ACCOUNTING PRINCIPLES 8TH CANADIAN EDITION (VOLUME 2) BY JERRY WEYGANDT, DONALD KIESO, PAUL KIMMEL, by QuentinAxel

ACCOUNTING PRINCIPLES 8TH CANADIAN EDITION (VOLUME 2) BY JERRY WEYGANDT, DONALD KIESO, PAUL KIMMEL, BARBARA TRENHOLM, VALERIE WARREN, LORI NOVAK ( CHAPTER 11_18) SOLUTIONS MANUAL

CHAPTER 11 Financial Reporting Concepts

Learning Objectives 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. 3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. 4. Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. 5. Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Solutions Manual .

11.1

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

1. 2. 3. 4. 5.

1 2 2 2 3

1. 2. 3. 4.

1 2 3 4

1. 2. 3.

2 3 3

BT Item LO BT Item LO BT Item LO Questions C 6. 3 C 11. 3,4 C 16. 4 K 7. 3 K 12. 4 C 17. 4 C C 13. 4 K 18. 8. 3 4 K C 14. 4 K 19. 9. 3 4 K 10. 3 K 15. 4 AN 20. 2,5 Brief Exercises AP 5. 4 AP 9. 4 AP 13. 4 AP 6. 4 AP 10. 4 AP 14. 4,5 AP 7. 4 AP 11. 4 AP 15. 5 AP 8. 4 AP 12. 4 AP 16. 5 Exercises C 4. 4 AP 7. 4 C 10. 4 C 5. 4 K 8. 4 AP 11. 1,5 AP 6. 4,5 AN 9. 4 AP 12. 2,4,5 Problems

1. 1,2,3,4,5 AP 2. 2,3,4 AP

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3. 4 AP 4. 2,4 AP

5. 6.

4 AP 7. 4 AP 8.

11.2

BT Item LO BT AN 21. 3,5 K 22. 5 C 23. 5 AN 24. 5 C

C C C C

AP 17. C C C

AP 13. 4,5 C C 14. 4,5 AP AP

4 AP 9. 2,3,4,5 AN

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Difficulty:

Time: AACSB

CPA CM

Solutions Manual .

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

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 situations.

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

4, 5, 6, 7, 8, 9, 10, 11, 13, 14

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

5. Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

20, 21, 22, 23, 24

14, 15, 16, 17

6, 11, 12, 13, 14

1, 8, 9

Learning Objectives

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11.4

1, 8, 9

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A

4A 5A 6A 7A

8A 9A 1B 2B

4B 5B 6B

8B 9B

Solutions Manual .

Complex

Time Allotted (min.) 45-50

Moderate

35-40

Moderate

20-25

Moderate

15-20

Moderate

20-25

Moderate

25-30

Complex

35-40

Moderate

30-35

Moderate

15-20

Complex

45-50

Moderate

35-40

Moderate

20-25

Moderate

15-20

Moderate

20-25

Moderate

25-30

Complex

35-40

Moderate

30-35

Moderate

15-20

Difficulty Level

Description Identify violations of the components of the conceptual framework. Identify objective of financial reporting, elements of the financial statements, and revenue and expense recognition–earnings approach. Identify contract components and prepare journal entries–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–contract-based approach, right of return. Determine transaction price with variable consideration and prepare journal entries– contract-based approach. 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, elements of the financial statements, 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– earnings 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. Determine transaction price with variable consideration and prepare journal entries– contract-based approach. Identify elements, assumptions, constraints, and recognition and measurement criteria. Comment on application of accounting assumptions and concepts.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 E11.11

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

P11.8A P11.8B

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

P11.8A P11.8B

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 BE11.14 E11.7 E11.11

BE11.4 BE11.5 BE11.6 BE11.7 BE11.8 BE11.9 BE11.10 BE11.11 BE11.12 BE11.13 BE11.14 E11.4 E11.8 E11.9 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 BE11.14 BE11.15

BE11.16 BE11.17 E11.11 E11.13

BYP11.3

11.6

E11.13 E11.14 P11.1A P11.2A P11.3A P11.4A P11.5A P11.6A P11.7A P11.1B P11.2B P11.3B P11.4B P11.5B P11.6B P11.7B

Synthesis Evaluation

Q11.15 Q11.16 Q11.19 E11.6 P11.8A P11.8B

E11.10 E11.12 E11.13 E11.14 P11.1A P11.9A P11.1B P11.9B

E11.6 P11.8A P11.7B

BYP11.4 BYP11.5

BYP11.1 BYP11.2

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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

(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.

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

(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.

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

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.

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

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 5.

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. 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.

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

(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)

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).

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

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 7.

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.

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

Although the transaction’s 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. 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.

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

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 9.

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

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

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

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 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. LO 4 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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

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

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 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, 2021. LO 4 BT: AN Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

16. Under the earnings approach of revenue recognition, the $10,000 cash received on March 24, 2021 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, 2021. The revenue from providing landscaping services should be allocated to the months 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 2021, at the rate of $2,000 per month. LO 4 BT: AN Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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

18. Variable consideration must be identified and recognized at the time of establishing the transaction price because it affects the amount and timing of when revenue can be recognized. Boomer Inc. uses the contract-based approach to revenue recognition and must therefore estimate and record any variable consideration. Variable consideration is any amount that may change the consideration that may be received from a customer. Examples of variable components of the transaction price include discounts, rebates, incentive, price concessions, and a customer’s right to return products. Variable consideration is estimated based on probable outcomes. The expected value can be the sum of the probability-weighted amounts in a range of possible amounts. LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 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 that will bring benefit to the business in future accounting periods. LO 4 BT: AN Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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

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

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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

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

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 to react appropriately to the financial information. LO 5 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11.1 a. F b. T c. F d. T e. T f. T LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.2 a. 4. b. 2. c. 1. d. 5. e. 3. f. 1.

Revenues Liabilities Assets Expenses Equity Assets

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

BRIEF EXERCISE 11.3 a. b. c. d. e. f. g. h. i. j.

4 6 3 5 7 10 1 9 8 2 k. 11 LO 3 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 11.4 Revenue of $250,000; the value of the work completed in March. Salaries expense of $75,000. LO 4 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 ($450,000 X 2%) should be recorded to Unearned Revenue. LO 4 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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, 2021. Accounts Receivable ............................ Sales ............................................... To record sales on account.

350,000

Cost of Goods Sold ............................... Merchandise Inventory .................. To record cost of goods sold.

200,000

350,000

200,000

The amount of gross profit recognized in November is $150,000 ($350,000 - $200,000) LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 11.7 Although the customer, Ragnar Company has taken possession of the goods, Willow Appliance Company has not fulfilled all 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 .................. To record deferred gross profit.

25,000 6,000 19,000

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

BRIEF EXERCISE 11.8

Possible outcome Amount 1 $7,650 ($9,000 x 85%) 2 $8,100 ($9,000 x 90%) Expected value

Probabilityweighted Probability amount 45% $3,443 55% 4,455 $7,898

Accounts Receivable ............................ Refund Liability ($9,000 - $7,898) .. Sales ............................................... To record sales on account.

9,000 1,102 7,898

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 11.9 Selling price $17,720 Less: estimated returns [$17,720 – ($17,720 x 90%)] (1,772) Transaction price before sales discount 15,948 Less: sales discount ($15,948 x 2%) (319) Transaction price $15,629 LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 11.10 Selling price Less: estimated returns Transaction price before sales discount Less: sales discount Transaction price Apr. 6 Accounts Receivable1 ................................ 4,910 Refund Liability ........................ Sales ($5,000 - $90 - $500) ....... To record sales on account. 1 ($5,000 - $90) Cost of Goods Sold .......................... 2,925 Estimated Inventory Returns ..... 325 Merchandise Inventory ............ To record cost of goods sold.

$5,000 (500) 4,500 (90) $4,410

500 4,410

3,250

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 11.11 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?

Criteria to be met and discussion Yes, a contract was signed April 3, 2021. 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, 2021, 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.

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

BRIEF EXERCISE 11.12 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

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

Solutions Manual .

11.19

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 11.13 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.

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.

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

BRIEF EXERCISE 11.14 a. 3. b. 5. c. 1. d. 1. e. 4. f. 6. g. 2.

Full disclosure Expense recognition Revenue recognition Revenue recognition Historical cost Realizable value Matching

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

BRIEF EXERCISE 11.15 a. b. c.

Yes Yes No

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

Solutions Manual .

11.20

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 11.16 a. b. c.

Yes Yes Yes

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

BRIEF EXERCISE 11.17 a. b. c. d. e.

1. 2. 3. 4. 6.

Going concern assumption Reporting entity concept Full disclosure Monetary unit Periodicity

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

Solutions Manual .

11.21

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 LO 2 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.2 a. 3 b. 4 c. 6 d. 6 e. 2 f. 7 g. 1 h. 5 LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.3 1. 2. 3. 4.

Feedback value Free from material error Completeness Predictive value

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

Solutions Manual .

11.22

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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

EXERCISE 11.5 1. 2. 3. 4. 5. 6. 7. 8.

Contract-based approach Earnings approach Contract-based approach Earnings approach Contract-based approach Earnings approach Earnings approach Contract-based approach

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

Solutions Manual .

11.23

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 ................................................ Cash purchase of inventory.

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 ............................................... Payment of office expense.

Solutions Manual .

11.24

50 50

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.6 (Continued) 5.

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........................ Collection of advance ticket sale.

650 650

LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.25

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.8 a. The variable consideration in the contract between Tango Treasures and Simon Development is the amount for right of return. Potential customer returns will change the amount expected to be received by Tango Treasures. b. Transaction price:

Possible outcome Amount 1 $38,000 ($40,000 x 95%) 2 $36,000 ($40,000 x 90%) Expected value

Probabilityweighted Probability amount 65% $24,700 35% 12,600 $37,300

c. Accounts Receivable ............................... Refund Liability ($40,000 - $37,300) Sales ............................................... To record sales on account.

Solutions Manual .

11.26

40,000 2,700 37,300

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.8 (Continued) Cost of goods sold and estimated inventory returns:

Possible outcome Amount 1 $26,600 ($28,000 x 95%) 2 $25,200 ($28,000 x 90%) Expected value

Probabilityweighted Probability amount 65% $17,290 35% 8,820 $26,110

Cost of Goods Sold ................................26,110 Estimated Inventory Returns1 ........................... 1,890 Merchandise Inventory .................. To record cost of goods sold. 1 ($28,000 - $26,110)

28,000

LO 4 BT: AP Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.27

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.9 a.

The variable consideration in the contract is the right of return and sales discounts offered. Estimated returns and cash discounts both change the amount of consideration that Pennant expects to receive.

Expected value - right of return: Total selling price = 300 x $80 = $24,000

Possible outcome Amount 1 $22,800 ($24,000 x 95%) 2 $20,400 ($24,000 x 85%) Expected value

Probabilityweighted Probability amount 70% $15,960 30% 6,120 $22,080

Expected value of sales discount: Possible outcome Amount 1 $21,638 ($22,080 x 98%) 2 $22,080 Expected value

Probabilityweighted Probability amount 70% $15,147 30% 6,624 $21,771

Selling price Less: estimated returns ($24,000 - $22,080) Transaction price before sales discount Less: sales discount ($22,080 - $21,771) Transaction price

$24,000 (1,980) 22,080 (309) $21,771

LO 4 BT: AP Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.28

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.10 1.

Byer’s Innovations Co. should record rent expense in 2021 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 2021 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 2021 fiscal year as the packaging equipment was not yet available for use.

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.29

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.11 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 with the necessary frequent feedback 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. LO 1,5 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.30

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.12 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.

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.

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.

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.

LO 2,4,5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.31

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 11.13 a. b. c. d. e. f.

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

Reporting entity concept Cost constraint Completeness Going concern assumption Materiality Historical Cost

LO 4,5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.14 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

LO 4,5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.32

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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 costing $60,000 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 .

11.33

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 that 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 .

11.34

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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)

Solutions Manual .

11.35

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 that will reduce total sales reported. The measurement problems exist for the reporting of inventory at the lower of cost and net realizable value. A writedown 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.

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. LO 1,2,3,4,5 BT: AP Difficulty: C Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.36

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.2A a.

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)1 Eliminate prepaid advertising (4) Revised current assets 1 ($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

Solutions Manual .

11.37

$ 80,000 15,000 $ 95,000

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 at December 31, 2021. 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, 2021. Taking It Further: a.

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. LO 2,3,4 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.38

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 2, 2021 and the removal of the fir trees will be satisfied on January 3, 2022.

b. Cash (200 x $60) ......................................... 12,000 Sales (200 x $42.86) ............................ Unearned Revenue (200 x $17.14) ..... To record cash sale and unearned revenue.

8,572 3,428

Unearned Revenue ..................................... 3,428 Service Revenue ................................. To record service revenue from removal of trees.

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. LO 4 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual .

11.39

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, Merchandise Inventory, and Estimated Inventory Returns) Liability (Refund Liability) 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. LO 2,4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.40

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

Solutions Manual .

11.41

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.5A (Continued) b. Sept. 18, 2021 Accounts Receivable (300 x $40) .............. Deferred Gross Profit.......................... Merchandise Inventory (300 x $20) .... To record deferred gross profit. Nov. 4, 2021 Cash ............................................................ Accounts Receivable ......................... Collection on account. Cost of Goods Sold .................................... Deferred Gross Profit ................................. Sales .................................................... To record sales and cost of goods sold.

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 expense. LO 4 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.42

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, 2021.

Nicolet’s performance obligation is to ship 300 accounting textbooks to Hinton University.

The transaction price is $33,000 (300 x $110).

The revenue from the sale of the books should be recognized on August 25, 2021.

e. August 25, 2021 Accounts Receivable ....................................... Refund Liability ($33,000 x 10%) ............. Sales.......................................................... To record sales on account. Cost of Goods Sold.......................................... Estimated Inventory Returns1 ......................... Merchandise Inventory (300 X $80)........ To record cost of goods sold. 1 (300 X 10% x $80) Sept. 15, 2021 Refund Liability ................................................ Accounts Receivable (10 X $110) ............ To record credit for goods returned. Merchandise Inventory (10 x $ 80) .................. Estimated Inventory Returns .................. To record cost of goods returned.

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11.43

33,000 3,300 29,700 21,600 2,400 24,000

1,100 1,100

800 800

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.6A (Continued) e. (Continued) Sept. 25, 2021 Cash ($33,000 - $1,100) .................................... Accounts Receivable ............................... Collection on account. Sept. 30, 2021 Refund Liability (20 x $ 110) ............................ Cash (20 X $110) ....................................... To record cash refund for goods returned. Merchandise Inventory (20 x $ 80) .................. Estimated Inventory Returns ................... To record cost of goods returned.

31,900 31,900

2,200 2,200

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, 2021 should be reduced by the sales discount if it is probable that Hinton will take advantage of the discount offered by Nicolet. LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.44

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.7A a.

The contract is for Pharma Company to deliver medication to its customer Laxall Drug Stores, terms FOB shipping point.

Expected value - right of return:

Possible outcome Amount 1 $38,000 ($40,000 x 95%) 2 $36,000 ($40,000 x 90%) 3 $32,000 ($40,000 x 80%) Expected value

Probabilityweighted Probability amount 50% $19,000 20% 7,200 30% 9,600 $35,800

Expected value of sales discount: ($35,800 x 2%) = $716 Selling price Less: estimated returns ($40,000 - $35,800) Transaction price before sales discount Less: sales discount Transaction price

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11.45

$40,000 (4,200) 35,800 (716) $35,084

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.7A (Continued) Cost of goods sold and estimated inventory returns:

Possible outcome Amount 1 $23,750 ($25,000 x 95%) 2 $22,500 ($25,000 x 90%) 3 $20,000 ($25,000 x 80%) Expected value

Probabilityweighted Probability amount 50% $11,875 20% 4,500 30% 6,000 $22,375

d. Apr. 10 Accounts Receivable ..................... Refund Liability1 ..................... Sales ($40,000 - $716 - $4,200) To record sales on account. 1 ($40,000 - $35,800)

Solutions Manual .

39,284 4,200 35,084

Cost of Goods Sold ............................ 22,375 Estimated Inventory Returns2 ............ 2,625 Merchandise Inventory .................. To record cost of goods sold. 2 ($25,000 - $22,375)

25,000

11.46

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.7A (Continued) Taking It Further: When Laxall Drugs Stores returns 5% of the medication purchased, within the return privilege, the entry recorded by Pharma Company will be as follows: Refund Liability ($40,000 x 5%) .............. 2,000 Accounts Receivable ..................... To record cash refund for goods returned.

2,000

Cost of Goods Sold ($25,000 x 5%) ........ 1,250 Estimated Inventory Returns ........ To record cost of damaged goods returned.

1,250

When the 30-day return period is reached, (May 10, 2021) the remaining balance of the refund liability and estimated inventory returns accounts will be reversed (brought to a zero balance) as follows: Refund Liability ($4,200 - $2,000) ........... 2,200 Sales................................................ To reverse accrual of refund liability.

2,200

Cost of Goods Sold ($ 2,625 - $1,250) 1,375 Estimated Inventory Returns ......... To reverse estimated inventory returns.

1,375

When Laxall Drugs Stores pays the balance of the accounts receivable of $38,000 ($40,000 less returns of $2,000), a sales discount of $760 ($38,000 x 2%) will be applied and recorded by Pharma Company as follows: Cash ($38,000 – $760) ............................37,240 Sales ($37,284 - $37,240) .................... 44 1 Accounts Receivable .................... Collection on account. 1 ($39,284 - $2,000)

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37,284

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.7A (Continued) Taking It Further: (continued) Summary of effect on net sales: Overestimate of refund liability .............$2,200 Underestimate of sales discount ........... 44 Effect on net sales (increase) ................$2,156 LO 4 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.48

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.8A 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 ..................................................... Cash purchase of equipment.

80,000 80,000

Depreciation Expense1 ............................... 32,000 Accumulated Depreciation—Equipment 32,000 To record depreciation expense for 2021. 1 [$80,000 × (100%  5 × 2)] 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 ................. To record depreciation expense.

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:

Solutions Manual .

11.49

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.8A (Continued) a. and b. (Continued) 3. (continued) Equipment................................................... Cash ..................................................... Cash purchase of equipment.

36,000 36,000

Going concern assumption. Liquidation value is not appropriate because it assumes that the enterprise will not continue. No entry is necessary as the asset is not impaired. 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 ......................................

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11.50

6,000 6,000

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.8A (Continued) a. and b. (Continued) 5. (continued) 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. 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. LO 2,3,4,5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.51

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.9A 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.

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 must be virtually certain that it will not continue operations in the near future 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. LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.52

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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 carrying amount. 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 .

11.53

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 that 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 .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 the carrying amount. 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.

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. LO 1,2,3,4,5 BT: AP Difficulty: C Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.56

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, 2021 ($24,000 × 11 ÷ 12).

Solutions Manual .

11.57

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. If an adjusting entry has been recorded to the inventory control account in the general ledger to agree with the inventory count, the additional adjustment required is a debit to cost of goods sold and a credit to inventory for $35,000. 4. The promotional expense recorded as a prepaid expense must be expensed as there is no measurable future benefit realized as at December 31, 2021.

Solutions Manual .

11.58

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.2B (Continued) 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 do 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. LO 2,3,4 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.59

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, 2021 and the service of hanging the lights will be satisfied on December 5, 2021.

b. Cash (40 x $110) ......................................... 4,400 Sales (40 x $28.52) .............................. 1,141 Unearned Revenue (40 x $81.48) ....... 3,259 To record cash sale and unearned revenue. (upon delivery of the box of lights and the collection) Unearned Revenue ..................................... 3,259 Service Revenue ................................. (upon completion of the installation of lights) To record service revenue.

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3,259

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 4 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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)

Solutions Manual .

11.62

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 2,4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.63

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.5B (Continued) b. March 15, 2021 Accounts Receivable (10 x $45) ................ Deferred Gross Profit.......................... Merchandise Inventory (10 x $30) ...... To record deferred gross profit. April 30, 2021 Cash ............................................................ Accounts Receivable ......................... Collection on account. Cost of Goods Sold .................................... Deferred Gross Profit ................................. Sales .................................................... To record sales and cost of goods sold

450 150 300

450 450 300 150 450

Solutions Manual .

11.65

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, 2021 Accounts Receivable (50 x $85) ...................... Refund Liability ($4,250 x 10%) ............... Sales ....................................................... To record sales on account. Cost of Goods Sold (50 x $25) - $125 ............. Estimated Inventory Returns1 ......................... Merchandise Inventory .......................... To record cost of goods sold. 1 (50 X 10% x $25)

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4,250 425 3,825 1,125 125 1,250

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.6B (Continued) f. (Continued) June 20, 2021 Refund Liability (5 x $85) ................................. Accounts Receivable ............................... To record credit for goods returned.

425 425

Merchandise Inventory (5 x $25) ..................... Estimated Inventory Returns.................. To record cost of goods returned. June 30, 2021 Cash ($4,250 - $425) ......................................... Accounts Receivable ............................... Collection on account.

125 125

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. LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.67

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.7B

The contract is for Solar Supplies Ltd. to deliver solar panels to its customer Spade Enterprises, terms FOB shipping point.

Expected value - right of return:

Possible outcome Amount 1 $61,750 ($65,000 x 95%) 2 $55,250 ($65,000 x 85%) 3 $52,000 ($65,000 x 80%) Expected value

Probabilityweighted Probability amount 40% $24,700 30% 16,575 30% 15,600 $56,875

Expected value of sales discount: ($56,875 x 2%) = $1,138 Selling price Less: estimated returns ($65,000 - $56,875) Transaction price before sales discount Less: sales discount Transaction price

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$65,000 (8,125) 56,875 (1,138) $55,737

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.7B (Continued) c. (continued) Cost of goods sold and estimated inventory returns:

Possible outcome Amount 1 $38,000 ($40,000 x 95%) 2 $34,000 ($40,000 x 85%) 3 $32,000 ($40,000 x 80%) Expected value

Probabilityweighted Probability amount 40% $15,200 30% 10,200 30% 9,600 $35,000

d. Oct. 10 Accounts Receivable ..................... Refund Liability 1 .................... Sales ($65,000 - $1,138 - $8,125) To record sales on account. 1 ($65,000 - $56,875)

Solutions Manual .

