31

Credit

$ 44,900 35,800 10,000 20,960 25,000 75,000 $ 38,800 6,450 1,950 14,000 10,450 67,400 87,600 1,300 18,500 6,000 9,390 3,900 $238,700

$238,700

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (e) Accounts Receivable Subsidiary Ledger S. Armstrong .................................................................... $ 2,500 R. Goge ............................................................................. 24,000 B. Lu ...................................................................................... 9,300 $35,800 Accounts Receivable control account balance .......................... $35,800

Accounts Payable Subsidiary Ledger Denomme Corp ................................................................ Voyer Co. ......................................................................... Warren Parts..................................................................... Watson & Co.....................................................................

$ 4,000 4,500 1,750 200 $10,450

Accounts Payable control account balance ............................... $10,450

Solutions Manual .

C-32

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (b) Sales Journal

Date

Account Debited

May 3

B. Simone

Invoice No. Ref.

Accounts Receivable Dr. Sales Cr.

COGS Dr. Merch. Inv. Cr

2,400 (112)/(401)

1,050 (505)/(120)



General Journal Date

Account Titles and Explanations

Ref.

Debit

May 14 Sales Returns and Allowances ................... Accounts Receivable—W. Karasch ....

410  /112

750

Merchandise Inventory ................................ Cost of Goods Sold .............................

120 505

325

20 Accounts Payable—Cobalt Sports. ............ Notes Payable ......................................

 /201

15,500

Solutions Manual .

C-33

750

325

200

Accounts Payable—Lancio Co. ..................  /201 Merchandise Inventory ........................ 120

Credit

15,500 510 510

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (b) (Continued)

Date

Purchases Journal Accounts Merchandise Supplies Payable Inventory Account Credited Terms Ref. Cr. Dr Dr.

P1 Other Accounts Account Debited

May 5 WN Shaw 17 Lancio Co. 30 Summers Corp.

Solutions Manual

  

2,600 2,100 4,000 8,700 (201)

2,600 2,100 _ 4,700 (120)

C-34 .

Ref. Amount

Equipment 157

4,000 4,000 X

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (b) (Continued)

Cash Receipts Journal

Date

Account Credited

May 7 G. Parrish 13 B. Simone 23 29 Notes Rec.

Cash Dr.

Ref.

CR1

Accounts Other COGS Dr. Receivable Sales Merch. Inv. Accounts Cr. Cr. Cr. Cr.

 

2,800 2,400 9,500 115 40,000 54,700 (101)

2,800 2,400 9,500 5,200 (112)

4,450

9,500 4,450 (401) (505)/(120)

Cash Payments Journal

Date

Payee

Cash Cr.

May 11 12 15 Buttercup 18 27 WN Shaw

318 1,500 17,400 4,700 1,000

31 C. Lee

1,000 25,918 (101)

Solutions Manual .

Merch. Inv. Dr.

Accts. Payable Dr.

40,000 40,000 (X)

CP1 Account Debited

Other Accts. Ref. Dr.

318 Rent Expense 730 17,400 Buttercup  Salaries Exp. 725 1,000 WN Shaw  C. Lee, 310 Drawings 18,400 (201)

318 (120)

C-35

1,500 4,700

1,000 7,200 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c)

General Ledger Cash

Date May

1 31 31

No. 101

Explanation

Ref.

Balance

 CR1 CP1

Debit

Credit

54,700 25,918

Accounts Receivable Date May

1 14 31 31

May

1 31

Explanation

Ref.

Balance

 J1 CR1 S1

Debit

Credit 750 5,200

2,400

Explanation

Ref.

Balance

 CR1

May

1 14 20 31 31 31 31

Solutions Manual .

Explanation

Ref.

Balance

 J1 J1 P1 S1 CR1 CP1

C-36

Balance 15,400 14,650 9,450 11,850 No. 115

Debit

Credit 40,000

Merchandise Inventory Date

36,700 91,400 65,482

No. 112

Notes Receivable—Cole Company Date

Balance

Balance 48,000 8,000

No. 120 Debit

Credit

325 510 4,700 1,050 4,450 318

Balance 22,000 22,325 21,815 26,515 25,465 21,015 21,333

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Equipment Date May

1 30

No. 157

Explanation

Ref.

Balance

 P1

Debit

Credit

8,200 12,200

4,000

Accumulated Depreciation—Equipment Date May

Explanation

Ref.

Balance



Debit

No. 158 Credit

Explanation

No. 200 Ref.

May 20

Debit

Credit 15,500

Accounts Payable Date May

1 20 20 31 31

May

Explanation

Ref.

Balance

 J1 J1 P1 CP1

Debit

Credit

15,500 510 8,700 18,400

Explanation

Ref.

Balance



Explanation

Ref.

May 31 Solutions Manual .