63,862 8,125 55,737

Cost of Goods Sold ............................ 35,000 Estimated Inventory Returns2 ............ 5,000 Merchandise Inventory ............... To record cost of goods sold. 2 ($40,000 - $35,000)

40,000

11.69

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.7B (Continued) Taking It Further: When it is established at the end of 20 days (Oct. 30, 2021) that Spade Enterprises has returned none of the solar panels, the entry that will be recorded by Solar Supplies Ltd. will be as follows: The full balance of the refund liability and estimated inventory returns will be reversed (brought to a zero balance) as follows: Refund Liability ................................... 8,125 Sales................................................ To reverse accrual of refund liability.

8,125

Cost of Goods Sold ............................ 5,000 Estimated Inventory Returns ......... To reverse estimated inventory returns.

5,000

When Spade Enterprises collects the balance of the accounts receivable, the collection will be recorded as follows: Cash ($65,000 – $1,138) .........................63,862 Accounts Receivable ..................... Collection on account.

63,862

Since the sales discount granted equals the amount previously estimated, there is no effect on net sales for this transaction. Summary of effect on gross profit: Overestimate of refund liability .............$8,125 Underestimate cost of goods sold ..... 5,000 Effect on gross profit (increase) ...........$3,125 Summary of effect on net sales: Overestimate of refund liability .............$8,125 LO 4 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

11.70

Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.8B 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 ..................................................... Cash purchase of equipment.

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 that have no probable future benefits are recognized immediately as expenses. Therefore, the following entries are necessary:

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.8B (Continued) a. and b. (Continued) 4. (Continued) Equipment................................................... Cash ..................................................... Cash purchase of equipment.

54,000

9,000 Depreciation Expense ($54,000  6) .......... Accumulated Depreciation—Equipment To record depreciation expense.

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 2022. 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 2022. No entry is necessary.

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Chapter 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 11.8B (Continued) 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 and the land 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. LO 2,3,4,5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 11.9B a.

EastJet Airlines prepared its financial statements using the cost model because it satisfied the going concern assumption for its operations.

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 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. LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE—CHAPTERS 6 TO 11 a.

Information on the two companies’ accounting principles would be found generally 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.

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.

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Accounting Principles, Eighth 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.

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Accounting Principles, Eighth Canadian Edition

BYP11.1 FINANCIAL REPORTING AND ANALYSIS a.

Aritzia prepares its financial statements using the historical cost basis except for: 1. derivative instruments – measured at fair value 2. cash-settled legacy option plan – measured at the fair value of the options determined by using the BlackScholes option pricing model. 3. Deferred Share Units – measured at market value of Aritzia shares.

1. Retail revenue is recognized when the customer received and pays for the merchandise at point of sale, net of any estimated allowance for returns. 2. For merchandise that is ordered and paid for in a store and subsequently picked up by the customer, revenue is deferred until the customer receives the merchandise and is subsequently recorded at the selling price less any estimated allowance for returns. 3. eCommerce revenue is recognized at the estimated date of receipt of the merchandise by the customer, net of an estimated allowance for returns. 4. Receipts from the sale of gift cards are treated as deferred revenue. The Company recognizes the revenue upon redemption of the gift cards at the selling price of the goods less any estimated allowance for returns. 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: 1. performance is complete and the seller has performed the services; 2. the amount of revenue can be reliably measured; 3. it is probable there will be an increase in economic resources (that is, cash will be collected); and 4. costs relating to providing the services can be reliably measured.

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Accounting Principles, Eighth Canadian Edition

BYP11.1 (Continued)

Once the shares are repurchased, they will be cancelled. The disclosure provided in Note 23 on subsequent events is required as a result of the full disclosure principle. The information provides relevant information to users of the financial statements concerning Aritzia’s plans and expected cash flows in the future.

The auditor’s report adds credibility to Aritzia’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 Aritzia Inc. as at February 25, 2018 and February 26, 2017 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.”

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Accounting Principles, Eighth 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.

Since the vast majority of countries throughout the globe follow IFRS, it is more cost effective for McCain to adopt and follow IFRS.

Despite 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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Accounting Principles, Eighth Canadian Edition

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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Accounting Principles, Eighth Canadian Edition

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 ended September 30, 2021. 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. 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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Accounting Principles, Eighth Canadian Edition

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, 2021. 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, 2021. 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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Accounting Principles, Eighth Canadian Edition

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.

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.

The cash 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.

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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Accounting Principles, Eighth Canadian Edition

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.

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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Accounting Principles, Eighth Canadian Edition

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.

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 11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CHAPTER 12 Accounting for Partnerships Learning Objectives 1. Describe the characteristics of the partnership form of business organization. 2. Account for the formation of a partnership. 3. Allocate and record profit or loss to partners. 4. Prepare partnership financial statements. 5. Account for the admission of a partner. 6. Account for the withdrawal of a partner. 7. Account for the liquidation of a partnership.

Solutions Manual .

12.1

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO BT Item LO BT Item LO BT Item LO 1. 2. 3. 4.

1 1 1 2

K C K K

5. 6. 7. 8.

2 2 3 3

K K C C

1. 2. 3. 4.

1 2 2 3

AP AP AP AP

5. 6. 7. 8.

3 3 3 3

AP AP AP AP

1. 2. 3. 4.

1 2 2 3

AN AP AP AP

5. 3 6. 3 7. 4 8. 3,4

AP AP AP AP

1. 1,2 AP 2. 3 AP 3. 3,4 AP

Solutions Manual .

4. 3,4 AP 5. 3,4 AP 6. 3,4 AP

Questions 9. 4 C 13. 5 10. 4 C 14. 5 11. 4 C 15. 6 12. 5 AP 16. 6 Brief Exercises 9. 3 AP 13. 6 10. 4 AP 14. 6 11. 5 AP 15. 7 12. 5 AP 16. 7 Exercises 9. 5 AP 13. 7 10. 5 AP 14. 7 11. 6 AP 15. 7 12. 6 AP 16. 7 Problems 7. 5 AP 10. 3,5,6 8. 5 AP 11. 7 9. 6 AP 12. 7

12.2

BT Item

C 17. C 18. C C

7 7

K C

AP 17. AP 18. AP AP

7 7

AP AP

AP 17. AP AP AP

AP 13. 2,3,4,5,6 AP AP

Chapter 12

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Accounting Principles, Eighth Canadian Edition

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

LO BT

Difficulty:

Time: AACSB

CPA CM

Solutions Manual .

12.3

Chapter 12

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Accounting Principles, Eighth Canadian Edition

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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Brief Exercises

12.4

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Difficulty Level

Time Allotted (min.)

Discuss advantages and disadvantages of partnerships and record formation of partnership. Calculate and record division of profit. Prepare closing entries.

Moderate

20-25

Moderate

25-35

Calculate and record division of profit or loss. Prepare statement of partners’ equity. Calculate division of profit. Prepare an income statement and a 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 to correct errors, 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

15-20

10A

Record withdrawal and admission of partner; allocate profit.

Complex

25-35

11A

Prepare and post entries for partnership liquidation.

Moderate

45-50

12A

Record liquidation of partnership.

Moderate

45-50

13A

Account for 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. Calculate and record division of profit. 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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12.5

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 to correct errors, 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

15-20

10B

Record withdrawal and admission of partner; allocate profit.

Moderate

25-35

11B

Prepare and post entries for partnership liquidation.

Moderate

45-50

12B

Record liquidation of partnership.

Moderate

45-50

13B

Account for formation of a partnership, allocation of profits, and admission and withdrawal of partners; prepare statement of partners’ equity.

Complex

50-60

Solutions Manual .

12.6

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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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12.7

Analysis E12.1

Synthesis Evaluation

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

12.8

Analysis

Synthesis

Evaluation

BYP12.4

BYP12.5

Chapter 12

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Accounting Principles, Eighth 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.

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

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.

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

(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.

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 3. (continued) (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, among other provisions, which may not meet the requirements of the partners.

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

(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.

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

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.

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

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.

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

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Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 7.

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 a 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.

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

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 each 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.

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

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.

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

10. The income statement of a partnership does not include the details of how the profit or loss is divided among the partners. That information is contained in the statement of partners’ equity. LO 4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11. I disagree. Only the ending balance of each partner’s capital account is shown on the balance sheet. Changes in the capital account for the current year are shown in the statement of partners’ equity. Only the ending balance of the capital account of each partner carry forward to the next fiscal year. LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

12.11

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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. LO 5 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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

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

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.

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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. LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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.

LO 6 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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. LO 7 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

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

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

BRIEF EXERCISE 12.2 Cash .................................................... 15,000 B. Ripley, Capital ........................... Invested cash in business. Cash .................................................... 10,000 Equipment............................................. 3,000 F. Nichols, Capital ......................... Invested cash and equipment in business,

15,000

13,000

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

Solutions Manual .

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Chapter 12

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.3 July 1

Cash .................................................... 10,000 R. Black, Capital ............................ Invested cash in business,

10,000

Accounts Receivable ........................... 2,400 Cash1 .................................................................................... 8,000 Allowance for Doubtful Accounts B. Rivers, Capital ........................... Invested cash and accounts receivable in business. 1 $10,000 – ($2,400 – $400) = $8,000

400 10,000

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

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%

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.5 (a)

(b)

Income Summary ........................................ 75,000 Rod, Capital............................................. Dall, Capital ............................................. To close Income Summary.

37,500 37,500

Rod, Capital ................................................. 37,500 Dall, Capital.................................................. 37,500 Income Summary.................................... To close Income Summary.

75,000

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

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 ................................... To close Income Summary.

31,500 52,500

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

Solutions Manual .

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Chapter 12

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Accounting Principles, Eighth Canadian Edition

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

Total $70,000

$5,000 59,000 11,000

2,200 11,000 0 $7,200 $70,000

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

Solutions Manual .

12.17

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.8 THE MILLSTONE PARTNERSHIP Division of Profit Year Ended February 28, 2021 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

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

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

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.9 (a) TOGNA COMPANY Division of Profit – Oct. 31, 2021 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.................................... To close Income Summary.

6,850 15,300

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

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.10 (a) DRS. JARRATT AND BRAMSTRUP Income Statement Year Ended April 30, 2021 Service revenue ................................................................ $377,000 Operating expenses .......................................................... 149,400 Profit .................................................................................. $227,600 (b) DRS. JARRATT AND BRAMSTRUP Statement of Partners’ Equity Year Ended April 30, 2021

Capital, May 1, 2020 .................... Add: Profit.................................... Less: Drawings............................ Capital, April 30, 2021 .................

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12.20

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

Chapter 12

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.10 (Continued) (b) (Continued) DRS. JARRATT AND BRAMSTRUP Balance Sheet April 30, 2021

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 .................

$27,100

66,900 $94,000

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.11 June 9 K. Carter, Capital .............................. 18,000 D. Dutton, Capital ........................ ($36,000 × ½ = $18,000) To record admission of partner.

18,000

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

BRIEF EXERCISE 12.12 Oct. 1 Cash .................................................. 58,000 Irey, Capital (50% × $8,6001) ............ 4,300 Pedigo, Capital (50% × $8,6001)....... 4,300 Vernon, Capital (45% × $148,000) To record purchase of interest. 1

66,600

[($40,000 + $50,000 + $58,000) × 45%] – $58,000 = $8,600

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.13 (a)

Dec. 31

T. Morden, Capital .......................... 25,000 R. Neepawa, Capital ................ S. Altona, Capital .................... To record withdrawal of partner.

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. LO 6 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.14 (a) T. Shelby receives $35,000 cash Dec. 31

T. Shelby, Capital ........................... 25,000 M. Knight, Capital (62.5%1 × $10,000) ....................... 6,250 C. Murphy, Capital (37.5%2 × $10,000) ....................... 3,750 Cash ......................................... To record withdrawal of partner. 1 (5/8 = 62.5%) 2 (3/8 = 37.5%)

35,000

(b) T. Shelby receives $20,000 cash Dec. 31

T. Shelby, Capital ........................... 25,000 M. Knight, Capital (62.5% × $5,000) C. Murphy, Capital (37.5% × $5,000) Cash ......................................... To record withdrawal of partner.

3,125 1,875 20,000

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.15 A, Capital ...................................... 8,000 B, Capital ...................................... 9,000 C, Capital ...................................... 4,000 Cash ......................................... To record final distribution to partners.

21,000

LO 7 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 12

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.16 Cash

Noncash Assets

Balances before liquidation

$ 15,000

$ 90,000

Sale of noncash assets and allocation of gain New balances

125,000 140,000

(90,000) -

Pay liabilities New balances Cash distribution to partners Final balances

(40,000) 100,000 (100,000) 0

= Liabilities +

40,000

Cisneros, Capital

Gunselman, + Capital +

Forren, Capital

$ 32,000

$13,000

20,000

40,000

13,125 (1) 33,125

8,750 40,750

(40,000) -

33,125

40,750

26,125

(33,125) 0

(40,750) 0

(26,125) 0

(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 LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

_ Solutions Manual

12.24 .

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.17 (a) Nov. 15

Cash .................................................... 20,000 Land ................................................ Gain on Realization........................ To record realization of assets.

17,000 3,000

Gain on Realization ............................ D. Dupuis, Capital (1/3 × $3,000) ... V. Dueck, Capital (1/3 × $3,000)..... B. Veitch, Capital (1/3 × $3,000) .... To allocate gain on realization.

1,000 1,000 1,000

(b) Nov. 15

3,000

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)................. To record final distribution to partners.

28,000

LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 12.18 (a) Nov. 15 Cash ...................................................... 14,000 Loss on Realization ................................ 6,000 Land ................................................ To record realization of assets.

20,000

(b) Nov. 15 D. Black, Capital (1/3 × $6,000) .............. 2,000 V. Green, Capital (1/3 × $6,000) .............. 2,000 B. Brown, Capital (1/3 × $6,000) ............. 2,000 Loss on Realization ....................... To allocate loss on realization.

6,000

(c) Nov. 15 D. Black, Capital ($15,000 – $2,000) ..... 13,000 V. Green, Capital ($12,000 – $2,000) .... 10,000 B. Brown, Capital ($4,000 – $2,000) ....... 2,000 Cash ($11,000 + $14,000)............... To record final distribution to partners.

25,000

LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth 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 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 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.

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.2 a.

Cash ......................................................... 50,000 K. Decker, Capital............................... Invest cash in business.

50,000

Land ......................................................... 15,000 Building ................................................... 80,000 S. Rosen, Capital................................ Invest land and building in business.

95,000

Cash........................................................... 9,000 Accounts Receivable .............................. 32,000 Equipment... ...................................... 39,000 Allowance for Doubtful Accounts ..... E. Toso, Capital .................................. Invest assets in business.

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 LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 12.3 Jan. 1

Cash .................................................... 12,000 Accounts Receivable ......................... 14,000 Equipment........................................... 23,500 Allowance for Doubtful Accounts S. Vopat, Capital ............................ Invest assets in business.

3,000 46,500

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.4 a.

Income Summary ........................................ 60,000 K. Ison, Capital ($60,000 × 55%) ............ I. McCoy, Capital ($60,000 × 45%).......... To close Income Summary.

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

$20,000 50,000 10,000

4,500

$24,500

Income Summary ........................................ 60,000 K. Ison, Capital........................................ I. McCoy, Capital ..................................... To close Income Summary.

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12.29

Total $60,000

10,000 0 $60,000

35,500 24,500

Chapter 12

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Accounting Principles, Eighth 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

Total $60,000

70,000 (10,000)

13,000 (23,000)

23,000 0 $60,000

33,500 26,500

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.5 a.

(1)

HUMA AND HOW Division of Profit Year Ended June 30, 2021 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

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12.31

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

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 12.5 (Continued) a.

(2) HUMA AND HOW Division of Profit Year Ended June 30, 2021 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

b. (1) June 30 Income Summary ........................... 70,000 R. Huma, Capital ....................... W. How, Capital ......................... To close Income Summary.

40,620 29,380

(2) June 30 Income Summary ........................... 55,000 R. Huma, Capital ....................... W. How, Capital ......................... To close Income Summary.

31,620 23,380

LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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 ................................ To close Income Summary.

15,000

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.7 a. COPPERFIELD DEVELOPMENTS Statement of Partners’ Equity Year Ended December 31, 2021

Capital, January 1........................ Add: Investment .......................... Profit............................................. Less: Drawings............................ Capital, December 31 .................. 1 2

A. Rodriguez $67,140 33,099 1 100,239 36,010 $64,229

E. Carrieri Total $78,140 $145,280 3,540 3,540 2 44,131 77,230 125,811 226,050 58,940 94,950 $66,871 $131,100

$77,230 × 3/7 = $33,099 $77,230 × 4/7 = $44,131

b. COPPERFIELD DEVELOPMENTS Balance Sheet (partial) December 31, 2021

Partners' equity Alvaro Rodriguez, capital ............................................... $64,229 Elisabetta Carrieri, capital ............................................ 66,871 Total partners' equity ........................................................ $131,100 LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.8 a. DRS. KOVACIK AND DONOVAN Income Statement Year Ended November 30, 2021 Service revenue ................................................................ $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, 2021

Capital, December 1, 2020 .......... Add: Profit.................................... Less: Drawings............................ Capital, November 30, 2021 ........

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 * $257,200 × 40% = $102,880

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.8 (Continued) a.

(Continued) DRS. KOVACIK AND DONOVAN Balance Sheet November 30, 2021

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 2025 ............................ 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, Eighth Canadian Edition

EXERCISE 12.8 (Continued) b. Closing entries dated November 30, 2021 Service Revenue ............................................ 425,000 Income Summary.................................... 425,000 To close revenue account. Income Summary ........................................... 167,800 Salaries Expense .................................... Office Expense........................................ Interest Expense ..................................... To close expense accounts.

80,100 83,600 4,100

Income Summary ........................................... 257,200 J. Kovacik, Capital .................................. 154,320 S. Donovan, Capital ................................ 102,880 To close Income Summary.

J. Kovacik, Capital ......................................... 142,000 J. Kovacik, Drawings.............................. 142,000 To close drawings account. S. Donovan, Capital ........................................ 94,000 S. Donovan, Drawings ........................... To close drawings account.

94,000

LO 3,4 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.9 a. (1) Sept. 1 A. Veveris, Capital ................. 21,000 S. Weiss, Capital ............. 21,000 ($42,000 × 1/2) = $21,000 To record purchase of an interest. (2) Sept. 1 A. Veveris, Capital ($42,000 × 25%) ................. 10,500 J. Rubenis, Capital ($33,000 × 25%) ................... 8,250 S. Weiss, Capital ............. 18,750 To record purchase of an interest.

b. Alternative 1 Beginning balance S. Weiss admission Ending balance Alternative 2 Beginning balance S. Weiss admission Ending balance

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

Total Capital $ 75,000

$ 21,000 $ 21,000

$ 75,000 Total Capital $ 75,000

$ 18,750 $ 18,750

$ 75,000

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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............................ To record purchase of an interest.

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 ....................... To record purchase of an interest.

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

Solutions Manual .

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Chapter 12

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Accounting Principles, Eighth 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

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

Total Capital $160,000 65,000 $225,000

Total Capital $160,000 95,000 $255,000

LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.11 a. 1.

Dec. 31

A. Noll, Capital ............................... 30,000 S. Miles, Capital......................... To record withdrawal of a partner.

30,000

A. Noll, Capital ............................... 30,000 Cash ........................................... To record withdrawal of a partner.

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 ........................................... To record withdrawal of a partner.

b. Condition 1 Beginning balance A. Noll withdrawal Ending balance Condition 3 Beginning balance A. Noll withdrawal Ending balance

J. Lane Capital $ 50,000

35,000

$ 50,000

S. Miles Capital $ 40,000 30,000 $ 70,000

A. Noll Capital $ 30,000 (30,000) 0

Total Capital $120,000 $120,000

J. Lane Capital $ 50,000 (3,125) $ 46,875

S. Miles Capital $ 40,000 (1,875) $ 38,125

A. Noll Capital $ 30,000 (30,000) 0

Total Capital $120,000 (35,000) $ 85,000

LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth 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 ........................................... To record withdrawal of a partner.

83,000

Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to retiring partner .........................................

$74,000 83,000 $9,000

Allocation of bonus: D. Nagel, Capital ($9,000 × 4/6) ..................... $6,000 I. Mbango, Capital ($9,000 × 2/6) ..................... 3,000

$9,000

Sept. 30 K. White, Capital............................. 74,000 D. Nagel, Capital........................ I. Mbango, Capital ..................... Cash ........................................... To record withdrawal of a partner.

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.12 (Continued) b. Condition 2 Beginning balance K. White withdrawal Ending balance

D. Nagel Capital

K. White Capital

I. Mbango Capital

$92,000

$74,000

$6,000

$172,000

10,000 $102,000

(74,000) -

5,000 $11,000

(59,000) $113,000

Total Capital

LO 6 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth 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

Balance before liquidation Sale of assets share of losses Balance Final liquidation Final balances

Partners' Capital Houghton Pahli Capital Capital

Total Capital

Partners' Capital Houghton Pahli Capital Capital

Cash

Windl Capital

Total 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) -

LO 7 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth 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

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

12.45 .

Chapter 12

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Accounting Principles, Eighth 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

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) -

LO 7 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

_ Solutions Manual

12.46 .

Chapter 12

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Accounting Principles, Eighth 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. Accounts H. Bayer J. Leech Total Equipment Equipment Payable 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. LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

_ Solutions Manual

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Accounting Principles, Eighth Canadian Edition

EXERCISE 12.16 a.

Dec. 31

Cash.............................................. 100,000 Accumulated Depreciation ............ 40,000 Equipment ............................... Gain on Realization................. To record realization of assets.

130,000 10,000

Gain on Realization........................ 10,000 H. Bayer, Capital ($10,000 × 50%) ....................... J. Leech, Capital ($10,000 × 50%) ....................... To allocate gain on realization. Accounts Payable .......................... 55,000 Cash ......................................... Payment on account.

H. Bayer, Capital ............................ 50,000 J. Leech, Capital ............................ 35,000 Cash ......................................... To record final distribution to partners.

5,000 5,000

55,000

85,000

LO 7 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth 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 loss Balances Payment of liabilities Balances a., b. 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

12.49 .

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Accounting Principles, Eighth 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

Refer to Liquidation Schedule above

Dec. 31 Cash ............................................... S. Lokum, Capital ...................... To invest cash in business.

3,000 3,000

31 O. Low, Capital............................... 33,100 A. Olson, Capital............................ 47,900 Cash ........................................... 81,000 To record final distribution to partners. d.

Dec. 31 O. Low, Capital ($3,000 × 50%) ..... A. Olson, Capital ($3,000 × 50%)... S. Lokum, Capital ...................... To reallocate capital deficiency.

1,500 1,500 3,000

31 O. Low, Capital ($33,100 – $1,500) 31,600 A. Olson, Capital ($47,900 – $1,500) 46,400 78,000 Cash ........................................... To record final distribution to partners. LO 7 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 12.1A a.

Advantages of forming a partnership instead of a corporation include: i. A partnership is more easily formed and less expensive to establish than a corporation. ii. A partnership is controlled by fewer government regulations and restrictions than is a corporation. iii. Decisions can be made quickly on important matters that affect the firm. Disadvantages of forming a partnership instead of a corporation include: i. Mutual agency provides for the risk of the actions taken by any of the partners that affects all partners. The action of any partner is binding on all other partners. ii. Limited life since the ownership of the business is not easily transferred by the sale of shares as is the case for corporations. iii. Unlimited liability in general partnerships. Each partner is jointly and severally (individually) liable for all partnership liabilities.

Jan.

Solutions Manual .

1 Cash ..................................................9,000 Accounts Receivable...................... 13,500 Merchandise Inventory................... 14,000 Equipment ....................................... 18,000 Allowance for Doubtful Accounts Accounts Payable ................... I. Domic, Capital ...................... To invest assets in business.

12.51

4,500 11,000 39,000

Chapter 12

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.1A (Continued) b. (Continued) Jan.

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 ................... To invest assets in business. 1 Cash ($39,000 – $25,000) ............... 14,000 P. Dasilva, Capital ................... To invest cash in business.

3,000 34,000 25,000

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.

LO 1,2 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.2A a. Dec. 31 Income Summary ........................... 90,000 Z. Gable, Capital ........................ M. Smith, Capital ....................... To close Income Summary.

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 ....................... To close Income Summary.

Solutions Manual .

12.53

Total $60,000

72,000 (12,000)

12,000 0 $60,000

36,000 24,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.2A (Continued) c. Division of Profit Z. Gable M. Smith Profit................................................. Salary allowance Z. Gable ....................................... $40,000 $30,000 M. Smith....................................... 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) (3,360) M. Smith ($11,200 × 30%) ........... Total ........................................ Profit remaining for allocation ......... Profit allocated to the partners ........ $33,360 $26,640

Total $60,000

70,000 (10,000) 1,200 (11,200)

11,200 0 $60,000

Dec. 31 Income Summary ............................. 60,000 Z. Gable, Capital ........................ M. Smith, Capital ....................... To close Income Summary.

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. LO 3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.3A a. 1. Dec. 31 Income Summary ............................. 40,000 J. Chapman-Brown, Capital ...... C. Duperé, Capital ..................... H. Weir, Capital .......................... To close Income Summary.

6,666 14,667 18,667

CDW PARTNERS Division of Profit Year Ended December 31, 2021 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

Solutions Manual .

12.55

Total $40,000

20,000 20,000

20,000 0 $40,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.3A (Continued) a. (Continued) 2. Dec. 31 Income Summary ........................... 40,000 J. Chapman-Brown, Capital ...... C. Duperé, Capital ..................... H. Weir, Capital .......................... To close Income Summary.

7,000 16,300 16,700

CDW PARTNERS Division of Profit Year Ended December 31, 2021 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%) $2,500 Total ...................... Profit remaining for allocation ............. Salary allowance J. Chapman-Brown ... 15,000 C. Duperé .................. 20,000 H. Weir ....................... 18,000 Total ...................... Profit (deficiency) remaining for allocation Fixed ratio ..................... Chapman-Brown [$(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 .

12.56

Total $40,000

6,000 34,000

53,000 (19,000)

(19,000) 0 $40,000 Chapter 12

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.3A (Continued) b. CDW PARTNERS Statement of Partners’ Equity Year Ended December 31, 2021

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. LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.4A a. STOREY ROGERS PARTNERSHIP Income Statement Year Ended December 31, 2021 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, 2021 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.4A (Continued) c. STOREY ROGERS PARTNERSHIP Statement of Partners’ Equity Year Ended December 31, 2021 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 ...................... To close revenue account.

340,000

31 Income Summary ........................... 380,000 Cost of Goods Sold .................. Operating Expenses.................. To close expense accounts.

250,000 130,000

Capital, January 1................... Less: Drawings...................... Loss ............................. Capital, December 31 .............

V. Storey $ 82,000 24,000 12,900 36,900 $ 45,100

31 V. Storey, Capital .......................... 12,900 G. Rogers, Capital.......................... 27,100 Income Summary ...................... To close Income Summary. 31 V. Storey, Capital ........................... 24,000 G. Rogers, Capital.......................... 28,800 V. Storey, Drawings................... G. Rogers, Drawings ................. To close drawings accounts.

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40,000

24,000 28,800

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Accounting Principles, Eighth Canadian Edition

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. LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 12.5A a. KANT-ADDER PARTNERSHIP Income Statement Year Ended March 31, 2021

Service revenue ................................................................. $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, 2021

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.5A (Continued) (a) (Continued) KANT-ADDER PARTNERSHIP Balance Sheet March 31, 2021

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 note payable ..................................... 1,500 Total current liabilities ........................................... 27,000 Long-term liabilities Note 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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.5A (Continued) b. Mar. 31 Service Revenue ............................ 255,000 Income Summary ...................... To close revenue account.

255,000

31 Income Summary ........................... 134,000 Salaries Expense....................... Rent Expense ............................ Interest Expense ....................... Depreciation Expense ............... Supplies Expense...................... To close expense accounts.

80,000 36,000 5,000 8,000 5,000

31 Income Summary ........................... 121,000 I. Kant, Capital ........................... U. Adder, Capital ....................... To close Income Summary.

80,667 40,333

31 U. Adder, Capital .............................. 60,000 I. Kant, Capital .................................. 90,000 U. Adder, Drawings ................... I. Kant, Drawings ....................... To close drawings accounts.

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. LO 3,4 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.6A a. Dec. 31 T. Gilligan, Drawings............................... 20,000 M. Melnyk, Drawings ............................... 10,000 Salaries Expense................................ To correct error. 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 made. c. TY & MATT SNOW REMOVAL SERVICES Statement of Partners’ Equity Year Ended December 31, 2021 T. Gilligan Capital, Jan. 1 ............................ 0 Add: Investment ............................ $ 4,000 Profit ..................................... 20,800 24,800 Less: Drawings .............................. 20,000 Capital, December 31 .................... $ 4,800

Solutions Manual .

12.64

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

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.6A (Continued) d. TY & MATT SNOW REMOVAL SERVICES Balance Sheet December 31, 2021 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, 2021. Tyler and Matt should come to some agreement to a fair allocation of profit for the coming year and document the details in writing. LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.7A a.

May 1 Cash .................................................. 23,500 Watson, Capital ......................... To invest cash in business.

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) .. 4,600 Emley, Capital ($9,200 × 3/10)... 2,760 Sigle, Capital ($9,200 × 2/10)..... 1,840 Watson, Capital ......................... 25,800 To invest cash in business. 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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Accounting Principles, Eighth Canadian Edition

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 ......................... To invest cash in business.

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 (LLPs) 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. LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.8A a.

May 1 W. Sanga, Capital ($59,000 × 50%) 29,500 N. Osvald, Capital...................... To record purchase of an interest.

May 1 Cash .................................................. 68,000 R. Short, Capital ($5,600 × 3/9) ...................................... 1,867 K. Osborne, Capital ($5,600 × 2/9) ...................................... 1,244 W. Sanga, Capital ($5,600 × 4/9) ...................................... 2,489 N. Osvald, Capital...................... To invest cash in business.

Solutions Manual .

29,500

73,600

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.8A (Continued) c.

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...................... To invest cash in business.

3,200 2,133 4,267 31,400

Total capital of existing partnership ............ $116,000 Investment by N. Osvald ............................... 41,000 Total capital of new partnership................... $157,000 N. Osvald's capital credit ($157,000 × 20%)

$31,400

Investment by N. Osvald ................................. $41,000 N. Osvald's capital credit ........................... 31,400 Bonus to old partners................................. $ 9,600 d.

May 1 Cash .................................................. 29,000 N. Osvald, Capital...................... To invest cash in business.

29,000

Total capital of existing partnership ............ $116,000 Investment by N. Osvald ............................... 29,000 Total capital of new partnership................... $145,000 N. Osvald's capital credit ($145,000 × 20%)

$29,000

No bonus to new or existing partners.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.8A (Continued) 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. LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.9A a. Dec. 31 R. Antoni, Capital ............................. 48,000 P. Jiang, Capital ........................ To record purchase of an interest. b. Dec. 31 R. Antoni, Capital ............................. 48,000 H. Fercho, Capital ($10,000 × 6/9)..................................... 6,667 P. Jiang, Capital ($10,000 × 3/9)..................................... 3,333 Cash ........................................... To record withdrawal of partner.

48,000

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 ........................................... To record withdrawal of partner.

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

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. LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

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 .................................. To record withdrawal of partner.

M. Kumar, Capital $85,000 – $14,400 = $70,600 A. Kassam, Capital $43,000 – $3,600 = $39,400

Feb. 28

Income Summary ........................... 24,000 M. Kumar, Capital ($24,000 × 4/6) A. Kassam, Capital ($24,000 × 2/6)................... To close Income Summary.

M. Kumar, Capital ($70,600 + $16,000) ....... A. Kassam, Capital ($39,400 + $8,000) ....... Total partnership capital .............................

Solutions Manual .

12.73

90,000

16,000 8,000

$86,600 47,400 $134,000

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.10A (Continued) 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 ............ To record admission of partner. Total capital of existing partnership.......... Investment by C. Mawani ........................... Total capital of new partnership ................

94,050

$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 ................................. f.

M. Kumar, Capital ($86,600 – $12,700) ....... A. Kassam, Capital ($47,400 – $6,350) ....... C. Mawani, Capital ...................................... Total partnership capital .............................

$75,000 94,050 $19,050 $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. LO 3,5,6 BT: AP Difficulty: C Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.11A a. Item Balances before liquidation Sale of noncash assets

Payment of liabilities

Allocation of cash

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

30,200

42,100

18,800

1,300

42,100

18,800

1,300

(62,200)

(42,100)

(18,800)

(1,300)

Cash

(30,200)

62,200

K. Lally Capital

_ Solutions Manual

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.11A (Continued) a. (Continued) June

June

30 Cash................................................ 59,800 Accumulated Depreciation – Equipment .............................. 16,800 Accounts Receivable ................ Equipment.................................. To record realization of assets.

30 Accounts Payable .......................... 30,200 Cash ........................................... Payment on account. 30 A. Hunt Capital ............................... 42,100 K. Lally, Capital .............................. 18,800 1,300 D. Portman, Capital......................... Cash ......................................... To record final distribution to partners.

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12.76

28,000 48,600

30,200

62,200

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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)

34,700

14,360

(1,660)

Cash

(30,200) 47,400

-30,200 -

1,660 49,060

34,700

14,360

1,660 0

(49,060)

(34,700)

(14,360)

_ Solutions Manual

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.11A (Continued) b. (Continued) June

30 Cash................................................ 45,000 Accumulated Depreciation – Equipment .............................. 16,800 Loss on Realization ....................... 14,800 Accounts Receivable ................ Equipment.................................. To record realization of assets.

30 A. Hunt, Capital ($14,800 × 50%) .......................... 7,400 K. Lally, Capital ($14,800 × 30%) .......................... 4,440 D. Portman, Capital ($14,800 × 20%) ..................... 2,960 Loss on Realization................... To allocate loss on realization. 30 Accounts Payable .......................... Cash ........................................... Payment on account.

30,200

30 Cash ($1,300 – $2,960) ................... D. Portman, Capital ................... Invest cash in business.

1,660

12.78

14,800

30,200

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) .................... To record final distribution to partners.

Solutions Manual .

28,000 48,600

1,660

49,060

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.11A (Continued) c. A. Hunt Capital

K. Lally Capital

D. Portman Capital

$42,100

$18,800

$1,300

(14,900)

(8,940)

(5,960)

27,200

9,860

(4,660)

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) -

Item Balances before liquidation Sales of noncash assets and loss on sale of assets

Payment of liabilities

Cash

Accounts Receivable

Accounts Accum. Equipment Depreciation Payable

$32,600

$28,000

$48,600

$16,800

30,000

(28,000)

(48,600)

16,800

62,600

$30,200

30,200

(30,200)

32,400

(32,400) -

_ Solutions Manual

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.................................. To record realization of assets.

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................... To allocate loss on realization.

30 Accounts Payable .......................... Cash ........................................... Payment on account.

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) To record final distribution to partners.

12.80

29,800

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) To reallocate capital balances.

Solutions Manual .

28,000 48,600

30,200

4,660

32,400

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.11A (Continued) 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. LO 7 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.12A a. (1)

Item Balances before liquidation Sale of merchandise inventory

Cash

Merchandise Inventory

$142,600

$402,900

434,000

(402,900)

Notes Payable $113,000

576,600 Payment of notes payable

Payment of cash

(113,000)

463,600

(463,600)

H. Brumby Capital

R. Criolio Capital

A. Paso Capital

$227,900

$179,900

$24,700

10,367

10,366

238,267

190,267

35,066

238,267

190,267

35,066

(238,267)

(190,267)

(35,066)

_ Solutions Manual

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.12A (Continued) a. (1) (Continued) Aug.

Solutions Manual .

Cash................................................. 434,000 Gain on Realization................. Merchandise Inventory ........... To record realization of assets.

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) To allocate gain on realization.

10,367 10,367 10,366

Notes Payable ................................. 113,000 Cash ......................................... Repay notes payable.

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 To record final distribution to partners.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.12A (Continued) a. (2)

Item Balances before liquidation Sale of merchandise inventory

Cash

Payment of notes payable Payment of deficiency

Allocation of cash

Merchandise Inventory

$142,600

$402,900

318,000

(402,900)

460,600

Notes Payable

H. Brumby Capital

$113,000

113,000

(113,000)

347,600

R. Criolio Capital

A. Paso Capital

$227,900

$179,900

$24,700

(28,300)

199,600

151,600

(3,600)

199,600

151,600

(3,600) 3,600 -

3,600 351,200

199,600

151,600

(351,200) -

(199,600) -

(151,600) -

_ Solutions Manual

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 12.12A (Continued) a. (2) (Continued)

Aug.

Solutions Manual .

Cash................................................. 318,000 Loss on Realization .......................... 84,900 Merchandise Inventory ........... To record realization of assets. 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 ................ To allocate loss on realization. Notes Payable ................................. 113,000 Cash ......................................... Repay notes payable. Cash..................................................... 3,600 A. Paso, Capital ($24,700 – $28,300)............... Invest cash in business.

402,900

84,900

113,000

3,600

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) .......... 351,200 To record final distribution to partners.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.12A (Continued) b.

Item Balances before liquidation Sale of merchandise inventory Payment of notes payable

Cash $142,600

$402,900

318,000

(402,900)

460,600

Notes Payable

H. Brumby Capital

$113,000

113,000

(113,000)

347,600

Allocation of deficiency Allocation of cash

Merchandise Inventory

(347,600) -

R. Criolio Capital

A. Paso Capital

$227,900

$179,900

$24,700

(28,300)

199,600

151,600

(3,600)

199,600

151,600

(3,600)

(1,800)

3,600 -

(197,800) -

(149,800) -

_ Solutions Manual

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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) ........... To reallocate capital accounts.

1,800 1,800 3,600

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) ....................... 347,600 To record final distribution to partners.

Taking It Further: 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 that should be sufficient to address any losses experienced on liquidation. LO 7 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.13A a. 2020 Mar. 2

Cash ....................................................... Equipment.............................................. Z. Moreau, Capital ............................ Invest assets in business.

15,000 18,000

Cash ....................................................... Furniture ................................................ Notes Payable .................................. K. Krneta, Capital ............................. Invest assets in business.

10,000 17,000

Cash ....................................................... Equipment.............................................. V. Visentin, Capital........................... Invest assets in business.

20,000 13,000

Dec. 20 Z. Moreau, Drawings ............................. K. Krneta, Drawings .............................. V. Visentin, Drawings ............................ Cash.................................................. Record cash drawings.

30,000 30,000 30,000

33,000

5,000 22,000

33,000

90,000

31 Income Summary................................... 110,000 Z. Moreau, Capital ($110,000 × 3/8). 41,250 K. Krneta, Capital ($110,000 × 2/8).. 27,500 41,250 V. Visentin, Capital ($110,000 × 3/8) To close Income Summary.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.13A (Continued) a. (Continued) MKV PERSONAL COACHING Capital Balances December 31, 2020 Investments Drawings Profit Ending Balance 2021 Jan. 5

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

K. Krneta, Capital................................... Z. Moreau, Capital ............................ V. Visentin, Capital........................... Cash.................................................. To record withdrawal of partner.

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.................................................. To record cash drawings.

$19,500 15,000 $ 4,500 $4,500

42,750 45,000 87,750

31 Income Summary................................... 123,750 55,000 Z. Moreau, Capital ($123,750 × 4/9) . V. Visentin, Capital ($123,750 × 5/9) 68,750 To close Income Summary.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.13A (Continued) a. (Continued)

2022 Jan. 4

Cash............................................................ 31,000 Z. Moreau, Capital (4/9 × $9,000) .......... 4,000 V. Visentin, Capital (5/9 × $9,000) ......... 5,000 D. Hirjikaka, Capital ......................... 40,000 To record withdrawal of partner.

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, Eighth Canadian Edition

PROBLEM 12.13A (Continued) b. MKV PERSONAL COACHING Balance of Partners’ Capital Accounts January 4, 2022

Balance Dec. 31, 2020 Withdrawal of partner Drawings 2021 Profit 2021 Balance Dec. 31, 2021 Admission new partner Balance Jan. 4, 2022

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, Eighth Canadian Edition

PROBLEM 12.13A (Continued) b. (Continued) MKV PERSONAL COACHING Balance Sheet (partial) January 4, 2022 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. LO 2,3,4,5,6 BT: AP Difficulty: C Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.1B a.

Advantages of forming a partnership instead of a corporation include: i. A partnership is more easily formed and less expensive to establish than a corporation. ii. A partnership is subject to fewer government regulations and restrictions than is a corporation. iii. Decisions can be made quickly on important matters that affect the firm. Disadvantages of forming a partnership instead of a corporation include: i. Mutual agency provides for the risk of the actions taken by any of the partners that affects all partners. The action of any partner is binding on all other partners. ii. Limited life since the ownership of the business is not easily transferred by the sale of shares as is the case for corporations. iii. Unlimited liability in general partnerships. Each partner is jointly and severally (individually) liable for all partnership liabilities.

Jan. 1 Cash .................................................... 9,500 Accounts Receivable ....................... 15,000 Merchandise Inventory .................... 20,000 Equipment ........................................ 18,000 Allowance for Doubtful Accounts Accounts Payable ....................... F. Visanji, Capital......................... To invest assets in business.

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3,500 25,000 34,000

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Accounting Principles, Eighth Canadian Edition

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 .................... To invest assets in business. c.

Jan. 1 Cash ($34,000 – $29,500) ................... 4,500 P. Vanbakel, Capital .................... Invest cash in business.

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.

LO 1,2 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.2B a. Dec. 31 Income Summary ........................... 170,500 K. Ali, Capital ............................. P. Ramsey, Capital .................... To close Income Summary.

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 .................... To close Income Summary.

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109,750 60,750

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Accounting Principles, Eighth 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

Total $90,000

115,000 (25,000) (2,675) (27,675)

27,675 0 $90,000

Dec. 31 Income Summary ............................. 90,000 K. Ali, Capital ............................. P. Ramsey, Capital .................... To close Income Summary.

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. LO 3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.3B a. 1.

Dec. 31 Income Summary .............................. 55,000 S. Little, Capital ......................... L. Brown, Capital....................... P. Gerhardt, Capital................... To close Income Summary.

10,000 30,000 15,000

LBG COMPANY Division of Profit Year Ended December 31, 2021 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 Solutions Manual .

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$25,000 $10,000 40,000 15,000

5,000 5,000 15,000 _ $30,000

$15,000 $55,000 Chapter 12

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Accounting Principles, Eighth 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................... To close Income Summary.