CP1 C-37

15,500

Balance 43,400 27,900 27,390 36,090 17,690

No. 301 Debit

Credit

Balance 85,100

C. Lee, Drawings Date

Balance

No. 201

C. Lee, Capital Date

Balance 1,800

Notes Payable Date

Balance

No. 310 Debit 1,000

Credit

Balance 1,000 Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Sales Date

No. 401

Explanation

Ref.

May 31 31

Debit

CR1 S1

Credit 9,500 2,400

Sales Returns and Allowances Date

Explanation

Ref.

May 14

Explanation

Debit

Credit

750

J1 S1 CR1

Debit

Credit 325

1,050 4,450

Salaries Expense Date

Explanation

Ref.

May 31

CP1

Explanation

Solutions Manual .

CP1

C-38

(325) 725 5,175

Debit

Credit

4,700

Balance 4,700 No. 730

Ref.

May 31

Balance

No. 725

Rent Expense Date

Balance

No. 505 Ref.

May 14 31 31

9,500 11,900 No. 410

Cost of Goods Sold Date

Balance

Debit 1,500

Credit

Balance 1,500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Accounts Receivable Subsidiary Ledger L. Cellars Date May

Explanation

Ref.

Balance



Explanation

Ref.

Balance

 J1

Debit

Credit

Balance 7,400

W. Karasch Date May

1 14

Debit

Credit 750

Balance 3,250 2,500

G. Parrish Date May

1 7

Explanation

Ref.

Balance

 CR1

Debit

Credit 2,800

Balance 4,750 1,950

B. Simone Date May

Explanation

Ref.

3 13

Solutions Manual .

S1 CR1

C-39

Debit

Credit

2,400 2,400

Balance 2,400 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Accounts Payable Subsidiary Ledger Buttercup Distributors Date May

1 15

Explanation

Ref.

Debit

Balance

 CP1

17,400

Explanation

Ref.

Debit

Balance

 J1

15,500

Ref.

Debit

Credit

Balance 17,400 0

Cobalt Sports Date May

1 20

Credit

Balance 15,500 0

Lancio Co. Date

Explanation

May 17 20

P1 J1

Credit 2,100

510

Balance 2,100 1,590

WN Shaw Date May

Explanation

Ref.

5 27

P1 CP1

Debit

Credit 2,600

1,000

Balance 2,600 1,600

Summers Corp. Date May

1 30

Solutions Manual .

Explanation

Ref.

Balance

 P1

C-40

Debit

Credit 4,000

Balance 10,500 14,500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (d) LEE CO. Trial Balance May 31, 2017 Debit Cash ..................................................................... Accounts receivable ........................................... Notes receivable.................................................. Merchandise inventory ....................................... Equipment............................................................ Accumulated depreciation—equipment ............ Notes payable ...................................................... Accounts payable................................................ C. Lee, capital ...................................................... C. Lee, drawings.................................................. Sales..................................................................... Sales returns and allowances ............................ Cost of goods sold .............................................. Salaries expense ................................................. Rent expense .......................................................

(e)

Credit

$ 65,482 11,850 8,000 21,333 12,200 $ 1,800 15,500 17,690 85,100 1,000 11,900 750 5,175 4,700 1,500 $131,990

Accounts Receivable control account balance ..............

$131,990 $11,850

Accounts Receivable Subsidiary Ledger account balances: L. Cellars .................................................................... $ 7,400 W. Karasch ................................................................ 2,500 G. Parrish ................................................................... 1,950 $11,850 Accounts Payable control account balance ................... Accounts Payable Subsidiary Ledger account balances: Lancio Co................................................................... WN Shaw.................................................................... Summers Corp. .........................................................

Solutions Manual .

C-41

$13,690 $ 1,590 1,600 14,500 $17,690

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-5 (a), (b) and (c) Sales Journal Date

Account Debited

Feb. 4 9 17 28

Gilles Co. Earlton Corp. Lumber Co. Gilles Co.

Invoice No.

Ref.

371 372 373 374

   

S1 Accounts Receivable Dr. Sales Cr. 5,220 2,050 1,800 9,810 18,880 (112)/(401)

GENERAL JOURNAL Date Feb.

Account Titles and Explanations

J1 Ref.

Debit

5 Accounts Payable—Zears Co ..................... 201/ Purchase Returns and Allowances..... 512

450

Solutions Manual .

C-42

Credit 450

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-5 (Continued) (a), (b) and (c) (Continued)

Cash Receipts Journal

Date

Accounts Other Cash Receivable Sales Accounts Ref. Dr. Cr. Cr. Cr.

Account Credited

Feb. 6 13 15 Earlton Corp. 17 Gilles Co. 20 27 28 Lumber Co.

Ch. Date No. Feb. 13 15 20 28

Solutions Manual .

Payee Zears Co. Fell Elect.