11,550 18,275

LBG COMPANY Division of Profit Year Ended December 31, 2021 S. L. P. Little Brown Gerhardt Total Profit............................... $25,000 Interest allowance S. Little ($65,000 × 7%) $4,550 L. Brown ($40,000 × 7%) $2,800 P. Gerhardt ($20,000 × 7%) $1,400 Total ...................... 8,750 Profit remaining for allocation 16,250 Salary allowance L. Brown .................... 15,000 P. Gerhardt ................ 20,000 Total ...................... 35,000 Profit (deficiency) remaining for allocation (18,750) Fixed ratio S. Little [$(18,750) × 3/6] ......... (9,375) L. Brown [$(18,750) × 2/6] ......... (6,250) P. Gerhardt (3,125) [$(18,750) × 1/6] ......... Total ...................... (18,750) Profit remaining for allocation ............. _ _ _ 0 Profit allocated to the partners........... $(4,825) $11,550 $18,275 $25,000 Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.3B (Continued) b. LBG COMPANY Statement of Partners’ Equity Year Ended December 31, 2021

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. LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.4B a. LAM TAN PARTNERSHIP Division of Loss Year Ended January 31, 2021 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, Eighth Canadian Edition

PROBLEM 12.4B (Continued) b. LAM TAN PARTNERSHIP Statement of Partners’ Equity Year Ended January 31, 2021

Capital, February 1, 2020 ............ Less: Drawings........................... Loss .................................. Capital, January 31, 2021............

T. Lam $100,000 12,000 14,000 26,000 $ 74,000

C. Tan Total $120,000 $220,000 14,400 26,400 16,000 30,000 30,400 56,400 $ 89,600 $163,600

c. Jan. 31 T. Lam, Capital ............................... 14,000 C. Tan, Capital ................................ 16,000 Income Summary .................... To close Income Summary. 31 T. Lam, Capital ............................. 12,000 C. Tan, Capital.............................. 14,400 T. Lam, Drawings .................... C. Tan, Drawings..................... To close Income Summary.

30,000

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. LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.5B a. CLAY AND OGLETREE, LLP Income Statement Year Ended September 30, 2021 Service revenue............................................... $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, 2021 G. Clay M. Ogletree Total Capital, October 1, 2020............ $ 65,000 $ 37,500 $102,500 Add: Investment ........................ 10,000 0 10,000 1 Profit ................................ 143,700 95,800 239,500 218,700 133,300 352,000 Less: Drawings.......................... 150,000 100,000 250,000 Capital, September 30, 2021 .... $68,700 $33,300 $102,000 1

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, 2021

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 note payable .................................... 5,000 Total current liabilities ........................................... 50,500 Long-term liabilities Note 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, Eighth Canadian Edition

PROBLEM 12.5B (Continued) b.

Sept. 30 Service Revenue....................... Income Summary ................. To close revenue account.

515,000

30 Income Summary...................... Salaries Expense ................. Depreciation Expense.......... Insurance Expense .............. Interest Expense .................. Property Tax Expense ......... To close expense accounts.

275,500

30 Income Summary...................... G. Clay, Capital..................... M. Ogletree, Capital.............. To close Income Summary.

239,500

30 G. Clay, Capital ......................... M. Ogletree, Capital .................. G. Clay, Drawings ................ M. Ogletree, Drawings ......... To close drawings accounts.

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, 2021 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. LO 3,4 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.6B a. Dec. 31 C. Maguire, Drawings.............................. 12,000 F. Whelan, Drawings ................................. 8,000 Salaries Expense................................ To correct error. 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, 2021 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, Eighth Canadian Edition

PROBLEM 12.6B (Continued) d. MAGUIRE & WHELAN CLEANING SERVICES Balance Sheet December 31, 2021 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, 2021. Caitlin and Fiona should come to some agreement to a fair allocation of profit for the coming year and document the details in writing. LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.7B a.

May 1 Cash ................................................ 100,000 Kai, Capital................................. Invest cash in business.

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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Accounting Principles, Eighth Canadian Edition

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................................. Invest cash in business.

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. LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.8B a.

Oct. 1

A. Nolan, Capital ($60,000 × 25%) ...... 15,000 15,000 C. Santos, Capital ......................... To record purchase of an interest.

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 To record purchase of an interest.

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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Accounting Principles, Eighth Canadian Edition

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 To record purchase of an interest.

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. LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 12.9B a.

Dec. 31 R. Dixon, Capital ............................ 35,000 G. Khan, Capital ...................... To record purchase of an interest. Dec. 31 R. Dixon, Capital ............................ 35,000 B. Vuong, Capital ($12,500 × 5/8) 7,813 G. Khan, Capital ($12,500 × 3/8) ...... 4,687 Cash ......................................... To record withdrawal of partner. Dixon's capital balance ............... Payment to Dixon ........................ Bonus to Dixon ............................

47,500

$35,000 47,500 $12,500

Dec. 31 R. Dixon, Capital ............................ 35,000 B. Vuong, Capital ($5,500 × 5/8) G. Khan, Capital ($5,500 × 3/8) Cash ......................................... To record withdrawal of partner. Dixon's capital balance ............... Payment to Dixon ........................ Bonus to old partners .................

35,000

3,437 2,063 29,500

$35,000 29,500 $ 5,500

Taking It Further: 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. LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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)....................... To record withdrawal of partner.

S. Kopel, Capital $79,000 + $6,000 = $85,000 E. Falkenberg, Capital $47,000 + $2,000 = $49,000

Dec. 31

Income Summary ........................... 45,000 S. Kopel, Capital ($45,000 × 2/3) E. Falkenberg, Capital ($45,000 × 1/3)................... To close Income Summary.

S. Kopel, Capital ($85,000 + $30,000) ......... E. Falkenberg, Capital ($49,000 + $15,000) Total partnership capital .............................

Mar. 1

Cash.............................................. 110,000 S. Kopel, Capital ($20,050 × 2/3) . 13,367 E. Falkenberg, Capital ($20,050 × 1/3) ....................... 6,683 D. Malkin, Capital.............. To record admission of partner.

90,000 6,000 2,000

30,000 15,000

$115,000 64,000 $179,000

130,050

Total capital of existing partnership.......... $179,000 Investment by D. Malkin ............................. 110,000 Total capital of new partnership ................ $289,000 D. Malkin’s capital credit ($289,000 × 45%) $130,050 Investment by D. Malkin ............................. $110,000 D. Malkin’s capital credit ............................ 130,050 Bonus to new partner ................................. $ 20,050

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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. LO 3,5,6 BT: AP Difficulty: C Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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

Accounts Receivable

Cash

Accumulated 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

53,160

39,600

25,200

3,840

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 ................................. To record realization of assets. 31 Accounts Payable.......................... Cash ........................................... Payment on account. 31

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53,160

B. Hally, Capital ............................ 39,600 H. Lockyear, Capital ..................... 25,200 A. Vu, Capital ................................. 3,840 Cash ........................................... To record final distribution to partners.

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20,000 75,200

53,160

68,640

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PROBLEM 12.10B (Continued) b. Item Balances before liquidation Sale of noncash assets

Accounts Receivable

Equipment

Accumulated Depreciation

$33,000

$20,000

$75,200

$6,400

60,000

(20,000)

(75,200)

93,000

Cash

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)

25,200

16,650

(1,920) 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)

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PROBLEM 12.11B (Continued) b. (Continued) May

31 Cash................................................ 60,000 Accumulated Depreciation – 6,400 Equipment.............................. Loss on Realization ....................... 28,800 Accounts Receivable ................ Equipment ................................. .To record realization of assets. 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 .................. To allocate loss on realization. 31 Accounts Payable.......................... Cash ........................................... Payment on account.

53,160

31 Cash ($3,840 – $5,760)................... A. Vu, Capital ............................. Invest cash in business.

1,920

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28,800

53,160

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) .................... To record final distribution to partners.

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20,000 75,200

1,920

41,760

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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)

15,200 (3,700)

10,560 (2,220)

(5,920) 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.................................. To record realization of assets. 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................... To allocate loss on realization. 31 Accounts Payable .......................... Cash ........................................... Payment on account.

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) ................................... To record final distribution to partners.

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48,800

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) To reallocate capital balances.

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20,000 75,200

53,160

5,920

19,840

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PROBLEM 12.11B (Continued) 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. LO 7 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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)

Payment of liabilities

Payment of cash

230,000

90,000

(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

(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 ................................... To record realization of assets.

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) To allocate gain on realization.

10,000 5,000 5,000

Accounts Payable ............................. 90,000 Cash ......................................... Payment on account.

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 To record final distribution to partners.

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PROBLEM 12.12B (Continued) b. (2)

Item Balances before liquidation Sale of supplies Payment of liabilities Payment of deficit

Cash

Supplies

Accounts Payable

$100,000

$110,000

$90,000

$70,000

$30,000

$20,000

25,000 125,000

(110,000) 90,000

(42,500) 27,500

(21,250) 8,750

(21,250) (1,250)

27,500

8,750

(1,250)

(90,000)

35,000

M. Nokota Capital

S. Taishuh Capital

A. Paso Capital

1,250

Payment of cash

(36,250) -

1,250 (27,500) -

(8,750) -

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PROBLEM 12.12B (Continued) a. (2) (Continued) Sept. 30

Cash ................................................ 25,000 Loss on Realization ........................ 85,000 Supplies ................................... To record realization of assets.

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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 ................ To allocate loss on realization.

Accounts Payable........................... Cash ......................................... Payment on account.

90,000

Cash ................................................ A. Paso, Capital ($20,000 – $21,250).................. Invest cash in business.

1,250

85,000

90,000

M. Nokota, Capital ($70,000 – $42,500).................. 27,500 S. Taishuh, Capital ($30,000 – $21,250) ...................... 8,750 Cash ($100,000 + $25,000 – $90,000 + $1,250) .......... To record final distribution to partners.

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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) ........... To reallocate capital accounts. 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) ......................... To record final distribution to partners.

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. LO 7 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 12.13B a. 2020 Feb. 14 Cash ....................................................... Furniture ................................................ I. Moretti, Capital .............................. Invest assets in business.

9,000 15,000 24,000

14 Cash ....................................................... Equipment.............................................. A. Kam, Capital ................................ Invest assets in business.

12,000 24,000

14 Cash ....................................................... Equipment.............................................. Accounts Payable ............................ C. Fenandoe, Capital ....................... Invest assets in business.

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.................................................. Record cash drawings.

16,000 24,000 32,000

31 Income Summary................................... I. Moretti, Capital ($81,900 × 2/9) ..... A. Kam, Capital ($81,900 × 3/9) ....... C. Fenandoe, Capital ($81,900 × 4/9) To close Income Summary.

81,900

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36,000

10,000 48,000

72,000

18,200 27,300 36,400

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PROBLEM 12.13B (Continued) a. (Continued) MKF MARKETING Capital Balances December 31, 2020 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 2021 Jan. 5

C. Fenandoe, Capital (1/2 × $52,400) .... 26,200 C. Wells, Capital .......................... 26,200 To record admission to partnership.

Dec. 20 I. Moretti, Drawings ($91,800 × 2/9) ...... A. Kam, Drawings ($91,800 × 3/9) ......... C. Fenandoe, Drawings ($91,800 × 2/9) C. Wells, Drawings ($91,800 × 2/9) ....... Cash.................................................. To record cash drawings.

20,400 30,600 20,400 20,400 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) .... To close Income Summary. 2022 Jan. 2

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C. Fenandoe, Capital ............................. I. Moretti, Capital .............................. A. Kam, Capital ................................ C. Wells, Capital ............................... Cash.................................................. To record withdrawal of partner. 12.127

22,900 34,350 22,900 22,900

28,700 900 1,350 900 25,550

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PROBLEM 12.13B (Continued) a. (Continued) Capital balance of withdrawing partner (part b)..... 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, 2021

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

c. Balance of Partners’ Capital Accounts January 2, 2022

Balance Dec. 31, 2021 Withdrawal of partner Balance Jan. 2, 2022

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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. LO 2,3,4,5,6 BT: AP Difficulty: C Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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. To have its shares traded on a stock exchange, Aritzia 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) The Statement of Operations and the Statement of Comprehensive Income (Loss): There would not be any income tax expense 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 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 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.

The revenues that could be generated 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

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.

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 that might be used for travel.

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BYP12.5 (Continued) d. (continued) 4. If money is needed to finance the band, more of it may have been contributed by one band member than the others. 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 recognized from 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 from a song created while with the band but very successful after the member leaves the band.

Should another band member join the band, when revenues have already been recognized, 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 recognized by the future use of the songs created before joining the band. 4. The possible need to change the name of the band.

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BYP12.5 (Continued) 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.

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 generated from 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 both agree with all the decisions being made. However, if a disagreement occurs later, 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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Accounting Principles, Eighth Canadian Edition

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.

Solutions Manual .

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Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BYP 12.6 (Continued) b. SANTÉ SMOOTHIES Balance Sheet April 1, 2022 Assets Current assets Cash ................................................................................. $16,4501 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 1

Value of N. Koebel’s proprietorship net assets .......... Value of Jade Wingert’s proprietorship net assets..... Cash Jade Wingert borrowed ....................................... Cash from N. Koebel’s proprietorship ......................... Cash from Jade Wingert’s proprietorship ................... Total cash when partnership is formed .......................

Solutions Manual .

12.141

$12,000 5,100 6,900 8,050 1,500 $16,450

Chapter 12

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CHAPTER 13 Introduction to Corporations Learning Objectives 1. Identify and 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. 3. Prepare a corporate income statement. 4. Explain and demonstrate the accounting for cash dividends. 5. Prepare a statement of retained earnings and closing entries for a corporation. 6. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Solutions Manual .

13.1

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

BT Item LO BT Item LO

1. 2. 3. 4.

1 1 1 1

C C C C

5. 6. 7. 8.

2 2 2 2

C C AP K

1. 2. 3.

1 2 2

K AP AP

4. 5. 6.

2 2 3

AP AP AP

1. 2. 3.

1 1,2 2

C K AP

4. 5. 6.

2 2 3

AP AP AP

1. 2. 3.

1 2 2

AN AP AP

4. 2,4 AP 5. 3,4,5 AP 6. 3,4,5 AP

Solutions Manual .

Item

Questions 9. 2 AP 13. 4 10. 2 AP 14. 4 11. 3 C 15. 5 12. 4 K 16. 5 Brief Exercises 7. 4 AP 10. 4 8. 4 AP 11. 5 9. 4 AP 12. 5 Exercises 7. 2,4 AP 10. 3,4,5 8. 4 AP 11. 2,6 9. 5 AP 12. 6 Problems 7. 2,4,6 AP 10. 5,6 8. 2,4,6 AP 11. 6 9. 3,5,6 AP 12. 2,3,4,5,6

13.2

BT K C C C

Item LO BT 17. 6 18. 6

K C

AP 13. 6 AP AP 14. 6 AN AP AP AP AP AP AN AP

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Difficulty:

Time: AACSB

CPA CM

Solutions Manual .

13.3

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Problems Brief Set A Exercises Exercises

Problems Set B

1. Identify and discuss 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

4. Explain and demonstrate the accounting for cash dividends. 5. Prepare a statement of retained earnings and closing entries for a corporation. 6. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

12, 13, 14

7, 8, 10

4, 5, 6, 7, 8, 12

15, 16

9, 10

5, 6, 9, 10, 12

17, 18

11, 12

7, 8, 9, 10, 11, 12

7, 8, 9, 11, 12

Solutions Manual .

13.4

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Solutions Manual .

13.5

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Solutions Manual .

13.6

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 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 BE13.9 BE13.10 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

13.7

Analysis

Synthesis

P13.1A P13.1B

Chapter 13

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. Broadening Your Perspective

Q13.17

Solutions Manual .

Comprehension

Application

Q13.15 Q13.16

BE13.11 BE13.12 E13.9 E13.10 P13.5A P13.6A P13.9A

P13.10A P13.12A P13.5B P13.6B P13.9B P13.10B P13.12B

Q13.18

BE13.13 E13.11 E13.12 P13.7A P13.8A P13.9A

P13.10A P13.12A P13.7B P13.8B P13.9B P13.12B

BYP13.1 BYP13.3

BYP13.4 BYP13.6 Santé Smoothie Saga

13.8

Analysis

Synthesis

BE13.14 P13.11A P13.11B

BYP13.2

BYP13.5

Chapter 13

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 Aritzia 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.

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

(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.

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

Solutions Manual .

13.9

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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 in which they do business. (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. LO 1 BT: C Difficulty: M Time:10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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.

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

Solutions Manual .

13.10

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 5.

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.

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

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 from the second purchase.

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

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.

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

Solutions Manual .

13.11

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 8.

The factors that help determine the market price of shares 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

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

(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.

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

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

Solutions Manual .

13.12

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

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

12.

Pro rata means proportional. If you own 5% of the shares, you are entitled to 5% of the dividends that are declared.

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

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, Dividends Payable is debited and Cash is credited.

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

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.

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

Solutions Manual .

13.13

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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.

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

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

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) is discussed in Chapter 14 and 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. LO 6 BT: K Difficulty: M Time:10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.14

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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 equity for each company. Company 1: $100,000 ÷ $300,000 = 33.3% and Company 2: $100,000 ÷ $350,000 = 28.6%. LO 6 BT: C Difficulty: S Time:10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.15

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13.1 1. 2. 3. 4. 5. 6. 7. 8.

(h) (c) (b) (d) (a) (g) (e) (f)

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

BRIEF EXERCISE 13.2 Aug.

Cash (2,000 × $12) ......................... Common Shares ....................... To record issuance of shares.

24,000 24,000

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

BRIEF EXERCISE 13.3 Sep. 10

Equipment ..................................... Common Shares ....................... To record issuance of 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. LO 2 BT: AP Difficulty: S Time:5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.16

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 13.4 (a) Jan. 13

Cash (3,000 × $90) ........................ Preferred Shares...................... To record issuance of shares.

270,000 270,000

(b) Total dividend: $4 per share × 3,000 shares = $12,000 LO 2 BT: AP Difficulty: S Time:5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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

BRIEF EXERCISE 13.6 June 30 Income Tax Expense....................... 33,750 Income Tax Payable ................... ($800,000 − $575,000) × 15% To record income tax expense.

33,750

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

Solutions Manual .

13.17

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 13.7 VICERON INC. Income Statement Year Ended June 30, 2021 Revenues ................................................................ Operating expenses ............................................... Profit before income tax......................................... Income tax expense ............................................... Profit ........................................................................

$800,000 575,000 225,000 33,750 $191,250

Income tax expense ($225,000 x 15%) = $33,375 LO 4 BT: AP Difficulty: M Time:10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.8 Oct. 14 Cash Dividends—Preferred ............... 131,250 Dividends Payable (25,000 × $5.25) To record declaration of dividend. Nov.

131,250

1 No journal entry.

Nov. 21 Dividends Payable .............................. 131,250 Cash................................................ To record payment of dividend.

131,250

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

Solutions Manual .

13.18

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 13.9 (a) Preferred shares, $0.80, cumulative: Arrears: $0.80 × 15,000 shares Current amount: Total Common shares: Current amount: $0.75 × 45,000 shares = Total (b) Preferred shares, $0.80, noncumulative: Current amount: Common shares: Current amount: $0.75 × 45,000 shares = Total

$12,000 12,000 24,000

33,750 $57,750

$12,000

33,750 $45,750

LO 4 BT: AP Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.19

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 13.10 (a) Preferred shares, $0.75, cumulative: Arrears: $0.75 × 18,000 shares x 2 Current amount: Total

$27,000 13,500 40,500

Common shares: remainder of total Total

24,300 $64,800

(b) Dec. 15 Cash Dividends—Preferred ............... 40,500 Cash Dividends—Common ............... 24,300 Dividends Payable ........................ To record declaration of dividend.

64,800

Dec. 28 No journal entry. Jan. 10 Dividends Payable.............................. Cash................................................ To record payment of dividends.

64,800 64,800

LO 4 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.20

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 13.11 GRAYFAIR INC. Statement of Retained Earnings Year Ended December 31, 2021 Retained earnings, January 1......................................... Add: Profit...................................................................... Less: Cash dividends .................................................... Retained earnings, December 31 ...................................

$248,000 175,000 423,000 120,000 $303,000

LO 5 BT: AP Difficulty: M Time:10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.12 Dec. 31

Sales ................................................. 745,000 Income Summary..................... To close revenue account.

745,000

Income Summary ............................. 620,000 Cost of Goods Sold ................. Operating Expenses ................ Income Tax Expense ............... To close expense accounts.

450,000 135,000 35,000

Income Summary ............................. 125,000 Retained Earnings ................... To close Income Summary.

125,000

Retained Earnings........................ Cash Dividends—Common .... To close dividends.

25,000

LO 5 BT: AP Difficulty: S Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.21

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 13.13 TRUE GREEN NURSERIES LTD. Balance Sheet (Partial) December 31, 2021

Shareholders' equity Share capital1 $6.50 cumulative preferred shares, 1,000 shares issued Common shares, 15,000 shares issued Total share capital Retained earnings Total shareholders' equity 1

$100,000 150,000 250,000 285,000 $535,000

Under ASPE, it is not necessary to show the number of shares authorized.

LO 6 BT: AP Difficulty: M Time:10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.14 Return on equity $283,578 ($2,212,524 + $2,060,702) ÷ 2

= 13.27%

LO 6 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

13.22

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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. A corporation 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.

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

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.

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

LO 1,2 BT: K Difficulty: C Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.23

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.3 a.

Jan. 12 Cash (50,000 × $5)........................ 250,000 Common Shares ................ To record issuance of shares. 24 Legal Fees Expense ................ Common Shares ................. To record issuance of shares.

4,500

July 11 Cash (1,000 × $25) ................... 25,000 Preferred Shares ................. To record issuance of shares. Oct.

250,000

1 Land.......................................... 55,000 Common Shares ................. To record issuance of shares.

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)].

LO 2 BT: AP Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.24

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.4 Mar.

2 Legal Fees Expense ................ Common Shares ................. To record issuance of shares.

June 12

30,000 30,000

Cash ......................................... 375,000 Common Shares ................. To record issuance of shares.

375,000

July 11 Cash (1,000 x $110) ................. 110,000 Preferred Shares ................. To record issuance of shares.

110,000

Nov. 28 Cash (2,000 x $95) ................... 190,000 Preferred Shares ................. To record issuance of shares.

190,000

LO 2 BT: AP Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.5 a.

The preferred shareholders would consider converting 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.

Sept. 19 Preferred Shares ...................... 11,000,000 Common Shares ................. 11,000,000 (100,000 × $110) To record the conversion of shares.

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.

LO 2 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.26

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.6 SHRUNK INC. Income Statement Year Ended July 31, 2021 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

Income Tax Expense ............... 10,000 Income Tax Payable............ ($200,000 × 20%) – $30,000 = $10,000 To record income tax expense.

$665,000 310,000 355,000

150,000 205,000 5,000 200,000 40,000 $160,000

10,000

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

Solutions Manual .

13.27

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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. 2021 Oct. 27 Cash Dividends—Preferred1........................ 255,000 Cash Dividends—Common ................ 150,000 Dividends Payable ......................... 1 ($210,000 + $45,000) To record declaration of dividend. Nov. 16

No journal entry.

Dec. 1

Dividends Payable .............................. 405,000 Cash................................................ To record payment of dividend.

405,000

c. Dividends to cumulative preferred shareholders would be 100% of the maximum dividend of $200,000. Noncumulative 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]. LO 2,4 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.28

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Dividends in arrears should be disclosed in the notes to the financial statements. They are not recorded in the general ledger accounts.

The likely amount is $4.50 per share, for a total of $675,000.

LO 4 BT: AP Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.29

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.9 a. SHRUNK INC. Statement of Retained Earnings Year Ended July 31, 2021 Retained earnings, August 1, 2020 ................................ Add: Profit ..................................................................... Less: Cash dividends .................................................... Retained earnings, July 31, 2021 ................................... b. July 31 Sales .................................................... 665,000 Income Summary ........................... To close revenue account. 31 Income Summary................................ 505,000 Cost of Goods Sold ....................... Supplies Expense .......................... Salaries Expense ........................... Interest Expense ............................ Income Tax Expense ..................... To close expense accounts. 31 Income Summary................................ 160,000 Retained Earnings ......................... ($665,000 – $505,000) To close Income Summary. 31 Retained Earnings ................................ 60,000 Cash Dividends—Common ........... To close dividends.

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13.30

$352,000 160,000 512,000 60,000 $452,000

665,000

310,000 10,000 140,000 5,000 40,000

160,000

60,000

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Balance Closing entry Closing entry

LO 5 BT: AP Difficulty: M Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.10 a. DIDSBURY DIGITAL LTD. Income Statement Year Ended September 30, 2021 Service revenue.............................................................. Operating expenses ....................................................... Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ($84,500 × 15%) ............................ Profit................................................................................

$529,000 442,000 87,000 2,500 84,500 12,675 $71,825

Sep. 30 Income Tax Expense1 .............. 12,675 Income Tax Payable............ 1 ($84,500 × 15%) To record income tax expense.

12,675

c. DIDSBURY DIGITAL LTD. Statement of Retained Earnings Year Ended September 30, 2021 Retained earnings, October 1, 2020 .................... Add: Profit............................................................. Less: Cash dividends declared ........................... Retained earnings, September 30, 2021 .............

$237,500 71,825 309,325 40,000 $269,325

LO 3,45 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.32

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.11 The memo would contain the following: a.

600,000 common shares are issued.

10,000 preferred shares are authorized.

The most common sources of contributed surplus are: 1) the excess of the 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.

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.

The preferred shares are cumulative and are in arrears for two years (2020 and 2021). Consequently, the 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 are declared in 2022.

LO 2,6 BT: C Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.33

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 13.12 a. RAIDERS LIMITED Balance Sheet (Partial) December 31, 2021

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, 2020 = $455,000 share capital + $287,000 beginning retained earnings = $742,000. LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 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. LO 1 BT: AN Difficulty: S Time:20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual .

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Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.2A GENERAL JOURNAL

a. Date

Debit

Credit

Feb. 10 Cash (80,000 × $4) ...............................320,000 Common Shares ............................ To record issuance of shares.

320,000

Mar.

Account Titles

1 Cash (5,000 × $115) .............................575,000 Preferred Shares ............................ To record issuance of shares.

575,000

1 Land .......................................................90,000 Common Shares ............................ To record issuance of shares.

90,000

Jun. 20 Cash (78,000 × $4.50) ..........................351,000 Common Shares ............................ To record issuance of shares.

351,000

Apr.

July

7 Legal Fees Expense ..............................45,000 Common Shares ............................ To record issuance of shares.

45,000

1 Cash (10,000 × $5) .................................50,000 Common Shares ............................ To record issuance of shares.

50,000

Nov. 1 Cash (1,000 × $117) .............................117,000 Preferred Shares ............................ To record issuance of shares.

117,000

Sep.

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13.36

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.2A (Continued) b. Preferred Shares Date Mar. Nov.

Ref. 1 1

Debit

J1 J1

Credit

Balance

575,000 117,000

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

c. Number of preferred shares = 5,000 + 1,000 = 6,000 shares 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 the common shares = $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.

Solutions Manual .

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Chapter 13

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.2A (Continued)

Taking It Further: April 1 and July 7 are examples of issuing shares for services or noncash assets. If Wetland were 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 available 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. LO 2 BT: AP Difficulty: M Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.38

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 2 BT: AP Difficulty: S Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.39

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.4A a.

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Credit

2020 Jan. 10 Cash Dividends—Preferred ............... 12,000 Cash................................................ 12,000 To record preferred share dividend. 2021 Jan. 10 Cash Dividends—Preferred1 ........................... 68,000 Cash Dividends—Common .................... 4,000 Cash................................................ 72,000 To record common and preferred share dividends. 1 Arrears from 2020: 2020 Dividend: (8,000 × $5) ............ $40,000 Less: Dividend paid in 2020............ 12,000 $28,000 Current year dividend (8,000 × $5) ........... 40,000 Cash dividend to Preferred ....................... $68,000 Mar. 1 Preferred Shares (8,000 shares) ........ 528,000 Common Shares (16,000 shares).. (8,000 × $66) To record conversion of shares. b.

528,000

The company needs to disclose dividends in arrears of $28,000 in the notes to the 2020 financial statements.

Solutions Manual .

13.40

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 2,4 BT: AP Difficulty: S Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.5A

GENERAL JOURNAL

Date

Account Titles

J1 Debit

2021 June 30 Cash Dividends—Common ............... 25,000 Dividends Payable ......................... To record declaration of dividend.

July

8 Dividends Payable.............................. Cash................................................ To record payment of dividend.

Credit

25,000

Dec. 31 Cash Dividends—Common ............... 25,000 Dividends Payable ......................... To record declaration of dividend.

25,000

b. ZURICH LIMITED Income Statement Year Ended December 31, 2021

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

Solutions Manual .

13.42

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.5A (Continued) c. ZURICH LIMITED Statement of Retained Earnings Year Ended December 31, 2021

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. LO 3,4,5 BT: AP Difficulty: S Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.6A a. MEMPHIS LTD. Income Statement Year Ended October 31, 2021 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, 2021 Retained earnings, November 1 .......................... Add: Profit ............................................................ Less: Cash dividends – common........................ Retained earnings, October 31............................

Solutions Manual .

13.44

$ 610,000 118,960 728,960 40,000 $688,960

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.6A (Continued) GENERAL JOURNAL

c. Date

Account Titles

J1 Debit

Credit

Oct. 31 Service Revenue ..................................385,000 Income Summary ........................... To close revenue account.

385,000

31 Income Summary ................................266,040 Depreciation Expense ................... Income Tax Expense ..................... Insurance Expense ........................ Interest Expense ............................ Rent Expense ................................. Salaries Expense ........................... To close expense accounts.

15,250 29,740 5,100 1,400 38,800 175,750

31 Income Summary ................................118,960 Retained Earnings ......................... To close Income Summary.

118,960

31 Retained Earnings .................................40,000 Cash Dividends—Common ........... To close dividends.

40,000

Solutions Manual .

13.45

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.6A (Continued) 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

Balance Closing entry Closing entry

 J1 J1 40,000

Credit

Balance

118,960

610,000 728,960 688,960

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. LO 3,4,5 BT: AP Difficulty: M Time:35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

13.46

Chapter 13

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Accounting Principles, Eighth 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 To record issuance of shares.

Apr.

1 Cash Dividends—Preferred................ 100,000 Cash (100,000 × $4  4)..................

100,000

1 Cash Dividends—Preferred................ 100,000 Cash................................................

100,000

July

Aug. 12 Cash (100,000 × $1.70) ....................... 170,000 Common Shares ............................ To record issuance of shares. Oct.

1 Cash Dividends—Preferred................ 100,000 Cash .............................................

Dec. 31 Cash Dividends – Preferred ............... 100,000 Cash Dividends—Common* .............. 275,000 Cash................................................ (1,000,000 + 100,000) × $0.25 = $275,000

170,000

100,000

375,000

Dec. 31 Retained Earnings .............................. 100,000 Income Summary ........................... To close Income Summary.

100,000

Dec. 31 Retained Earnings .............................. 675,000 Cash Dividends—Preferred........... Cash Dividends—Common ........... To close dividends.

400,000 275,000

Solutions Manual .

13.47

Chapter 13

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Accounting Principles, Eighth 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

Dec 31 Dec. 31

J1 J1

275,000

Ref.

Debit

Closing entry

Cash Dividends—Common

Closing entry

Retained Earnings Date Jan. 1 Dec. 31 31

Solutions Manual .

Balance Closing entry Closing entry

 J1 100,000 J1 675,000

13.48

1,800,000 1,700,000 1,025,000

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.7A (Continued) c. SCHIPPER LTD. Balance Sheet (Partial) December 31, 2021 Shareholders' equity Share capital1 $4 noncumulative preferred shares, 100,000 issued ................................................. Common shares, 1,100,0002 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. 2 1,000,000 + 100,000 = 1,100,000 common shares No disclosure of arrears is required since the preferred shares are noncumulative. If they were cumulative, since the full dividend was declared in 2021, there would be no dividends in arrears.

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 these conditions are met, the company is allowed to declare and pay dividends even though it generated a loss in the current year. LO 2,4,6 BT: AP Difficulty: M Time:50 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.8A a.

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Feb. 28 Cash ................................................. Preferred Shares .......................... To record issuance of shares.

Credit

275,000 275,000

Apr. 12 Cash ................................................. 3,200,000 3,200,000 Common Shares .......................... To record issuance of shares. May 25 Land ................................................. Common Shares .......................... To record issuance of shares.

75,000

Jan.

37,500

1 Cash Dividends—Preferred ............ Cash [(10,000 + 5,000) × $2.50].... To record declaration and payment of dividend

Jan. 31

75,000

37,500

Retained Earnings ........................... Income Summary ......................... To close Income Summary.

50,000

Jan. 31 Retained Earnings ........................... Cash Dividends—Preferred......... To close dividends.

37,500

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50,000

37,500

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Accounting Principles, Eighth 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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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 13.8A (Continued) c. CATTRALL CORPORATION Balance Sheet (Partial) January 31, 2021 Shareholders' equity Contributed capital Share capital1 $5 cumulative preferred shares, 15,0002 issued $ 750,000 Common shares, 275,0003 issued ....................... 4,325,000 Total share capital................................................ 5,075,000 Retained earnings..................................................... 612,500 Total shareholders’ equity ............................................ $5,687,500 1

Under ASPE, it is not necessary to show the number of authorized shares. 2 10,000 + 5,000 = 15,000 preferred shares 3 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, 2021.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.8A (Continued) 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 in 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. LO 2,4,6 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.9A CHOKE CHERRY LTD. Income Statement Year Ended December 31, 2021 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, 2021 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, Eighth Canadian Edition

PROBLEM 13.9A (Continued) CHOKE CHERRY LTD. Balance Sheet December 31, 2021 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 capital1 $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 1

Under ASPE, it is not required to show the number authorized shares. Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.9A (Continued)

Taking It Further: Withdrawals by partners are based on mutually agreed amounts among 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. Corporations must also abide by the Corporations Act in paying 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. LO 3,5,6 BT: AP Difficulty: M Time:40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.10A a. NORTHWOOD ARCHITECTS LTD. Statement of Retained Earnings Year Ended March 31, 2021 Retained earnings, April 1 ................................... Add: Profit1 ........................................................... 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 ........................................................ Operating expenses: Depreciation expense .................................. $ 11,825 Insurance expense ..................................... 6,550 Rent expense .................................................. 35,800 Salaries expense ........................................... 245,400 Supplies expense......................................... 25,800 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................

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$404,500

325,375 79,125 3,000 76,125 16,535 $ 59,590

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.10A (Continued) a. (Continued) NORTHWOOD ARCHITECTS LTD. Balance Sheet (partial) March 31, 2021 Shareholders’ equity Share capital2 $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 2

Under ASPE, it is not required to show the number authorized shares.

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. LO 5,6 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.11A a. 2017 Canadian Pacific Railway Limited Return on assets 12.22% (1) Return on equity 43.48% (3)

8.23% (2) 33.94% (4)

Canadian National Railway Company Return on assets 14.69% (5) Return on equity 34.82% (7)

9.91% (6) 24.44% (8)

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

2016

12.22% = $2,405 ÷ (($20,135 + $19,221) ÷ 2) 8.23% = $1,599 ÷ (($19,221 + $19,637) ÷ 2) 43.48% = $2,405 ÷ (($6,437 + $4,626) ÷ 2) 33.94% = $1,599 ÷ (($4,626 + $4,796) ÷ 2) 14.69% = $5,484 ÷ (($37,629 + $37,057) ÷ 2) 9.91% = $3,640 ÷ (($37,057 + $36,402) ÷ 2) 34.82% = $5,484 ÷ (($16,656 + $14,841) ÷ 2) 24.44% = $3,640 ÷ (($14,841 + $14,950) ÷ 2)

The return on assets and the return on equity ratios of both companies have improved substantially.

Canadian Pacific`s return on assets were lower than CN’s, but their return on equity was much higher than CN’s in both years.

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Accounting Principles, Eighth Canadian Edition

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 2016 to 2017 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 for return on assets but is worse when comparing return on equity. Finally, the industry average comparison allows us to compare how each company is performing within its industry. LO 6 BT: AN Difficulty: S Time: 25 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.12A a. Jan.

Jan.

1 Cash ................................................. Common Shares .......................... To record issuance of shares.

150,000 150,000

2 Cash (30,000 x $40) ......................... 1,200,000 Preferred Shares .......................... 1,200,000 To record issuance of shares.

Dec. 1 Cash Dividends—Preferred*........... 120,000 105,000 Cash Dividends—Common ............ 225,000 Dividends Payable ....................... *(30,000 × $4) To record declaration of dividend.

b. ANNORA INC. Income Statement (partial) Year Ended December 31, 2021 Profit before income tax ($915,000 – $610,000)............ Income tax expense (15% × $305,000) .......................... Profit................................................................................

Dec. 31

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Income Tax Expense1...................... Income Tax Payable..................... 1 ($45,750 – $40,000) To record income tax expense.

13.61

$305,000 45,750 $259,250

5,750 5,750

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.12A (Continued) c. ANNORA INC. Statement of Retained Earnings Year Ended December 31, 2021 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, 2021 Shareholders’ equity Share capital2 $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 2

Under ASPE, it is not required to show the number of authorized shares. 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. LO 2,3,4,5,6 BT: AP Difficulty: M Time:40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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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Accounting Principles, Eighth Canadian Edition

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. LO 1 BT: AN Difficulty: S Time:20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.2B a.

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Jan. 10 Cash (100,000 × $2) ........................ Common Shares ........................ To record issuance of shares.

200,000

Mar.

1 Cash (10,000 × $42) ........................ Preferred Shares ........................ To record issuance of shares.

420,000

Mar. 31 Cash (75,000 × $3) .......................... Common Shares ........................ To record issuance of shares.

225,000

Apr.

3 Land ................................................ Common Shares ........................ To record issuance of shares.

74,000

July 24 Cash ............................................... Equipment....................................... Common Shares ........................ To record issuance of shares.

60,000 12,000

Nov.

96,000

1 Cash (2,000 × $48) .......................... Preferred Shares ........................ To record issuance of shares.

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Credit

200,000

420,000

225,000

74,000

72,000

96,000

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Accounting Principles, Eighth 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 for common shares = $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.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.2B (Continued)

Taking It Further: April 3 and July 24 are examples of issuing shares for services or noncash assets. If Highland were 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 available 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. LO 2 BT: AP Difficulty: M Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.3B a.

Dividend Noncumulative Cumulative Paid Preferred Year 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. LO 2 BT: AP Difficulty: S Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.4B a.

GENERAL JOURNAL

Date

Account Titles

J1 Debit

2020 Jan. 10 Cash Dividends—Preferred ............... 12,000 Cash................................................ To record preferred share dividend.

Credit

12,000

2021 Jan. 10 Cash Dividends—Preferred1.............. 28,000 Cash Dividends—Common ............... 4,000 Cash................................................ 32,000 To record common and preferred share dividend. 1

Arrears from 2020: 2020 Dividend: (5,000 × $4) .............. $20,000 Less Dividend paid in 2020 .............. 12,000 Current year dividend (5,000 × $4) ........... Cash dividend to Preferred .......................

Mar. 1 Preferred Shares (5,000 shares)2 ............ 400,000 Common Shares (20,000 shares).. 2 (5,000 × $80) To record dividend conversion. b.

$ 8,000 20,000 $28,000

400,000

The company needs to disclose dividends in arrears of $8,000 in the notes to the 2020 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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Accounting Principles, Eighth Canadian Edition

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, for a conversion of preferred shares, there is no cash involved. Total shareholders’ equity remains the same. LO 2,4 BT: AP Difficulty: S Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.5B a.

GENERAL JOURNAL

Date

Account Titles

Debit

2014 June 23 Cash Dividends—Common ............... 80,000 Dividends Payable ......................... To record declaration of dividend. July

9 Dividends Payable.............................. Cash................................................ To record payment of dividend.

Credit

80,000

Dec. 28 Cash Dividends—Common ............... 80,000 Dividends Payable ......................... To record declaration of dividend.

80,000

HYPERCHIP LIMITED Income Statement Year Ended December 31, 2021

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.5B (Continued) b. HYPERCHIP LIMITED Statement of Retained Earnings Year Ended December 31, 2021 Retained earnings, January 1................................. Add: Profit ............................................................... Less: Cash dividends declared 1............................ Retained earnings, December 31 ........................... 1

$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. LO 3,4,5 BT: AP Difficulty: S Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.6B a. HAYDEN INC. Income Statement Year Ended November 30, 2021 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, 2021 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.6B (Continued) GENERAL JOURNAL

c. Date

Account Titles

J1 Debit

Credit

Nov. 30 Service Revenue ................................. 425,000 Income Summary ........................... To close revenue account.

425,000

30 Income Summary................................ 346,800 Depreciation Expense ................... Income Tax Expense ..................... Insurance Expense ........................ Interest Expense ............................ Rent Expense ................................. Salaries Expense ........................... To close expense accounts.

51,650 13,800 10,350 7,500 43,500 220,000

30 Income Summary ............................... 78,200 Retained Earnings ......................... To close Income Summary.

78,200

30 Retained Earnings .............................. 120,000 Cash Dividends—Common ........... To close dividends.

120,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.6B (Continued) 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

Balance Closing entry Closing entry

 J1 J1 120,000

Credit 78,200

Balance 339,500 417,700 297,700

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 needs 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. LO 3,4,5 BT: AP Difficulty: M Time:35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.7B a.

GENERAL JOURNAL

Date Jan.

Account Titles

J1 Debit

Credit

2 Cash (100,000 × $66) ....................... 6,600,000 Preferred Shares ......................... 6,600,000 To record issuance of shares.

Mar. 31 Cash Dividends—Preferred1........................ 150,000 Cash ............................................. 1 (100,000 × $6  4) To record declaration and payment of dividend. Apr. 18

Cash (250,000 × $1.30) ................... Common Shares ......................... To record issuance of shares.

325,000

June 30 Cash Dividends—Preferred ........... 150,000 Cash ............................................. To record declaration and payment of dividend. Sep. 30 Cash Dividends—Preferred................ 150,000 Cash ............................................. To record declaration and payment of dividend. Dec. 31

Cash Dividends—Preferred................ 150,000 Cash ............................................. To record declaration and payment of dividend.

Dec. 31 Income Summary................................ 160,000 Retained Earnings ...................... To close Income Summary. Solutions Manual .

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150,000

325,000

150,000

160,000

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PROBLEM 13.7B (Continued) a. (continued) Dec. 31 Retained Earnings .......................... Cash Dividends—Preferred........ To close dividends.

600,000 600,000

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

Balance

Cash Dividends—Preferred Date

Ref.

Debit

Credit

Mar. 31 June 30 Sep. 30 Dec. 31 Dec. 31

J1 J1 J1 J1 J1

150,000 150,000 150,000 150,000

150,000 300,000 450,000 600,000 600,000 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 550,000 160,000 710,000 110,000

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PROBLEM 13.7B (Continued) c. CONWAY LTD. Balance Sheet (Partial) December 31, 2021 Shareholders' equity Share capital1 $6 noncumulative preferred shares, 100,000 issued ............................................. Common shares, 1,750,0002 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 the number of authorized shares. 2 1,500,000 + 250,000 = 1,750,000 shares No disclosure of arrears is required since the preferred shares are noncumulative. Even if they were cumulative, since the full dividend was declared, there would be no dividends in arrears.

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. LO 2,4,6 BT: AP Difficulty: M Time:50 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 13.8B a.

GENERAL JOURNAL

Date Jan.

Apr.

Account Titles

J1 Debit

1 Cash ................................................. Preferred Shares .......................... To record issuance of shares.

600,000

14 Cash ................................................. Common Shares .......................... To record issuance of shares.

560,000

June 30 Cash Dividend—Preferred Shares1 Cash .............................................. 1 (8,000 + 10,000) × ($4.00 ÷ 2) To record declaration and payment of dividend.

Credit

600,000

560,000

36,000 36,000

Aug. 22 Building .................................................150,000 Common Shares .......................... 150,000 To record issuance of shares. Dec

31 Income Summary..................................582,000 Retained Earnings........................ 582,000 To close Income Summary. 31 Retained Earnings ........................... Cash Dividend—Preferred Shares To close dividends.