CR1

1,950 3,850  2,050  5,220 4,900 4,560  1,800 24,330 (101)

1,950 3,850 2,050 5,220 4,900 4,560 1,800 9,070 15,260 (112) (401)

Cash Payments Journal

CP1

Accounts Payable Dr.

Other Accounts Dr.

Cash Cr. 3,750 14,100 7,200 14,900 39,950 (101)

Account Debited

3,750 Zears Co. Salaries 7,200 Fell Elect. Salaries 10,950 (201)

C-43

Ref.  726  726

14,100 14,900 29,000 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-5 (Continued) a), (b) and (c) (Continued)

Date

Purchases Journal Accounts Payable Purchases Account Credited Terms Ref. Cr. Dr

P1 Supplies Dr.

Other Accounts Account Debited

Feb 3 4 8 11 19 23 24

Zears Co. Green Deer Inc. Fell Electronics Thomas Co. Brown Corp. Zears Co. Lewis Co.

Solutions Manual

      

4,200 290 7,200 9,100 16,400 4,800 5,130 47,120 (201)

Amount

Equipment 157

16,400

4,200 290 7,200 9,100 4,800 _5,130 30,430 (510)

C-44 .

Ref.

290 (126)

16,400 X

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE: Chapters 2 to 6 and Appendix C (a) Sales Journal

Date Jan. 3 3 11 11 22 22 25 25

Account Debited B. Soto J. Ebel R. Draves S. Tang B. Soto R. Draves B. Jacovetti J. Ebel

Solutions Manual .

Invoice No. 510 511 512 513 514 515 516 517

Ref.        

C-45

S1 Accounts Cost of Goods Receivable Sold Dr. Dr. Merch. Inventory Sales Cr. Cr. 3,100 1,240 1,800 720 1,900 760 900 360 1,700 680 800 320 3,500 1,400 6,100 2,440 19,800 7,920 (112)/(401) (505)/(120)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) (Continued) Cash Receipts Journal CR1 Accounts COGS Dr. Other Account Cash Receivable Sales Merch. Inv. Accounts Date Credited Ref. Dr. Cr. Cr. Cr. Dr. Jan. 7 S. Tang 5,000 5,000  7 B. Jacovetti  2,000 2,000 10 16,500 16,500 6,600 20 17,500 17,500 7,000 21 S. Tang  900 900 31 19,920 19,920 7,968 31 B. Soto  4,800 4,800 31 J. Ebel  7,500 7,500 74,120 20,200 53,920 21,568 (101) (112) (401) (505)/(120)

Date Jan. 8 9 9 15 23 23 31

Payee

Cash Payments Journal Merch. Accts. Cash Invent. Payable Cr. Dr. Dr.

Freight Co. 180 Liazuk Co. 10,000 Nguyen & Son 11,000 A. Winters 2,000 Nguyen & Son 15,000 Liazuk Co. 13,400 6,900 58,480 (101)

Solutions Manual .

Account Debited

CP1 Other Accts. Ref. Dr.

180

180 (120)

C-46

10,000 Liazuk Co. 11,000 Nguyen & Son A. Winters, Drawings 15,000 Nguyen & Son 13,400 Liazuk Co. Salaries Exp. 49,400 (201)

  310   725

2,000

6,900 8,900 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) (Continued)

Date

Account Credited

Terms Ref.

Purchase s Journal Merchandise Accounts Inventory Supplies Payable Cr. Dr Dr.

P1 Other Accounts Account Debited Ref. Amount

Jan. 5 Welz Wares 5 Laux Supplies 16 Nguyen & Son 16 Liazuk Co. 16 Welz Wares 17 Laux Supplies 27 Nguyen & Son 27 Laux Supplies 27 Welz Wares 28 Laux Supplies

Solutions Manual

         

3,000 2,700 15,000 13,900 1,500 400 14,500 1,200 2,800 800 55,800 (201)

C-47 .

3,000 2,700 15,000 13,900 1,500 400 14,500 1,200 2,800 54,600 (120)

800 1,200 (125)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) , (d), and (f)

Date Jan.9

General Journal Account Titles and Explanations

Ref.

Sales Returns and Allowances ...... Accounts Receivable—J. Ebel

410 112/

400

Merchandise Inventory ................... Cost of Goods Sold .................

120 505

160

Accounts Payable—Liazuk Co....... Merchandise Inventory ...........

201/ 120

500

Accounts Payable—Mikush Bros. . Notes Payable..........................

201/ 200

15,000

Supplies Expense ........................... Supplies ................................... ($1,000 + $400 + $800 − $700)

728 125

1,500

Insurance Expense (1/9 × $2,000) Prepaid Insurance ...................

722 130

222

Depreciation Expense .................... Accumulated Depreciation— Building (1/12 × $6,000) ... Accumulated Depreciation— Equipment (1/12 × $1,500)

711

625

Debit

J1 Credit

400 160

500 15,000

Adjusting Journal Entries 31

Solutions Manual .