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36,000 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, 2021

Shareholders' equity Share capital1 Preferred shares, $4 cumulative, 18,0002 issued ................................................. $1,040,000 Common shares, 120,0003 issued ....................... 1,760,000 Total share capital .................................................... 2,800,000 Retained earnings..................................................... 1,346,000 Total shareholders' equity ............................................ $4,146,000 1

Under ASPE, it is not necessary to show the number of authorized shares. 2 8,000 + 10,000 = 18,000 shares 3 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. LO 2,4,6 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 13.9B RUPERT ENGINEERING CORP. Income Statement Year Ended March 31, 2021 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, 2021 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, 2021 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 capital1 $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 of authorized shares. 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. LO 3,5,6 BT: AP Difficulty: M Time:40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 13.10B CARLOTTA’S CAKES INC. Income Statement Year Ended May 31, 2021 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, 2021 Retained earnings, June 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 13.10B (Continued) CARLOTTA’S CAKES INC. Balance Sheet May 31, 2021 Assets Current assets Cash ......................................................................... Accounts receivable ................................................ Inventory .................................................................. Total current assets ............................................ Property, plant, and equipment: Equipment .............................................. $420,000 Less: Accumulated depreciation ........... 126,000 Total property, plant, and equipment .. ............. Total assets ..............................................................

$ 20,600 15,300 70,220 106,120

294,000 $400,120

Liabilities and Shareholders’ Equity Current liabilities Accounts payable .................................................... Dividends payable ................................................... Total current liabilities ........................................ Long-term note payable............................................... Total liabilities ..................................................... Shareholders’ equity Share capital1 $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 of authorized shares.

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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. LO 5,6 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 13.11B a. 2017

2016

Husky Energy Inc. Return on assets Return on equity

2.41% (1) 4.42% (3)

2.82% (2) 5.39% (4)

Suncor Energy Inc. Return on assets Return on equity

5.00% (5) 9.91% (7)

0.54% (6) 1.06% (8)

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

2.41% = $786 ÷ (($32,927 + $32,260) ÷ 2) 2.82% = $922 ÷ (($32,260 + $33,056) ÷ 2) 4.42% = $786 ÷ (($17,967 + $17,627) ÷ 2) 5.39% = $922 ÷ (($17,627 + $16,586) ÷ 2) 5.00% = $4,458 ÷ (($89,494 + $88,702) ÷ 2) 0.54% = $445 ÷ (($88,702 + $77,527) ÷ 2) 9.91% = $4,458 ÷ (($45,383 + $44,630) ÷ 2) 1.06% = $445 ÷ (($44,630 + $39,039) ÷ 2)

The return on assets and return on equity ratios for Husky Energy Inc. have deteriorated from 2016 to 2017 while those of Suncor Energy have improved significantly.

Husky Energy`s return on assets and return on equity ratios both underperformed compared to those of Suncor Energy in 2017. The opposite was true for 2016.

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PROBLEM 13.11B (Continued) c.

In 2017 Suncor’s return on equity exceeds the industry average whereas Husky’s return on equity is well below in both 2016 and 2017.

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 2016 to 2017 and determine whether an improvement or deterioration has occurred. In this case, the performance of Husky deteriorated, while Suncor’s improved significantly. The intercompany comparison allows us to examine each company`s performance by comparison to its competitor. Finally, the industry average comparison allows us to compare how each firm is performing within its industry and to note that in 2016 both companies underperformed the industry whereas in 2017 Husky exceeded the five-year average slightly. LO 6 BT: AN Difficulty: S Time: 25 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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PROBLEM 13.12B a. Jan.

Jan.

1 Cash ................................................. Common Shares .......................... To record issuance of shares.

60,000

2 Cash (1,000 × $62.50) ...................... Preferred Shares .......................... To record issuance of shares.

62,500

Dec. 10 Cash Dividends—Preferred1 ........... Cash Dividends—Common ............ Dividends Payable ....................... 1 (1,000 × $5.00) To record declaration of dividend.

60,000

62,500 5,000 12,000 17,000

b. NYGREN CORPORATION Income Statement Year Ended December 31, 2021 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, 2021 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, 2021 Shareholders’ equity Share capital1 $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 1

Under ASPE, it is not required to show the number authorized shares.

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. LO 2,3,4,5,6 BT: AP Difficulty: M Time:40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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BYP13.1 FINANCIAL REPORTING PROBLEM a.

Per note 12 to the financial statements, Aritzia Inc. has authorized share capital of (i) an unlimited number of subordinate voting shares, (ii) an unlimited number of multiple voting shares, and (iii) an unlimited number of preferred shares. There are 55,756,002 multiple voting shares issued and 56,275,341 subordinate voting shares issued. No preferred shares have been issued.

Multiple voting shares have 10 votes per share and subordinate voting shares have one vote per share.

Using Note 13 and the statement of cash flows, it can be determined that during 2018 3,258,882 subordinate voting shares were issued for $10,275,000 cash when stock options were exercised.

From the statement of shareholders’ equity, the average per share amount for the multiple voting shares is $1.30 ($72,343,000 ÷ 55,756,002). The average per share amount for the subordinate voting shares is $1.76 ($98,787,000 ÷ 56,275,341).

Artizia did not declare dividends in 2018 for the following reasons: 1. The company went public during fiscal 2017, incurring a large one-time expense for stock-based compensation. 2. The company had a $56.1 million loss in fiscal 2017 and was left with a deficit (negative Retained Earnings) at February 26, 2017. Dividends cannot be declared when a company has a deficit.

Artizia went public in fiscal 2017 and incurred significant expenses for stock-based compensation expense during the year. This is not unusual for a business going public.

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BYP13.2 INTERPRETING FINANCIAL STATEMENTS a.

Loblaw’s profitability has improved from 2016 to 2017. Its gross profit margin has increased slightly and the return on assets and return on equity ratios have increased slightly, indicating that profit climbed in 2017.

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 improved profitability, the market price of the common shares has decreased from 2016 to 2017.

The number of common shares issued during 2017 was quite small in relation to the total number of shares outstanding. From the perspective of Loblaw, issuing preferred shares has the disadvantage of fixed amounts of dividends that must be paid first should a dividend be declared, before any dividends are paid to common shareholders.

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 $1.325 ($225,000,000 X .053 ÷ 9,000,000 = $1.325). 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 must 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.

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BYP13.3

Accounting Principles, Eighth Canadian Edition

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. Use of a name across Canada 2. Registered office location anywhere in Canada 3. Recognition as a Canadian entity

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, cooperatives, boards of trade 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.

Any business operating in Canada can incorporate federally.

d. 1. The steps in incorporating include: Step 1: Deciding how you want to name your corporation Step 2: Completing articles of incorporation Step 3: Establishing the initial registered office address and first board of directors Step 4: Filing the appropriate forms and paying the fee Step 5: Processing your application Completing provincial and territorial registration and other requirements

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BYP 13.4 (Continued) d. (continued) 2. Requirements that must be met by a director include: Be at least 18 years old Not have been declared incapable under the laws of a Canadian province or territory, or by a court in a jurisdiction outside Canada Be an individual (a corporation cannot be a director) Not be in a bankrupt status 3. Generally Accepted Accounting Principles (GAAP) are located in the Canadian Professional Accounting Handbook CPA Canada Handbook – Accounting. 4. Financial statements must be delivered not less than 21 days before the corporation’s annual meeting.

5. There is no limit on the number of classes of shares that can be set out in the articles. If there is more than one class, the rights, privileges, restrictions, and conditions for each class must also be indicated in the articles. 6. If there is only one class of shares, those shares must, as a minimum, have: I. the right to vote II. the right to receive dividends (if the board of directors has declared any) III. the right to receive the remaining property of the corporation after it is dissolved.

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BYP 13.4 (Continued) 7. A corporation must keep certain corporate records: I. Articles of Incorporation, by-laws and their amendments, and any unanimous shareholder agreements; II. Minutes of meetings and resolutions of shareholders; III. Copies of certain forms that have been filed; IV. A share register showing the names and addresses of all shareholders and details of shares held; V. A securities register. 8. At annual shareholders' meetings, shareholders must appoint an auditor to audit the corporation's financial statements. However, the shareholders of a nondistributing corporation can decide by a unanimous resolution not to appoint an auditor.

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BYP13.6 Santé Smoothie Saga a. 2022 May 16 Cash Dividends—Common ............ Dividends Payable ....................... To record declaration of dividend.

May 31 Dividends Payable .......................... Cash.............................................. To record payment of dividend.

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, 2022 Retained earnings, June 1, 2021 ......................... Add: Profit1 ........................................................... Less: Cash dividends .......................................... Retained earnings, May 31, 2022......................... 1 ($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, 2022 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 .......................... To record issuance of shares.

8,050 800 1,200 450 1,500 12,000

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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Accounting Principles, Eighth Canadian Edition

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 ($241,226 ÷ 200 shares = $1,206). By using the value of $1,200 per share to value Natalie’s $12,000 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.

Solutions Manual .

13.103

Chapter 13

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CHAPTER 14 Corporations: Additional Topics and IFRS Learning Objectives 1. Explain how to account for stock dividends and stock splits, and compare their financial impact. 2. Explain how to account for the reacquisition of shares. 3. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. 4. Explain the different types of accounting changes and account for the correction of a prior period error. 5. Prepare a statement of changes in shareholders’ equity. 6. Explain earnings and dividend performance and calculate performance ratios.

Solutions Manual .

14.1

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

BT Item

BT Item LO

1. 2. 3. 4.

1 1 1 2

K C C K

5. 6. 7. 8.

2 2 2 3

C C C C

1. 2. 3.

1 1 1

AP AP AP

4. 5. 6.

2 2 3

AP AP AP

1. 2. 3.

1 1 2

AP AP AP

4. 5. 6.

3 3 4

AP AP AP

1. 1 2. 1,2 3. 2

AP AP AP

4. 5. 6.

1,2 3 2,3,4

AP AP AP

Solutions Manual .

Questions 9. 3 C 10. 3 C 11. 3 C 12. 4 C Brief Exercises 7. 3 AP 8. 3 AP 9. 4 AP Exercises 7. 1,2,3,4 AP 8. 1,4,5 AP 9. 1,3,5 AP Problems 7. 2,4,5 AP 8. 2,3,5 AP 9. 5 AP

14.2

Item LO

BT Item LO

13. 14. 15. 16.

4 5 5 6

C C K C

17. 18.

6 6

C C

10. 11. 12.

4 5 5

AP 13. AP 14. AP 15.

6 6 6

AP AP AP

10. 2,3,5 AP 13. 11. 6 AP 12. 6 AP

10. 11. 12.

6 6 6

AP AN AN

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Difficulty:

Time: AACSB

CPA CM

Solutions Manual .

14.3

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

Problems Set A

Problems Set B

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

Solutions Manual .

14.4

Exercises

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 a 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

Solutions Manual .

14.5

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 a 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

Solutions Manual .

14.6

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

Solutions Manual .

Q14.15

14.7

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

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

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

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.

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

(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

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

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.

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

This transaction: (a) decreases total assets, (b) has no effect on total liabilities and, (c) decreases total shareholders' equity.

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

Solutions Manual .

14.8

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

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

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.

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

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 aftertax results, which is more relevant to the financial statement user.

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

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.

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

Solutions Manual .

14.9

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 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.

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

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.

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

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.

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

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.

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

Solutions Manual .

14.10

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 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

Increase Decrease

Contributed Surplus

Retained Earnings Increase Decrease

Increase or Decrease

Decrease

Accumulated Other Comprehensive Income

Increase Decrease Increase

Decrease Decrease Increase or Decrease Increase or Decrease

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

The two components of comprehensive income are profit or loss and other comprehensive income.

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

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.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

14.11

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Questions (Continued) 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 entitlements 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.

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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.

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

14.12

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14.1 Mar. 1 Stock Dividends (400,000 × 5% × $5) ... 100,000 Stock Dividends Distributable ......... To record declaration of stock dividend.

100,000

14 Date of record – no entry required 31 Stock Dividends Distributable .............. 100,000 Common Shares ............................... To record distribution of stock dividend.

100,000

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

BRIEF EXERCISE 14.2 (a) (b) (c) (d)

Share capital Retained earnings2 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 2 Retained earnings will decrease and share capital will increase by this amount. LO 1 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

14.13

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 14.3 Transaction

Shareholders’ Assets Liabilities Equity

(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

Number of Shares

–

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

BRIEF EXERCISE 14.4 (a) Apr 5

(b) Apr 5

Common Shares (8,000 × $6.251)........50,000 Contributed Surplus— Reacquisition of Common Shares 5,000 Cash ............................................. 45,000 To record reacquisition of common shares. Common Shares (8,000 × $6.251)........50,000 Retained Earnings ...............................10,000 Cash ............................................. 60,000 To record reacquisition of common shares.

Average per share amount = $250,000 ÷ 40,000 shares = $6.25

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

Solutions Manual .

14.14

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, 2021 and Dec. 22, 2021. (b) Feb.

Common Shares (1,000 × $12.60) ... 12,600 Contributed Surplus— Reacquisition of Common Shares 2,600 Cash ............................................. 10,000 To record reacquisition of common shares.

Dec. 22

Common Shares (2,000 × $12.60) ... 25,200 Contributed Surplus— Reacquisition of Common Shares .. 2,600 Retained Earnings ........................... 200 Cash ............................................. 28,000 To record reacquisition of common shares.

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

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 discontinued operations = $(85,000) × 20% $(17,000) Income taxes on gain on disposal of assets = $60,000 × 20% 12,000 Income tax savings on discontinued operations $ (5,000)

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

Solutions Manual .

14.15

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 14.7 OLIVIER CORPORATION Statement of Income Year Ended August 31, 2021

Revenues ................................................. Operating expenses ................................. Profit before income taxes ...................... Income tax expense ................................. Profit from continuing operations ....... Discontinued operations: Loss from discontinued operations, net of $17,0001 income tax savings Gain on disposal of assets of discontinued operations, net of $12,0002 income tax expense Profit ......................................................... 1 $85,000 × 20% = $17,000 2 $60,000 × 20% = $12,000

$500,000 180,000 320,000 64,000 256,000

$68,000

48,000

20,000 $236,000

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

BRIEF EXERCISE 14.8 JET SET AIRLINES Statement of Comprehensive Income Year Ended December 31, 2021 Profit............................................................... Other comprehensive income Holding gain on equity investments, net of $19,8001 income tax expense ......... Comprehensive income ................................ 1 $66,000 × 30% = $19,800

$920,000

46,200 $966,200

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

Solutions Manual .

14.16

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 14.9 Mar. 1 Land ................................................................. 5,000 Retained Earnings [$5,000 × (1 − 20%)] Income Tax Payable ............................... To record correction of error.

4,000 1,000

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

BRIEF EXERCISE 14.10 BROADFOOT BAKERIES INC. Statement of Retained Earnings Year Ended December 31, 2021 Balance, January 1, 2021 as previously reported ......... Add: Correction for overstatement of rent expense, net of $1,0001 income tax expense .... Balance, January 1, 2021 as restated ............................ Add: Profit ..................................................................... Less: Dividends ............................................................. Balance, December 31 .................................................... 1 $5,000 × 20% = $1,000

$394,000 4,000 398,000 128,000 526,000 44,000 $482,000

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

Solutions Manual .

14.17

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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, 2020 (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 LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

14.18

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 14.12 (a)

PENINSULA SUPPLY CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

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

14.19 .

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 14.12 (Continued) PENINSULA SUPPLY CORPORATION Partial Balance Sheet December 31, 2021

(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

LO 5 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 14.13 Weighted average number of shares: Date Jan. 1 Mar. 1 June 1 Sep. 30

Actual Number 20,000 (5,000) 6,000 10,000 31,000

Fraction of Year × 12/12 = × 10/12 = × 7/12 = × 3/12 =

Weighted Average 20,000 (4,167) 3,500 2,500 21,833

LO 6 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

14.20

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 14.14 (a) Earnings per share = $1.81 [($454,000 – $55,0001)  220,000] 1 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) LO 6 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 14.15 Price-earnings ratio = Market price per share ÷ Earnings per share = $24.00 ÷ $4.00 = 6 times Payout ratio

= Cash dividends ÷ profit = $90,000 ÷ $450,000 = .20 or 20%

LO 6 BT: AN Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 $ 75,000 $ 75,000 Common shares 1,200,000 1,200,000 1,242,0001 1,200,000 Retained earnings 600,000 576,0002 558,000 600,000 Total shareholders' equity 1,800,000 1,776,000 1,800,000 1,800,000 Total liabilities and shareholders’ equity $1,875,000 $1,851,000 $1,875,000 $1,875,000

Number of common shares 1 2

60,000

63,000

120,000

$1,200,000 + (60,000 shares × 5% × $14) = $1,242,000 $600,000 - (60,000 shares x $0.40) = $576,000

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

Solutions Manual .

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Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 14.2 1.

No this is not the correct entry. Transactions with shareholders are never recorded as an expense. The entry below records the payment, ignoring the declaration as a separate entry. The correct entry is: Cash Dividends—Preferred (20,000 × $4 ÷ 4) ..................... 20,000 Cash ....................................... To record payment of cash dividend.

No, this is not the correct entry. Stock dividends do not give rise to a liability. The correct entry is: Stock Dividends (1,000 x $12) ... 12,000 Stock Dividends Distributable ...... To record declaration of stock dividend.

20,000

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.

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

Solutions Manual .

14.23

Chapter 14

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Accounting Principles, Eighth Canadian Edition

EXERCISE 14.3 a.

Jan.

6 Cash.............................................. 300,000 Common Shares1 ................ 1 (200,000 shares × $1.50) Issued common shares for cash. 12 Cash ......................................... 87,500 2 Common Shares ................ 2 (50,000 shares × $1.75) Issued common shares for cash.

Mar. 17 Cash.............................................. 105,000 Preferred Shares3................ 3 (1,000 shares × $105) Issued preferred shares for cash.

300,000

87,500

105,000

July 18 Cash........................................... 2,000,000 Common Shares ................. 2,000,000 Issued common shares for cash. Nov. 17 Common Shares (200,000 × $1.914) ................ 382,000 8,000 Retained Earnings ................... 390,000 Cash (200,000 × $1.95) ........ To record reacquisition of common shares.

Solutions Manual .

14.24

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 14.3 (Continued) a. (continued) Dec. 30

Common Shares (150,000 × $1.914) .................... 286,500 Contributed Surplus— Reacquisition of Common Shares 16,500 Cash (150,000 × $1.80) ........ 270,000 To record reacquisition of common shares.

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

There are 900,000 common shares remaining, at an average per share amount of $1.915 5

Average per share amount for Common Shares:

Transaction Date January 6 January 12 July 18 November 17 December 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 LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 14

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Accounting Principles, Eighth Canadian Edition

EXERCISE 14.4 SHRINK LTD. Partial Statement of Income Year Ended December 31, 2021 Profit from continuing operations........... Discontinued operations Profit on discontinued component operations, net of $27,0001 income tax expense $63,000 Loss on disposal of discontinued operations, net of $9,0002 income tax savings... 21,000 Profit.......................................................... 1 2

$320,000

42,000 $362,000

$90,000 × 30% = $27,000 $30,000 × 30% = $9,000

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 14.5 TOP BRANDS LIMITED Income Statement Year Ended March 31, 2021 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 $5,4001 in income tax savings.... Profit.......................................................... 1 ($18,000 x 30%) = $5,400

$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, 2021 Profit.......................................................... Other comprehensive income (loss) Holding loss on equity investments, net of $9002 in income tax savings....... Comprehensive income ........................... 2 ($3,000 x 30%) = $900

$39,200

2,100 $37,100

LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 14.6 a. Jan. 1 Land ............................................................... 75,000 Income Tax Payable .............................. 18,750 Retained Earnings [$75,000 × (1 − 25%)] 56,250 To record correction of error. b. SILVER FOX ENTERPRISES INC. Statement of Retained Earnings Year Ended December 31, 2021

Balance, January 1 as previously reported ........ Add: Correction of error in recording purchase of land in 2020, net of $18,750 income tax expense ............................................................. Balance, January 1 as adjusted .......................... Add: Profit............................................................. Less: Cash dividends .......................................... Retained earnings, December 31 ........................

$ 573,500

56,250 629,750 193,000 822,750 216,000 $606,750

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 14.7 FYRE LITE CORPORATION Statement of Retained Earnings Year Ended December 31, 2021

Balance, January 1, as previously reported .................... $650,000 Add: Correction for understatement of 2020 profit due to error, net of $21,2501 income tax expense 63,750 Balance, January 1, as adjusted .................................... 713,750 2 Add: Profit .................................................................... 562,500 1,276,250 Less: Excess cost of reacquired shares......... $ 50,000 Cash dividends........................................ 245,000 295,000 Balance, December 31 .................................................... $981,250 1

$85,000 × 25% = $21,250

2 $750,000 × (1 − 25%) = $562,500 LO 1,2,3,4 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth 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

LO 1,4,5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

_ Solutions Manual

14.30 .

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 14.9 MARCHELLE CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

Common Shares Balance, January 1 Issued for cash Stock split 3 for 2 Stock dividends Comprehensive income Balance, December 31

Stock Dividend Distributable

$2,200,000 1,200,0001 0 $495,0002 $3,400,000

$495,000

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

$850,000

$27,000

(495,000) 390,000 $745,000

(28,500)3 $ (1,500)

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

LO 1,3,5 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

_ Solutions Manual

14.31 .

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 14.10 a. Feb. 2 Common Shares1 ............................................................25,000 Contributed Surplus— Reacquisition of Common Shares ...........19,500 Cash ............................................... 44,500 1 ($800,000 ÷ 32,000) x 1,000 To record reacquisition of common shares. Apr. 17 Cash Dividends - Common ......................70,000 Cash ............................................... Declared and paid a cash dividend.

70,000

Oct. 29 Cash ......................................................... 104,000 Common Shares ........................... 104,000 Issued common shares for cash.

Solutions Manual .

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Chapter 14

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Accounting Principles, Eighth Canadian Edition

EXERCISE 14.10 (Continued) b. RUBY RED RENTAL CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

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)1

$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

_ Solutions Manual

14.33 .

Chapter 14

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Accounting Principles, Eighth Canadian Edition

EXERCISE 14.10 (Continued) c. Number of common shares issued Beginning balance January 1, 2021 ..... Shares repurchased Feb. 2 ................... Shares issued for cash Oct. 29............. Balance Dec. 31, 2021 ...........................

32,000 (1,000) 2,000 33,000

LO 2,3,5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 14.11 (a)

Profit available to common shareholders = Profit − Preferred share dividends = $465,325 − $65,000 = $400,325

Weighted average number of shares December 1, 2020 Feb. 28, 2021 May 31, 2021 Nov. 1, 2021

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

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

14.34

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 14.12 a.

Weighted average number of shares Jan. 1, 2021 Apr. 1, 2021 Sept. 30, 2021

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 − $10,0001)  86,250] 1 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) LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 14.13 a. Earnings per share Price-earnings ratio Payout ratio

2021

2020

2019

$3.79 11.3 X .660

$4.18 11.9 X .538

$5.26 10.7 X .399

Calculations: Earnings per share (in thousands) 2021: ($1,978 − $73) ÷ 502 = $3.79 2020: ($2,131 − $43) ÷ 500 = $4.18 2019: ($2,663 − $30) ÷ 501 = $5.26 Price-earnings ratio 2021: $43.00 ÷ $3.79 = 11.3 times 2020: $49.75 ÷ $4.18 = 11.9 times 2019: $56.25 ÷ $5.26 = 10.7 times Payout ratio 2021: $2.50 ÷ $3.79 = .66 2020: $2.25 ÷ $4.18 = .54 2019: $2.10 ÷ $5.26 = .40

Solutions Manual .

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Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 2021 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 2020, and then declined in 2021. 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. LO 6 BT: AN Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Chapter 14

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Accounting Principles, Eighth 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

Solutions Manual .

14.38

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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-thirds 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 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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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.2A a.

GENERAL JOURNAL

Date

Account Titles

Debit

Jan. 15

Cash Dividends—Common................... 90,000 Dividends Payable (90,000 × $1) ...... To record declaration of cash dividend.

Credit

90,000

Jan. 31 Date of record – No entry required Feb. 15 Dividends Payable .................................... 90,000 Cash ................................................... To record payment of dividend. July

90,000

1 Memo: 3-for-2 stock split increases the number of shares to 135,000 (90,000 × 3 ÷ 2)

Dec. 15 Stock Dividends ...................................... 135,000 Stock Dividends 135,000 Distributable (135,000 × 10% × $10). To record declaration of stock dividend. 30 Date of record – No entry required 31 Income Summary .................................... 315,000 Retained Earnings ............................ 315,000 [($450,000 × (1 – 30%)] To close Income Summary. 31 Retained Earnings .................................. 225,000 Cash Dividends—Common .............. 90,000 Stock Dividends ................................ 135,000 To close dividends to retained earnings.

Solutions Manual .

14.41

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 14.2A (Continued) b. Common Shares Date Jan.

Explanation

Ref.

Debit

Credit



1 Balance

Balance 1,100,000

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

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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Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 14.2A (Continued) c. LEBLANC CORPORATION Partial Balance Sheet December 31, 2021

Shareholders' equity Share capital Common shares, no par value, unlimited number of shares authorized, 135,000 shares issued... $1,100,000 Stock dividends 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. LO 1,2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.3A a.

Shares authorized Shares issued - refer to part (b)

1,000,000 437,000

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

Solutions Manual .

14.44

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 3,060,000 (425,000) 2,635,000 294,500 $2,929,500

Preferred Shares (1) (2) Date Jan. 1 July 25 Bal.

Solutions Manual .

No. of Shares

Total Cost

5,000 (500) 4,500

14.46

$375,000 (37,500) $337,500

(3) Average per Share Amount $16.00 17.00 17.00 17.00 8.50 8.50 9.00

(3) Average per Share Amount $75.00 75.00 75.00

Chapter 14

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 14.4A (Continued) a. Feb. 11 Cash .................................................... 1,000,000 Common Shares1 ........................ 1,000,000 1 (50,000 shares × $20) Issued common shares for cash. 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 To record reacquisition of common shares. June 14 No entry July 25 Preferred Shares (500 × $75) ................ 37,500 Contributed Surplus— 2,500 Reacquisition of Preferred Shares Cash (500 × $70).............................. 35,000 To record reacquisition of preferred shares. Sept. 16 Common Shares (50,000 × $8.50) .......... 425,000 Retained Earnings .................................. 425,000 Cash (50,000 × $17)......................... 850,000 To record reacquisition of common shares. Oct. 27 Stock Dividends (15,5001 × $19) ............. 294,500 Stock Dividends Distributable ....... 294,500 To record declaration of stock dividend. 1 (310,000 x 5%) = 15,500 Dec. 13 Stock Dividends Distributable................ 294,500 Common Shares ............................. 294,500 To record distribution of stock dividend.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.4A (Continued) 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

$ 337,500 2,929,500

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. LO 1,2 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.5A a. PORT HOPE CORPORATION Income Statement Year Ended November 30, 2021 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 expense1 ..................................................... Profit from continuing operations................................ Discontinued operations Profit on discontinued operations of communications devices division net of $5,0002 income taxes .............. $15,000 Loss on disposal of discontinued communications devices division 56,250 net of $18,7503 income tax savings .. 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 1

($417,000 × 25%) = $104,250 ($20,000 × 25%) = $5,000 3 ($75,000 × 25%) =$18,750 2

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.5A (Continued) b. PORT HOPE CORPORATION Statement of Comprehensive Income Year Ended November 30, 2021 Profit.......................................................... Other comprehensive loss Loss on equity investment, net of $20,7504 in income tax savings ..................... Comprehensive income ........................... 4

$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. LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.6A a. 2021 Mar. 17 Notes Payable .................................. Income Taxes Payable1 .............. Retained Earnings ...................... 1 ($57,000 × 25% = $14,250) To record correction of error.

57,000 14,250 42,750

b. Apr. 10 Common Shares .............................. 75,000 Retained Earnings ........................... 22,500 Cash ............................................. To record reacquisition of common shares. c. Profit Year Ended October 31, 2021 Service revenue............................................................. Operating expenses ................................ $929,000 Depreciation expense ............................. 87,000 Profit from operations................................................... Interest expense ............................................................ Profit before income taxes ........................................... Income tax expense2 ..................................................... Profit............................................................................... 2

97,500

$1,476,000 1,016,000 460,000 54,000 406,000 101,500 304,500

($406,000 × 25%) = $101,500

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.6A (Continued) d. ZUG LIMITED Statement of Retained Earnings Year Ended October 31, 2021

Balance, November 1, 2020 as previously reported Add: Correction of error in recording payment on notes payable in 2020, net of $14,250 income tax expense........................................ Balance, November 1 as adjusted....................... Add: Profit............................................................. Less: Reacquired common shares $ 22,500 Cash dividends ................... 120,000 Balance October 31, 2021 ....................................

$ 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. 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. LO 2,3,4 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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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14.53

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

Chapter 14

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.7A (Continued) b. GENERAL JOURNAL Date

Account Titles

J1 Debit

Credit

Jan. 15 Common Shares ($41 × 20,000) ................80,000 Contributed Surplus—Reacquisition of Common Shares ...................................30,000 Retained Earnings ....................................30,000 Cash (20,000 × $7)............................. 140,000 To record reacquisition of common shares. 1 $1,280,000 ÷ 320,000 = $4 Mar. 31 Cash Dividends—Preferred .................. Cash (10,000 × $5 × ¼)...................... To record cash dividend.

12,500

Jun. 30 Cash Dividends—Preferred .................. Cash (10,000 × $5 × ¼)...................... To record cash dividend.

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 To record correction of error. Oct. 1 Cash......................................................... 800,000 Common Shares (100,000 × $8) ....... 800,000 Issued common shares for cash.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.7A (Continued) c. Dec. 31 Income Summary [$760,000 × (1 − 25%)] ............................... 570,000 Retained Earnings ......................... 570,000 To close Income Summary. 31 Retained Earnings ...................................25,000 Cash Dividends—Preferred .......... To close dividends to retained earnings.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.7A (Continued) d.

JAJOO CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

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

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Accounting Principles, Eighth 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. LO 2,4,5 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.8A a. PANSY PAINTS LTD. Statement of Comprehensive Income Year Ended December 31, 2021 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 disposal of equipment.............................. Other expenses Interest expense Profit before income taxes ........................................... Income tax expense1 ..................................................... Profit............................................................................... Other comprehensive income Holding loss on equity investment, net of $1,350 income tax savings2 .............................. Comprehensive income ................................................ 1

$316,340 × 25% = $79,085

[$5,400 × (1 − 25%)] = $4,050

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14.58

$780,000 412,000 368,000

47,860 320,140 850 320,990 4,650 316,340 79,085 237,255

4,050 $233,205

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.8A (Continued) b. PANSY PAINTS LTD. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.8A (Continued) c. PANSY PAINTS LTD. Partial Balance Sheet December 31, 2021 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. LO 2,3,5 BT: AP Difficulty: M Time: 70 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.9A TMAO INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

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

Stock Dividend Distributable

(50,000)1

Contributed Surplus– Reacquisition of Common Shares

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

$450,000

$(50,000)

$10,0002

$400,000

$750,000

$180,000

$10,000

$1,600,000 (40,000) 0

$180,0003

Total

(12,000)5

(12,000)

(180,000) 227,5004 $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, Eighth 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. All income statement items are ultimately closed to Retained Earnings under ASPE. LO 5 BT: AP Difficulty: C Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.10A a.

Weighted Average Number of Shares

Date Apr. 1 June 1 July 1 Sept. 30 Jan. 31 Mar. 31 b.

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

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.

The number of common shares issued at March 31, 2021 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. However, common shareholders do not have a dividend rate and “own” all of the company’s profit after the preferred shareholders receive their dividend. LO 6 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth 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

2017 $2,405 − $0 = $16.48 145.9 $229.66 = 13.94 times $16.48 $319 = .133 $2,405

2016 $1,599 − $0 = $10.69 149.6 $191.56 = 17.92 times $10.69 $274 = .171 $1,599

2015 $1,352 − $0 = $8.47 159.7 $176.73 = 20.87 times $8.47 $221 = .163 $1,352

2016 $3,640 − $0 = $4.69 776.0 $90.36 = 19.27 times $4.69 $1,159 = .318 $3,640

2015 $3,538 − $0 = $4.42 800.7 $77.35 = 17.50 times $4.42 $996 = .282 $3,538

Canadian National Railway Company Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio

2017 $5,484 − $0 = $7.28 753.6 $103.65 = 14.24 times $7.28 $1,239 = .226 $5,484

_ Solutions Manual

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Accounting Principles, Eighth 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 2015 to 2017. On the other hand, for Canadian National, earnings per share improved slightly in 2016, due to a modest increase in earnings, and had a large improvement in 2017. From a potential investor’s point of view, a higher priceearnings ratio is an indicator of higher future income. From that perspective, Canadian Pacific’s price-earnings ratio is not positive since it keeps decreasing because of the large and continuous increase in earnings per share versus smaller increases in the share price. Canadian National’s price-earnings ratio improved slightly in 2016 and then declined significantly in 2017. For the dividend payout ratio, if one takes the perspective of a current shareholder who receives dividends, Canadian Pacific’s ratio improved slightly in 2016 and then worsened in 2017 because of the significant increase in profit. Dividends are increasing in amount despite a lower number of issued shares. Canadian National’s payout ratio also increased in 2016, but dropped significantly in 2017 as earnings jumped higher without a similar increase in dividends.

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Accounting Principles, Eighth Canadian Edition

Problem 14.11A (Continued) b.

Canadian Pacific’s earnings per share are numerically higher than Canadian National’s earnings per share in all three years, but the numbers are irrelevant because of the number of shares outstanding in each company. It is necessary to compare the price-earnings ratios. In 2016 and 2017 the price-earnings ratio of Canadian National is higher than Canadian Pacific, which may indicate that the market considers Canadian National to be a superior investment. If a current shareholder is interested in receiving regular dividends, Canadian National’s dividend payout ratio would be considered much 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 likely prefer Canadian National’s two-year increase of 34% from $77.35 per share to $103.65 compared with Canadian Pacific’s two-year increase of 30%.

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. LO 6 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.12A a. Before Discontinued Operations Ratio 2021 $1,160 = 34.12% 1. Return on equity $3,400 $1,160 2. Earnings per = $3.87 share 300 $45.50 3. Price-earnings = 11.76 ratio times $3.87

2020 $810 $2,400 $810 290 $33.65 $2.79

After Discontinued Operations Ratio 2021 $710 = 20.88% 1. Return on equity $3,400 $710 2. Earnings per = $2.37 share 300 $45.50 3. Price-earnings = 19.20 ratio times $2.37

= 33.75% = $2.79 = 12.06 times

2020 $730 $2,400 $730 290 $33.65 $2.52

= 30.42% = $2.52 = 13.35 times

2019 $570 $1,800 $570 280 $44.80 $2.04

= 31.67% = $2.04 = 21.96 times

2019 $500 $1,800 $500 280 $44.80 $1.79

= 27.78% = $1.79 = 25.03 times

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.12A (Continued) b.

Before Discontinued Operations: Highlander’s return on equity increased slightly from 2019 to 2021 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 2019 to 2020, followed by a substantial decrease in 2021 from 2020 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 2019 to 2020 and decreased between 2020 and 2021 The increase between 2019 and 2021 was due to increased profit, but the increase was not as substantial as the increase in earnings per share from continuing operations. The price-earnings ratio decreased in 2020 due to the significant drop in share price and increased in 2021 due to a lower profit and much higher share price.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.12A (Continued) 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 2021. 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 2021 affected this trend for both of these ratios. The 2021 loss on disposal of discontinued operations, together with the much higher share price, contributed to an upward trend in the 2021 price-earnings ratio from 2020. LO 6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

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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Accounting Principles, Eighth Canadian Edition

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 split 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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Accounting Principles, Eighth Canadian Edition

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. LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.2B a.

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Feb. 1 Cash Dividends—Common (75,000 × $1) ........................................... 75,000 Dividends Payable ............................ To record declaration of cash dividend.

Credit

75,000

15 Date of record – no entry required Mar. 1 Dividends Payable ................................. Cash ................................................... To record payment of dividend.

75,000 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 (150,000 × 5% × $16) . 120,000 Stock Dividends Distributable ......... 120,000 To record declaration of stock dividend. 20 Date of record – no entry required 31 Income Summary [$400,000 × (1 − 25%)] ............................. 300,000 Retained Earnings ............................ 300,000 To close Income Summary. 31 Retained Earnings .................................. 195,000 Cash Dividends—Common .............. 75,000 Stock Dividends ................................ 120,000 To close dividends to retained earnings.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 14.2B (Continued) b. Common Shares Date Jan.

Explanation 1 Balance

Ref.

Debit

Credit



Balance 1,700,000

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 Date Dec.

Explanation 1 31 Closing entry

Retained Earnings Date

Explanation

Jan. 1 Balance Dec. 31 Closing entry 31 Closing entry

Solutions Manual .

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, 2021

Shareholders' equity Share capital Common shares, no par value, unlimited number of shares authorized, 150,000 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 may often rise above the split value, or the decreased value due to the stock dividend, because of investor interest. LO 1,2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 14.3B a.

Shares authorized Shares issued

150,000 15,300

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)

Average per share amount (a) ÷ (b)

Cont. surplus— reacq. of common shares

$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

$35.00

$12,000 (1) (5,400) 6,600

$220,000

(2) (6,600) 0 (3) 4,560 $ 4,560

(16,152) 203,848

35.00

Retained earnings

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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Accounting Principles, Eighth Canadian Edition

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 an 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 past performance. Paying bonuses also has the disadvantage of draining cash out of the business. For these reasons, companies reacquire common shares for employee compensation plans. LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 14.4B Calculations needed for parts (a) and (b)

(1) Date Jan. 1 Jan. 17 Sub. Feb. 27 Sub. Apr. 14 Sub. Aug. 16 Sub. Dec. 3 Bal.

Common Shares (2)

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

(1)

(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 (2)

(3) Average per Date No. of Shares Total Cost Share Amount Jan. 1 4,000 $600,000 $150.00 June 25 (500) (75,000) 150.00 Bal. 3,500 $525,000 150.00

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PROBLEM 14.4B (Continued) a. Jan. 17 Cash ................................................. Common Shares1 ........................ 1 (50,000 shares × $10) Issued common shares for cash.

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 To record reacquisition of common shares. June 25 Preferred Shares (500 × $150) .................. 75,000 Contributed Surplus— Reacquisition of Preferred Shares 2,500 Cash (500 × $145)............................ 72,500 To record reacquisition of preferred shares. Aug. 16 Common Shares (100,000 × $4.09) ........ 409,000 Retained Earnings .................................. 691,000 Cash (100,000 × $11)....................... 1,100,000 To record reacquisition of common shares. Oct. 17 Stock Dividends (48,000 × $10) .............. 480,000 Stock Dividends Distributable ....... 480,000 To record declaration of stock dividend. Dec. 3

Stock Dividends Distributable ............... 480,000 Common Shares ............................. 480,000 To record distribution of stock dividend.

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 Solutions Manual .

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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. LO 1,2 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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PROBLEM 14.5B a. COQUITLAM CORPORATION Income Statement Year Ended December 31, 2021 Net sales ........................................................................ Cost of goods sold ........................................................ Gross profit.................................................................... Operating expenses ..................................................... Profit from operations................................................... Other expenses ............................................................. Profit before income taxes ........................................... Income tax expense1 ..................................................... Profit from continuing operations................................ Discontinued operations Loss on discontinued operations of ceramics division net of $37,5002 income tax savings............. $112,500 Gain on disposal of discontinued ceramics division net of $17,5003 income tax expense . 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 1

($393,000 × 25%) = $98,250 ($150,000 × 25%) = $37,500 3 ($70,000 × 25%) = $17,500 2

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PROBLEM 14.5B (Continued) b. COQUITLAM CORPORATION Statement of Comprehensive Income Year Ended December 31, 2021

Profit.......................................................... Other comprehensive income Holding gain, net of $11,7504 in income tax .................................................... Comprehensive income ........................... 4

$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. LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 14.6B a. 2021 Jul. 9 Notes Payable .................................. Income Taxes Payable................ Retained Earnings ...................... ($61,500 × 25% = $15,375) To record correction of error. b. Aug. 18 Common Shares .............................. Retained Earnings ........................... Cash ............................................. To record repurchase of shares. c. Profit Year Ended September 30, 2021

61,500 15,375 46,125

57,500 32,500

Service revenue............................................................. Operating expenses ................................ $971,000 Depreciation expense ............................. 74,000 Profit from operations................................................... Other revenue ................................................................ Profit before income taxes ........................................... Income tax expense1 ..................................................... Profit............................................................................... 1

90,000

$1,647,000 1,045,000 602,000 65,000 667,000 166,750 $ 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, 2021

Balance, October 1, 2020 as previously reported Add: Correction of error in recording payment on notes payable in 2020, 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, 2021 .............

$ 845,000

46,125 891,125 500,250 1,391,375 182,500 $1,208,875

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. LO 2,3,4 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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

Solutions Manual .

Debit

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PROBLEM 14.7B (Continued) b.

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Credit

Mar. 1 Cash (20,000 × $15.50) ............................ 310,000 Common Shares ............................... 310,000 Issued common shares for cash. Mar. 31 Cash Dividends—Preferred (15,000 × $4 × ¼) ....................................... 15,000 Cash ................................................... To record cash dividend.

Jun. 30 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... Cash ................................................... To record cash dividend. July

15,000

15,000 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 To record reacquisition of common shares. ($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 ........................ To record correction of error. Sep. 30 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... Cash ................................................... To record cash dividend. Solutions Manual .

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PROBLEM 14.7B (Continued) c. Dec. 31 Income Summary [$750,000 × (1 − 30%)] ............................. 525,000 Retained Earnings ............................ 525,000 To close Income Summary. 31 Retained Earnings .................................... 45,000 Cash Dividends—Preferred.............. To close dividends to retained earnings.

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PROBLEM 14.7B (Continued) d.

MICHAUD CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

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 2020 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. LO 2,4,5 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

. Solutions Manual .

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PROBLEM 14.8B a. ASTER AUTOMOBILES INC. Statement of Comprehensive Income Year Ended December 31, 2021 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 disposal of equipment ............................. Other expenses Interest expense Profit before income taxes ........................................... Income tax expense1..................................................... Profit .............................................................................. Other comprehensive income Holding loss on equity investment, net of $850 income tax savings2 ................................. Comprehensive income................................................ 1

$278,290 × 25% = $69,573

[$3,400 × (1 − 25%)] = $2,550

$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

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PROBLEM 14.8B (Continued) b. ASTER AUTOMOBILES INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2021

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

_ Solutions Manual

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PROBLEM 14.8B (Continued) c. ASTER AUTOMOBILES INC. Partial Balance Sheet December 31, 2021 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. LO 2,3,5 BT: AP Difficulty: M Time: 70 min. AACSB: None CPA: cpa-t001 CM: Reporting

. Solutions Manual .