C-48

1,500

222

146

500

158

125

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) , (d), and (f) (Continued)

Date Jan. 31 31

General Journal Account Titles and Explanations Interest Expense ............................. Interest Payable.......................

Ref. 718 230

Debit 45

505 120

102

Sales ................................................ Income Summary ....................

401 300

73,720

Income Summary............................ Sales Returns and Allowances Cost of Goods Sold .................. Depreciation Expense .............. Interest Expense ....................... Insurance Expense ................... Salaries Expense ...................... Supplies Expense .....................

300 410 505 711 718 722 725 728

39,122

Income Summary............................ A. Winters, Capital ..................

300 301

34,598

A. Winters, Capital .......................... A. Winters, Drawings ..............

301 310

2,000

Cost of Goods Sold ........................ Merchandise Inventory ........... ($44,850 − $44,952)

J2 Credit 45 102

Closing Journal Entries 31 31

31 31

Solutions Manual .

C-49

73,720 400 29,430 625 45 222 6,900 1,500 34,598 2,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued)

(b) and (f)

General Ledger Cash

Date Jan. 1 31 31

Explanation Balance

No. 101 Ref.  CR1 CP1

Date Jan. 1 9 31 31

Accounts Receivable Explanation Ref. Balance  J1 S1 CR1

Date Jan. 1

Notes Receivable Explanation Ref. Balance 

Debit

Credit

74,120 58,480

Debit

Credit 400

19,800 20,200

Debit

Credit

Merchandise Inventory Date Jan. 1 9 18 31 31 31 31 31

Solutions Manual .

Explanation Balance

Adjusting entry

Ref.  J1 J1 S1 P1 CR1 CP1 J2

C-50

Balance 35,050 109,170 50,690 No. 112 Balance 14,000 13,600 33,400 13,200 No. 115 Balance 39,000 No. 120

Debit

Credit

160 500 7,920 54,600 21,568 180 102

Balance 20,000 20,160 19,660 11,740 66,340 44,772 44,952 44,850

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Supplies Date Jan. 1 31 31

Date Jan. 1 31

Explanation Balance Adjusting entry

No. 125 Ref.  P1 J1

Prepaid Insurance Explanation Ref. Balance  Adjusting entry J1

Debit

Credit

1,200 1,500

Debit

Credit 222

Land Date Jan. 1

Explanation Balance

Ref. 

Debit

Explanation Balance

Ref. 

Debit

Credit

No. 145 Balance 100,000

Accumulated Depreciation—Building Date Jan. 1 31

Solutions Manual .

Explanation Balance Adjusting entry

Ref.  J1

C-51

Debit

No. 130 Balance 2,000 1,778 No. 140 Balance 50,000

Building Date Jan. 1

Balance 1,000 2,200 700

No. 146 Credit 500

Balance 25,000 25,500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Equipment Date Jan. 1

Explanation Balance

No. 157 Ref. 

Debit

Credit

Accumulated Depreciation—Equipment Date Jan. 1 31

Explanation Balance Adjusting entry

Ref.  J1

Date Jan. 21

Notes Payable Explanation Ref. J1

Debit

No. 158 Credit 125

Balance 1,500 1,625

Credit 15,000

No. 200 Balance 15,000

Accounts Payable Date Jan. 1 18 21 31 31

Explanation Balance

Ref.  J1 J1 P1 CP1

No. 201 Debit

Credit

500 15,000 55,800 49,400

Interest Payable Date Jan. 31

Explanation Adjusting entry

Date Jan. 1

Mortgage Payable Explanation Ref.  Balance

Solutions Manual .

Ref. J2

C-52

Balance 6,450

Balance 36,000 35,500 20,500 76,300 26,900 No. 230

Debit

Credit 45

Credit

Balance 45 No. 275 Balance 125,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Income Summary Date Jan. 31 31 31

Explanation Closing entry Closing entry Closing entry

Ref. J2 J2 J2

Date Jan. 1 31 31

A. Winters, Capital Explanation Ref. Balance  Closing entry J2 Closing entry J2

Date Jan. 31 31

A. Winters, Drawings Explanation Ref. CP1 Closing entry J2

No. 300 Debit

Credit 73,720

39,122 34,598

Debit

Credit 34,598

2,000

Debit 2,000

Credit 2,000

Sales Date Jan. 31 31 31

Date Jan. 9 31

Solutions Manual .

Balance 73,720 34,598 0 No. 301 Balance 80,000 114,598 112,598 No. 310 Balance 2,000 0

Credit 19,800 53,920

73,720

No. 401 Balance 19,800 73,720 0

Sales Returns and Allowances Explanation Ref. Debit J1 400 Closing entry J2

Credit

No. 410 Balance 400 0

Explanation

Closing entry

Ref. S1 CR1 J2

C-53

Debit

400

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Cost of Goods Sold Date Jan. 9 31 31 31 31

Explanation

Adjusting entry Closing entry

Ref. J1 S1 CR1 J2 J2

Date Jan. 31 31

Depreciation Expense Explanation Ref. Adjusting entry J1 Closing entry J2

Date Jan. 31 31

Interest Expense Explanation Ref. Adjusting entry J2 Closing entry J2

No. 505 Debit

Credit 160

7,920 21,568 102 29,430

Debit 625

Credit 625

Debit 45

Credit 45

Insurance Expense Date Jan. 31 31

Explanation Adjusting entry Closing entry

Date Jan. 31 31

Salaries Expense Explanation Ref. CP1 Closing entry J2

Date Jan. 31 31

Supplies Expense Explanation Ref. Adjusting entry J1 Closing entry J2

Solutions Manual .

Ref. J1 J2

C-54

Balance (160) 7,760 29,328 29,430 0 No. 711 Balance 625 0 No. 718 Balance 45 0 No. 722

Debit 222

Credit 222

Debit 6,900

Credit 6,900

Debit 1,500

Credit 1,500

Balance 222 0 No. 725 Balance 6,900 0 No. 728 Balance 1,500 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Receivable Subsidiary Ledger R. Draves Date Jan. 1 11 22

Explanation Balance

Ref.  S1 S1

Debit

Ref. S1 J1 S1 CR1

Debit 1,800

B. Jacovetti Date Explanation Jan. 1 Balance 7 25

Ref.  CR1 S1

Debit

S. Tang Date Jan. 1 7 11 21

Ref.  CR1 S1 CR1

Debit

Ref. S1 S1 CR1

Debit 3,100 1,700

Credit

Balance 1,500 3,400 4,200

Credit

Balance 1,800 1,400 7,500 0

1,900 800

J. Ebel Date Jan. 3 9 25 31

Explanation

Explanation Balance

400 6,100 7,500

Credit 2,000

3,500

Credit 5,000

900 900

Balance 7,500 5,500 9,000

Balance 5,000 0 900 0

B. Soto Date Jan. 3 22 31

Solutions Manual .

Explanation

C-55

Credit

4,800

Balance 3,100 4,800 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Payable Subsidiary Ledger Laux Supplies Date Jan. 5 17 27 28

Explanation

Ref. P1 P1 P1 P1

Debit

Credit 2,700 400 1,200 800

Balance 2,700 3,100 4,300 5,100

Explanation Balance

Ref.  CP1 P1 J1 CP1

Debit

Credit

Balance 10,000 0 13,900 13,400 0

Liazuk Co. Date Jan. 1 9 16 18 23

10,000 13,900 500 13,400

Mikush Bros. Date Jan. 1 21

Explanation Balance

Nguyen & Son Date Explanation Jan. 1 Balance 9 16 23 27

Ref.  J1

Ref.  CP1 P1 CP1 P1

Debit

Credit

Balance 15,000 0

Credit

14,500

Balance 11,000 0 15,000 0 14,500

Credit 3,000 1,500 2,800

Balance 3,000 4,500 7,300

15,000

Debit 11,000

15,000 15,000

Welz Wares Date Jan. 5 16 27

Solutions Manual .

Explanation

Ref. P1 P1 P1

C-56

Debit

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (c) and (d)

WINTERS COMPANY Trial Balance January 31, 2017 Unadjusted Debit Credit $ 50,690 13,200 39,000 44,952 2,200 2,000 50,000 100,000

Cash ........................................ Accounts receivable............... Notes receivable ..................... Merchandise inventory........... Supplies .................................. Prepaid insurance .................. Land......................................... Building ................................... Accumulated depreciation— building............................... Equipment ............................... 6,450 Accumulated depreciation— equipment........................... Notes payable ......................... Accounts payable ................... Interest payable ...................... Mortgage payable ................... A. Winters, capital .................. A. Winters, drawings .............. 2,000 Sales ........................................ Sales returns & allowances 400 Cost of goods sold ................. 29,328 Depreciation expense............. Interest expense ..................... Salaries expense .................... 6,900 Insurance expense ................. Supplies expense ................... Totals .................................. $347,120

Solutions Manual .

C-57

Adjusted Debit Credit $ 50,690 13,200 39,000 44,850 700 1,778 50,000 100,000

$ 25,000

$ 25,500 6,450

1,500 15,000 26,900

1,625 15,000 26,900 45 125,000 80,000

125,000 80,000 2,000 73,720

73,720

$347,120

400 29,430 625 45 6,900 222 1,500 $347,790 $347,790

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (c) (Continued) Accounts Receivable control account balance Subsidiary ledger account balances R. Draves .................................................. B. Jacovetti ...............................................

$13,200 $4,200 9,000 $13,200

Accounts Payable control account balance .. Subsidiary ledger account balances Laux Supplies........................................... Nguyen & Son........................................... Welz Wares ...............................................

$25,700 $ 5,100 14,500 7,300 $26,900

Solutions Manual .

C-58

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (e) WINTERS COMPANY Income Statement Month Ended January 31, 2017 Sales revenues Sales ................................................................. Less: Sales returns and allowances.............. Net sales ....................................................

$73,720 400 $73,320

Cost of goods sold ................................................ Gross profit ............................................................ Operating expenses Salaries expense.............................................. Supplies expense ............................................ Insurance expense .......................................... Depreciation expense...................................... Total operating expenses.......................... Profit from operations ...........................................

29,430 43,890 $6,900 1,500 222 625

Other expenses Interest expense .............................................. Profit .......................................................................

9,247 34,643 45 $34,598

WINTERS COMPANY Statement of Owner’s Equity Month Ended January 31, 2017 A. Winters, capital, January 1 ................................................ Add: Profit ............................................................................. Less: Drawings ...................................................................... A. Winters, capital, January 31 ..............................................

Solutions Manual .

C-59

$ 80,000 34,598 114,598 2,000 $112,598

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (e) (Continued) WINTERS COMPANY Balance Sheet January 31, 2017 Assets Current assets Cash ............................................................ Notes receivable......................................... Accounts receivable .................................. Merchandise inventory .............................. Supplies ...................................................... Prepaid insurance ...................................... Total current assets............................ Property, plant, and equipment Land ................................................. Building ........................................... $100,000 Less: Accumulated depreciation ... 25,500 Equipment ....................................... 6,450 Less: Accumulated depreciation .. 1,625 Total assets..............................

$ 50,690 39,000 13,200 44,850 700 1,778 150,218

$50,000 74,500 4,825

129,325 $279,543

Liabilities and Owner’s Equity Current liabilities Notes payable............................................. Accounts payable ...................................... Interest payable .......................................... Total current liabilities .......................

$ 15,000 26,900 45 41,945

Long-term liabilities Mortgage payable....................................... Total liabilities.....................................

125,000 166,945

Owner’s equity A. Winters, capital ...................................... Total liabilities and owner’s equity....

112,598 $279,543

Solutions Manual .

C-60

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (g) WINTERS COMPANY Post-Closing Trial Balance January 31, 2017 Cash ................................................................ Accounts receivable ...................................... Notes receivable ............................................ Merchandise inventory .................................. Supplies.......................................................... Prepaid insurance .......................................... Land ................................................................ Building .......................................................... Accumulated depreciation—building ........... Equipment ...................................................... Accumulated depreciation—equipment ....... Notes payable................................................. Accounts payable .......................................... Interest payable.............................................. Mortgage payable .......................................... A. Winters, capital .......................................... Totals .........................................................

Solutions Manual .

C-61

Debit $ 50,690 13,200 39,000 44,850 700 1,778 50,000 100,000

Credit

$ 25,500 6,450

$306,668

1,625 15,000 26,900 45 125,000 112,598 $306,668

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

Present Value Concepts Solutions to Brief Exercises BEPV–1 (a)

$50.00

($1,000 × 5%)

(b)

$40.00

($500 × 4% × 2 periods)

(c)

$40.80

($500 × 4%) + ($520 × 4%)

Solutions Manual .

PV-1

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–2 Using tables: Discount rate from Table PV-1 is 0.82193 (5 periods at 4%). The present value of $600,000 to be received in 5 years discounted at 4% is therefore $493,158 ($600,000 × 0.82193). Wong Ltd. should therefore invest $493,158 to have $600,000 in five years. Using a financial calculator: Enter: 4 5 Press:

I/Y

600000

PMT

CPT

Result: PV = $ (493,156.26) Using Excel: =PV(rate,nper,pmt,fv,type) RATE .04 NPER

PMT

FV Type

$600,000 0

Result: PV = $(493,156.26)

Solutions Manual .

PV-2

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–3 Using tables: Present value factor of 1, for 10 periods at 4% is 0.67556. PV = $10,000 x 0.67556 PV = $6,755.60 Using a financial calculator: 10000 Enter: 4 10 0 Press:

I/Y

PMT

CPT

Result = $6,755.64

Solutions Manual .

PV-3

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–4

Using tables: Present value = Future amount × Present value of 1 Factor OR Present value of 1 Factor = Present value ÷ Future amount 0.44401= $44,401 ÷ $100,000 The 0.44401 at 7% is found in the 12 years column. Xin Su therefore must wait 12 years to receive $100,000. Using a financial calculator: Enter: 7 –44401 Press:

I/Y

100000

PMT

CPT

Result: N = 12 Using Excel functions: the formula is: =NPER(rate,pmt,pv,fv,type) RATE .07 PMT

$ (44,401.00)

$ 100,000.00

Type

Result: NPER = 12

Solutions Manual .

PV-4

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–5

Using tables: Present value = Future amount × Present value of 1 Factor $3,152 = $10,000 × Present value of 1 Factor Present value of 1 Factor = $3,152 ÷ $10,000 Present value of 1 Factor = 0.31520 The closest PV factor for 15 periods is 0.31524, which is found in the 8% column. As this factor is almost exactly equal to 0.31520, this means Jin Fei will earn an 8% return. Using a financial calculator: Enter: 15 0 –3152 10000 Press:

PMT

CPT

I/Y

Result: I = 8.001% Using Excel functions: the formula is: =RATE(nper,pmt,pv,fv,type) NPER

PMT

$ (3,152.00)

$ 100,000.00

Type

Result: Rate = 8.001%

Solutions Manual .

PV-5

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV-6 Using a financial calculator: (a) Enter:

25000

Press:

I/Y

PMT

CPT

Result: PV = $(10,602.44) (b) Enter:

25000

Press:

I/Y

PMT

Result: PV = $(112,147.96)

Solutions Manual .

PV-6

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–8 Annual Number Interest of Frequency Rate Years of Payment 1. 6% 2 Quarterly Semi2. 5% 8 annually 3. 7% 5 Annually 4. 4% 3 Quarterly Semi5. 2% 6 annually 6. 6% 9 Monthly

Solutions Manual .

PV-8

(n) Number of (i) Discount Periods Rate 2×4=8 6% ÷ 4 = 1.5% 8 × 2 = 16 5 3 × 4 = 12

5% ÷ 2 = 2.5% 7% 4% ÷ 4 = 1%

6 × 2 = 12 9 × 12 = 108

2% ÷ 2 = 1% 6% ÷ 12 = 0.5%

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–9 Using tables: Present value of principal to be received at maturity: $100,000 × 0.61027 (PV of $1 due in 20 periods at 2.5% from Table PV-1) ............................................. $61,027.00 Present value of interest to be received periodically over the term of the bonds: $2,750* × 15.58916 (PV of $1 due each period for 20 periods at 2.5% from Table PV-2) ............................................................... 42,870.19 Present value of bonds ................................................... $103,897.19 * $100,000 × 5.5% ÷ 2 = $2,750 Using a financial calculator: Enter: 2.5 20

2750

100000

Press:

PMT

I/Y

CPT

Result: PV = $(103,897.29) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE

.025

NPER

PMT

$2,750

$100,000

Type

Result: PV = $(103,897.29)

Solutions Manual .

PV-9

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–10 Using tables: Present value of principal to be received at maturity: $100,000 × 0.55368 (PV of $1 due in 20 periods at 3% from Table PV-1) ..................................................... Present value of interest to be received periodically over the term of the bonds: $2,750* × 14.87747 (PV of $1 due each period for 20 periods at 3% from Table PV-2)............................................................ Present value of bonds................................................. *$100,000 x 5.5% / 2 = $2,570 Using a financial calculator: Enter: 3 20 2750 100000 Press:

I/Y

PMT

$55,368.00

40,913.04 $96,281.04

CPT

Result: PV = $(96,280.63) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE

.03

NPER

PMT

$2,750

$100,000

Type

Result: PV = $(96,280.63)

Solutions Manual .

PV-10

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV-11 Using a financial calculator: (a) Enter: 7.35 7

-16000

Press:

PMT

I/Y

CPT

Result: PV = $85,186.34 (b) Enter:

10.65

16000*

200000

Press:

I/Y

PMT

Result: PV = $(168,323.64)

*PMT is face value x 8% contractual (coupon) rate of 8% = ($1,000 x 200) x 8% = $16,000

Solutions Manual .

PV-11

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–12 Using tables: From Table PV-2, n = 6, i = 8%, the present value for a $1 payment annually is $4.62288. In this problem, we want to determine the payment that would result in a present value of $50,000. The required payment would be $10,815.77 ($50,000 ÷ 4.62288). Using a financial calculator: 0 Enter: 8 6 –50000 Press:

I/Y

CPT

PMT

Result: PMT = $10,815.77 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.08

NPER

$(50,000.00)

Type

Result: PMT = $10,815.77

Solutions Manual .

PV-12

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–13 Using tables: From Table PV-2, n = 6, i = 9%, the present value for a $1 payment annually is $4.48592. In this problem, we want to determine the payment that would result in a present value of $50,000. The required payment would be $11,145.99 ($50,000 ÷ 4.48592). Using a financial calculator: 0 Enter: 9 6 –50000 Press:

I/Y

CPT

PMT

Result: PMT = $11,145.99 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.09

NPER

$(50,000.00)

Type

Result: PMT = $11,145.99

Solutions Manual .

PV-13

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–14 Using tables: Using present value tables, for an annuity, find the rate for 12 periods that will give the factor arrived at by dividing the present value (PV) by the amount of the payment (PMT). $1,058,871 ÷ $112,825 = 9.38507 The factor will be found in the column for 4% interest*. Using a financial calculator: Enter: 12 –112825 Press:

PMT

1058871

CPT

I/Y

Result: I = 4%* Using Excel functions: the formula is: =RATE(nper,pmt,pv,fv,type) NPER

PMT

$(112,825.00)

$1,058,871.00

Type

Result: Rate = 4%* *Semi-annual rate of 4% × 2 = annual rate of 8%

Solutions Manual .

PV-14

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–15 Using a financial calculator: Enter: 1.25* 12** Press:

I/Y

185000

CPT

PMT

Result: PMT = $(16,697.79) * 5 ÷ 4 = 1.25 ** 3 × 4 = 12 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.0125

NPER

$185,000

Type

Result: PMT = $(16,697.79)

Solutions Manual .

PV-15

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–16 Using tables: First divide the present value with the amount of the payment: $18,000 ÷ $1,702 = 10.57579 Look in the Present Value Table PV-2 for an annuity under the column for 2% and locate the number of periods which is close to the factor 10.57579. You will find the factor 10.57534 under 12 periods. **(within rounding) Using a financial calculator: Enter: 2* 18000 –1702 0 Press:

I/Y

PMT

CPT

Result: N = 12 periods** *4 ÷ 2 = 2 Using Excel functions: the formula is: =NPER(rate,pmt,pv,fv,type) RATE .02 PMT

$(1,702.00)

$18,000.00

Type

Result: NPER = 12 periods **12 semi-annual periods will equal 6 years

Solutions Manual .

PV-16

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–17 Using tables: From Table PV-2, n = 5, i = 3%, the present value for a $1 payment annually is $4.57971. In this problem, we want to determine the payment that would result in a present value of $32,000. The required payment would be $6,987.34 ($32,000 ÷ 4.57971). Using a financial calculator: 0 Enter: 3 5 32000 Press:

I/Y

CPT

PMT

Result: PMT = $(6,987.35) Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.03

NPER

$32,000

Type

Result: PMT = $(6,987.35)

Solutions Manual .

PV-17

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–18 Using a financial calculator: (a) Enter: 0.65* 96** Press:

I/Y

42000

CPT

PMT

CPT

PMT

Result: PMT = $(589.48) *I is 7.8% ÷ 12 for monthly payments = 0.65% ** N is 8 years x 12 = 96 (b) Enter:

7.25

8000

Press:

I/Y

Result: PMT = $(1,964.20)

Solutions Manual .

PV-18

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–19

The better option for repayment of this piece of equipment is the single payment of $46,000 in 2 years.

Using a financial calculator: Option 1:

Enter:

–10000

Press:

I/Y

PMT

CPT

Result: PV = $39,927.10 Option 2:

Enter:

46000

Press:

I/Y

PMT

Result: PV = $39,437.59

Solutions Manual .

PV-19

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–19 (Continued) Using Excel functions the formula is: =PV(rate,nper,pmt,fv,type) Option 1

Option 2

RATE

.08

RATE

.08

NPER

PMT

$(10,000)

PMT

Type

Result PV = $39,927.10

Solutions Manual .

$(46,000) 0

Result PV = $39,437.59

PV-20

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–20 Using tables:

The same option would not be chosen; the better choice now is 5 payments of $10,000 each. As market (or discount) rates rise, the effect of the timing of repayments becomes more significant. Using a financial calculator: Option 1:

Enter:

–10000

Press:

I/Y

PMT

CPT

Result: PV = $37,907.87 Option 2:

Enter:

46000

Press:

I/Y

PMT

Result: PV = $38,016.53

Solutions Manual .

PV-21

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–20 (Continued) Using Excel functions the formula is: =PV(rate,nper,pmt,fv,type) Option 1

Option 2

RATE

.10

RATE

.10

NPER

PMT

$(10,000)

PMT

Type

Result PV = $37,907.87

Solutions Manual .

$(46,000) 0

Result PV = $38,016.53

PV-22

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–21 The present value of an annuity collected of $21,000 for 12 years at 4% is calculated as follows: Using tables: $21,000 × 9.38507 = $197,086.47 (discount rate from Table PV-2) Using a financial calculator: Enter: 4 12

21000

Press:

PMT

I/Y

CPT

Result: PV = $(197,086.55) The value in use is $197,086.55. Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE

.04

NPER

PMT

$21,000

Type

Result: PV = $(197,086.55) The value in use is $197,086.55.

Solutions Manual .

PV-23

Appendix PV