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PROBLEM 14.9B KANADA INC. Statement of Changes in Shareholders’ Equity Year Ended September 30, 2021

Balance, October 1, 2020 Cash dividends–preferred Stock dividends Reacquired common shares Comprehensive income Balance, September 30, 2021

Preferred Shares

Common Shares

$465,000

$900,000 35,0002 (71,920)3

$465,000

$863,080

Retained Earnings $540,000 (30,000)1 (35,000) (8,080) 227,5004 $694,420

Accumulated Other Comprehensive Income $95,000

18,9005 $113,900

Total $2,000,000 (30,000) 0 (80,000) 246,400 $2,136,400

1 6,000 × $5 = $30,000 2 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

_ Solutions Manual

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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. All income statement accounts are ultimately closed to Retained Earnings. LO 5 BT: AP Difficulty: C Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

. Solutions Manual .

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PROBLEM 14.10B a.

Weighted Average Number of Shares

Date Aug. 1 Nov. 30 Feb. 1 Mar. 1 July 31 b.

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

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

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

The number of common shares issued at July 31, 2021 is 411,500 as calculated in part (a) above.

. Solutions Manual .

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PROBLEM 14.10B (Continued) 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. LO 6 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

. Solutions Manual .

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PROBLEM 14.11B a.

($in millions except for market price per share)

Imperial Oil Limited Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio

2017 $490 843 $39.23 $0.58 $531 $490

2016

= $0.58 = 67.64 times = 1.08

$2,165 848 $46.71 $2.55 $500 $2,165

= $2.55 = 18.32 times = 0.23

Suncor Energy Inc. Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio

2017 $4,458 1,661 $46.15 $2.68 $2,124 $4,458

= $2.68 = 17.22 times = .47

2016 $445 1,610 $43.90 $0.28 $1,877 $445

= $0.28 = 16.38 times = 4.22

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. Both companies are involved in the oil industry and so one must also consider the impact of the change in oil prices during the time period being analyzed. Instead of looking for improvements, a user would look at which company performed better overall. While Suncor experienced a dramatic improvement in profit from 2016 to 2017 the exact opposite trend was experienced by Imperial Oil Limited.

. Solutions Manual .

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PROBLEM 14.11B (Continued) a.

(Continued) From a potential investor’s point of view, a higher priceearnings ratio is an indicator of higher future income. From that perspective, Imperial Oil appears at first glace to be ahead of Suncor at the end of 2017, but that is because of the lower profit in 2017. In terms of the dividend payout ratio, both companies show a very strong commitment in paying out significant amounts of dividends despite the reduced earnings. The payout ratios were exceptionally high for Suncor in 2016 and Imperial Oli in 2017 as a consequence of this decision. In this case, maintaining high dividends would be considered a positive sign.

Based on the payout ratios and price-earnings ratios, Imperial Oil would be considered the more favourable of the two companies in 2017. On the other hand, Suncor has shown a larger percentage increase in earnings from the low level experienced in 2016.

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. LO 6 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

. Solutions Manual .

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PROBLEM 14.12B a. Before Discontinued Operations Ratio 2021 $1,250 = 36.76% 1. Return on equity $3,400 2. Earnings per $1,250 = $2.78 share 450 $24.40 3. Price-earnings = 8.78 ratio times $2.78

2020 $1,130 $2,400 $1,130 470 $19.88 $2.40

After Discontinued Operations Ratio 2021 $430 = 12.65% 1. Return on equity $3,400 $430 2. Earnings per = $0.96 share 450 $24.40 3. Price-earnings = 25.42 ratio times $0.96

= 47.08% = $2.40 = 8.28 times

2020 $980 $2,400 $980 470 $19.88 $2.09

= 40.83% = $2.09 = 9.51 times

2019 $990 $1,900 $990 460 $21.60 $2.15

= 52.11% = $2.15 = 10.05 times

2019 $810 $1,900 $810 460 $21.60 $1.76

= 42.63% = $1.76 = 12.27 times

_ Solutions Manual

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PROBLEM 14.12B (Continued) b.

Before Discontinued Operations: All Care’s return on equity decreased from 2019 to 2021 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 2021 due to losses from discontinued operations. The same loss also causes a large decrease in earnings per share for 2021. 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 2021. 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 earnings per share caused by an increase in profits from continuing operations. However, the lower return on equity should be somewhat concerning, dropping from 47.08% to 36.76%. The price-earnings ratio remains modest, indicating that the market is not expecting much future growth. 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 to prevent this type of event from recurring. LO 6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance . Solutions Manual .

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BYP14.1 FINANCIAL REPORTING PROBLEM a. For the 2018 fiscal year of Dollarama: (1) There were no stock dividends or stock splits. (2) Other comprehensive income in 2018 was a loss of $31,077,000 (3) There were no corrections of prior period errors. b. For the 2018 fiscal year, Dollarama repurchased 6,104,540 common shares and paid cash of $812,336,000. For the 2017 fiscal year 7,420,168 common shares were repurchased and $696,628,000 was paid on the repurchase as shown on the consolidated statement of cash flows. These amounts of cash paid are slightly different from the amounts shown in Note 12. c. The basic earnings per share for fiscal 2017 was $3.75. The basic earnings per share in fiscal 2018 was $4.61 and it improved in fiscal 2018 due to both higher earnings and a lower number of issued shares. d. Fully diluted earnings per share were reported in both years. In fiscal 2017, the fully diluted amount was four cents lower than the basic amount, at $3.71 per share. For the 2018 fiscal year, the fully diluted figure was six cents lower than the basic earnings per share ratio, at $4.55. e. Ratio Price Earnings Ratio

2018 $56.43 $4.61

2017 12.24 times

$33.14 $3.75

8.84 times

The price-earnings ratio improved from 2017 to 2018 by a considerable amount. This is consistent with the answer from part (c) because the basic earnings per share also increased from 2017 to 2018.

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Accounting Principles, Eighth Canadian Edition

BYP14.1 (Continued) f. Dollarama’s payout ratio for fiscal 2017 was 0.11 ($47,440 ÷ $445,636), compared with 0.10 in fiscal 2018. The cause for the decreased payout ratio in 2018 from 2017 is the increase in earnings of 16.5% exceeded the increase in cash dividends declared of 4.4%.

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Accounting Principles, Eighth Canadian Edition

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.

The reason Loblaw repurchased shares is likely because management concluded that the stock price was undervalued and the company had excess cash available. In addition, Loblaw has remuneration plans for its employees that require the issuance of shares.

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.

Loblaw paid more than the average book value per share (average share amount) on the shares repurchased as evidenced by the decrease in the Retained Earnings account.

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Accounting Principles, Eighth Canadian Edition

BYP14.2 (Continued) e. (in millions of dollars, except per share data): Ratio Return on shareholders' equity

Earnings per share

Payout ratio

2017

$1,526 $13,052 + $13,028 2

2016

= 11.7%

= $990 $13,028 + $13,124 2

7.6%

$1,526 393.8

= $3.88

$990 405.1

= $2.44

$421 $1,526

$416 $990

= 0.42

0.28

Loblaw’s profit increased 54% [($1,526 – $990) / $990] in 2017. This improvement in profit for the year led to a corresponding increase in the earnings per share ratio and return on shareholders’ equity.

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Accounting Principles, Eighth Canadian Edition

BYP14.3 COLLABORATIVE LEARNING ACTIVITY All 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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Accounting Principles, Eighth Canadian Edition

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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Accounting Principles, Eighth Canadian Edition

BYP14.5 “ALL ABOUT YOU” ACTIVITY a.

Canadian Tire’s distinct sources of revenue include: 1. Retail, including: a. Canadian Tire b. PartSource c. Petroleum d. Mark’s e. FGL Sports 2. CT REIT segment which holds 331 properties 3. Financial services 4. Foreign operations Knowledge of these distinct sources of revenue will help investors interpret the financial statement information.

The management’s discussion and analysis includes: 1. A preface 2. Company and industry overview 3. Core capabilities 4. Historical performance highlights 5. 2017 financial aspirations and strategic objectives 6. 2018 financial aspirations and strategic objectives 7. Financial performance 8. Balance sheet analysis, liquidity, capital resources 9. Equity 10. Tax matters 11. Accounting policies, estimates, and non-GAAP measures 12. Enterprise risk management 13. Internal controls and procedures 14. Social and environmental responsibility 15. Related parties 16. Subsequent event 17. Forward-looking statements and other investor communication

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Accounting Principles, Eighth Canadian Edition

BYP14.5 (Continued) b. (Continued) 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. c.

Cash dividends per share in 2017 were $2.85 and $2.375 for 2016. 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.

The basic earnings per share for 2017 was $10.70.

The web page under Shareholders includes links to: 1. Stock Information 2. Dividend Information 3. Analyst Coverage Canadian Tire’s share price at December 29, 2017 was $163.90.

The price-earnings ratio is $163.90 ÷ $10.70 = 15.3 times

Canadian Tire is listed on the Toronto (TSX) stock exchange under the symbol CTC.A and its auditors are Deloitte LLP.

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Accounting Principles, Eighth Canadian Edition

BYP14.5 (Continued) 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 7. Voting results 8. Notices of meetings

Solutions will vary depending on date retrieved: As at Aug. 22, 2018, the price-earnings ratio was 16.16 and for the industry it was 26.02. At that date, from the perspective of a potential investor, Canadian Tire’s priceearnings ratio is better (lower) than the industry average.

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Accounting Principles, Eighth Canadian Edition

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 share repurchase would be $35,484 ($241,026 – $205,542).

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Accounting Principles, Eighth Canadian Edition

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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Accounting Principles, Eighth Canadian Edition

BYP14.6 (Continued) b. Common Shares (180 × $58.10)......................... 10,458 Retained Earnings ............................................ 205,542 Cash (180 × $1,200)........................... 216,000 To record reacquisition of common shares. c. Balance of share capital after common share repurchase: Common shares $12,200 - $10,458 = $1,742 Average per share amount is $1,742 divided by 30 shares = $58.07 per share

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Accounting Principles, Eighth Canadian Edition

CHAPTER 15 Non-Current Liabilities Learning Objectives 1. Describe the characteristics of bonds. 2. Calculate the price of a bond. 3. Account for bond transactions. 4. Account for the retirement of bonds. 5. Account for instalment notes payable. 6. Account for leases. 7. Explain and illustrate the methods for the presentation and analysis of non-current liabilities.

Solutions Manual .

15.1

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item

BT Item LO BT Item LO BT Item LO Questions 1. 1 5. 2 9. 4 C K AP 13. 5 2. 1 C 6. 2 C 10. 4 C 14. 6 3. 1 K 7. 3 K 11. 5 C 15. 6 4. 2 K 8. 3 C 12. 5 AP 16. 6 Brief Exercises 1. 1 C 6. 3 AP 11. 3 AP 16. 5 2. 2 AP 7. 3 AP 12. 3 AP 17. 5 AP AP 18. 5 3. 2 8. 3 AP 13. 4 4. 3 AP 9. 3 AP 14. 4 AP 19. 6 5. 3 AP 10. 3 AP 15. 5 AP 20. 6 Exercises 1. 1,2 K 6. 3 AP 11. 3 AP 16. 5 2. 2,3 AP 7. 3 AP 12. 3 AP 17. 5 3. 2 AP 8. 3 AP 13. 4 AP 18. 5 AP AP 19. 5 4. 2,3 9. 3 AP 14. 3,4 5. 3 AP 10. 3 AP 15. 5 AP 20. 6 Problems 1. 1,2,3,7 AP 4. 1,2,3 AP 7. 2,3,4,7 AP 10. 5 2. 2,3,7 AP 5. 2,3,4 AP 8. 3,4,7 AP 11. 5 3. 1,2,3 AP 6. 2,3,4 AP 9. 5,7 AP 12. 6

Solutions Manual .

15.2

BT Item LO BT 17. 18. 19. 20.

7 7 7 7

K K K C

AP 21. AP 22. AP 23. AP AP

6 7 7

AP AP AN

AP 21. AP 22. AP AP AP

7 7

AN AP

AP 13. AP 14. AP

7 7

AP AN

AP C C K

Chapter 15

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Accounting Principles, Eighth Canadian Edition

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

Difficulty:

Time: AACSB

CPA CM

Solutions Manual .

15.3

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

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

Solutions Manual .

15.4

Exercises

Problems Set A

Problems Set B

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare entries to record issuance of bonds at par and interest accrual, and show balance sheet presentation.

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, and record bond transactions.

Moderate

25-30

Describe the features of a bond, calculate the price of a bond, and 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 bond transactions including bond redemption; 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 liabilities section of balance sheet and analyze leverage.

Moderate

25-35

Prepare entries to record issuance of bonds at par and interest accrual, and show balance sheet presentation.

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, and record bond transactions.

Moderate

25-30

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

Describe the features of a bond, calculate the price of a bond, and 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 bond transactions including bond redemption; 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 liabilities section of balance sheet and analyze leverage.

Moderate

25-35

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

Solutions Manual .

15.7

Analysis

Synthesis

Chapter 15

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

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

Solutions Manual .

Q15.17 Q15.18 Q15.19

Accounting Principles, Eighth 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

15.8

Analysis

Synthesis

P15.13A P15.13B

BYP15.2 BYP15.3 BYP15.6

Chapter 15

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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

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

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

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 these cash flows are used to determine the market price of a bond. LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 5. The issue price at par is determined before the bond is made available for sale. By the time the 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, to meet the market’s needs. LO 2 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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.

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

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.

LO 3 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Interest expense is calculated by multiplying the carrying amount of the bond by the periodic market rate. 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.

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

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.

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

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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.

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

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.

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

12.

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.

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

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. The mortgage will be repaid in 20 years.

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

Solutions Manual .

15.11

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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 payments. The lessor is the owner of the property and the lessee is the renter or tenant. IFRS requires a lessee to report leased assets and the related lease liabilities on the balance sheet. A lease liability is computed as the present value of the lease payments. A leased asset is recorded at its cost, which includes the present value of the lease payments. An exception is permitted for leases with terms of fewer than 12 months or leases with low value assets.

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15.

Under ASPE, if substantially all the benefits and risks of ownership of the leased property are transferred to the lessee, then the lease is considered a capital lease. This is primarily determined if one of the following guidelines are met: 1. There is a transfer of ownership at the end of the lease or a bargain purchase option is included in the lease 2. The lease term is equal to 75% or more of the economic life of the leased property 3. The present value of the lease payments is equal to or greater than 90% of the fair value of the leased property.

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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 capital lease and the asset must be included on the lessee’s balance sheet.

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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.

LO7 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.12

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

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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.

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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.

LO7 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.13

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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BRIEF EXERCISE 15.2 (a) Face value of the bond: $900,000 When will it be paid: January 1, 2031 (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 LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.14

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

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Solutions Manual .

15.15

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.4 (a)

Jan.

1 Cash........................................... 2,000,000 Bonds Payable .................... 2,000,000 To record issuance of bonds. 1 Interest Expense1 ..................... Cash ..................................... 1 ($2,000,000 × 3% × 6/12) To record interest payment.

30,000

(c) Dec. 31 Interest Expense2 ..................... Interest Payable ................... 2 ($2,000,000 × 3% × 6/12) To accrue interest expense.

30,000

(b) July

30,000

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BRIEF EXERCISE 15.5 Mar. 1 Cash ($300,000 × 98%)................. 294,000 Bonds Payable ..................... To record issuance of bonds.

294,000

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BRIEF EXERCISE 15.6 June 1 Cash ($400,000 × 101%) ............... 404,000 Bonds Payable ..................... To record issuance of bonds.

404,000

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

Solutions Manual .

15.16

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.7 (a)

Jan.

(b) July

(c)

1 Cash (1,000 x $1,000) ................ 1,000,000 Bonds Payable ..................... 1,000,000 To record issuance of bonds. 1 Cash ($900,000 × 102%)............... 918,000 Bonds Payable ..................... To record issuance of bonds.

918,000

Sept. 1 Cash ($400,000 × 98%) ................. 392,000 Bonds Payable ..................... To record issuance of bonds.

392,000

LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.17

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.8 (a)

Interest Expense .............................. 3,256 Bonds Payable............................. 744 Cash ......................................... To record interest payment.

4,000

Interest Expense .............................. 3,234 Bonds Payable............................. 766 Cash ......................................... To record interest payment.

4,000

(b) Because the bonds were issued at a premium, the coupon rate, used to determine the interest payment, is higher than the market rate, used to calculate the interest expense. The difference between the interest expense and the interest payment is the amount of premium amortization for the period. (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.

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Solutions Manual .

15.18

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 ......................................... To record interest payment.

7,812 40,000

Oct. 31 Interest Expense ............................ 48,007 Bonds Payable ........................ Cash ......................................... To record interest payment.

8,007 40,000

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Solutions Manual .

15.19

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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) 2021 July 1 Interest Expense .............................. 7,172 Bonds Payable ........................ Cash ......................................... To record interest payment. (c)

(d)

1,172 6,000

2021 Dec. 31 Interest Expense .............................. 7,201 Bonds Payable ........................ Interest Payable ...................... To accrue interest expense.

1,201 6,000

2022 Jan. 1 Interest Payable ............................... 6,000 Cash ......................................... To record interest payment.

6,000

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

Solutions Manual .

15.20

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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, 2021 Nov. 1, 2021 May 1, 2022 Nov. 1, 2022

(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

$4,308 4,373 4,439

(D) Bond Amortized Cost (D) – (C) $1,046,110 1,041,802 1,037,429 1,032,990

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Solutions Manual .

15.21

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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% (A) (B) (C) Interest Interest Discount Payment Expense $3,000,000 × (D) × 6% × Amortization (B) – (A) 4% × 6/12 6/12

Date

Jan. 1, 2021 July 1, 2021 Jan. 1, 2022 July 1, 2022 (b)

(c)

(d)

$60,000 60,000 60,000

$79,834 80,429 81,041

$19,834 20,429 21,041

(D) Bond Amortized Cost (D) + (C) $2,661,118 2,680,952 2,701,381 2,722,422

2021 July 1 Interest Expense ............................ 79,834 Bonds Payable ........................ Cash ......................................... To record interest payment.

19,834 60,000

2021 Dec. 31 Interest Expense ............................ 80,429 Bonds Payable ........................ Interest Payable ...................... To accrue interest expense.

20,429 60,000

2022 Jan. 1 Interest Payable ............................. 60,000 Cash ......................................... To record interest payment.

60,000

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Solutions Manual .

15.22

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.13 July 1

Bonds Payable ............................. 940,000 Loss on Bond Redemption1 ................. 70,000 Cash ($1,000,000 × 101%)....... 1,010,000 1 ($1,010,000 – $940,000) To record redemption of bonds.

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BRIEF EXERCISE 15.14 Bonds Payable ............................. 390,000 Gain on Bond Redemption2.... Cash ($400,000 × 97%)............ 2 ($390,000 - $388,000) To record redemption of bonds.

2,000 388,000

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

BRIEF EXERCISE 15.15

Monthly Interest Period Issue Date 1 2 3 4

(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

LO 5 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.23

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.16 (a) Monthly Interest Period Nov. 30, 2021 Dec. 31, 2021 Jan. 31, 2022

(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

2021 Nov. 30 Cash..................................................... 360,000 Mortgage Note Payable ................. To record issuance of note. Dec. 31

2022 Jan. 31

Interest Expense................................. Mortgage Note Payable ...................... Cash................................................ To record payment on note.

1,800 3,000

Interest Expense................................. Mortgage Note Payable ...................... Cash................................................ To record payment on note.

1,785 3,000

360,000

4,800

4,785

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Solutions Manual .

15.24

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.16 (Continued) (b) Monthly Interest Period Nov. 30, 2021 Dec. 31, 2021 Jan. 31, 2022 2021 Nov. 30

(A) Cash Payment $3,997 3,997

(B) (C) Interest Expense Reduction (D) × 6% × of Principal 1/12 (A) – (B) $1,800 1,789

$2,197 2,208

Cash .......................................... Mortgage Note Payable ....... To record issuance of note.

360,000

Dec. 31 Interest Expense....................... Mortgage Note Payable ............ Cash...................................... To record payment on note.

1,800 2,197

2022 Jan. 31 Interest Expense....................... Mortgage Note Payable ............ Cash...................................... To record payment on note.

(D) Principal Balance (D) – (C) $360,000 357,803 355,595

360,000

3,997

1,789 2,208 3,997

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Solutions Manual .

15.25

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.17 (a) December 31, 2021 Current liabilities Interest payable .......................................................... Current portion of note payable ................................

$2,000 10,000

Non-current liabilities Note payable, 5%, due 2025, net of current portion .

$30,000

(b) December 31, 2024 Current liabilities Interest payable .......................................................... Current portion of notes payable ..............................

$500 10,000

There is no non-current portion on December 31, 2024. LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.26

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.18 (a) 2021 Mar. 31 Cash .......................................... Note Payable ........................ To record issuance of note. 2022 Mar. 31 Note Payable............................. Interest Expense1 ..................... Cash...................................... 1 ($600,000 × 4%) To record payment on note.

600,000 600,000

150,000 24,000 174,000

(b) ELBOW LAKE CORP. Balance Sheet (Partial) March 31, 2022 Current liabilities Current portion of note payable ................................... $150,000 Non-current liabilities Note payable, net of current portion .............................. 300,000 LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.27

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.19 (a)

Equipment Rental Expense.......................... 80,000 Cash........................................................ To record rent payment.

80,000

(b) Right-of-Use Asset ..................................... 700,000 Lease Liability ........................................ To record lease asset and liability.

700,000

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BRIEF EXERCISE 15.20 Rent Expense .................................................. 2,500 Cash........................................................ To record rent payment.

2,500

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BRIEF EXERCISE 15.21 (a)

Lessor: Lessee:

Bracer Construction Inc. Chang Corp.

(b) Right-of-Use Asset ..................................... 300,000 Lease Liability ........................................ To record lease asset and liability.

300,000

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Solutions Manual .

15.28

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.22 WAUGH CORPORATION Balance Sheet (Partial) December 31, 2021 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 2032 .............................................1,035,000 Notes payable, net of current portion ............................ 145,000 Lease liability, net of current portion1....................................... 50,000 Total non-current liabilities ......................................1,230,000 Total liabilities ..................................................$1,362,000 1 ($75,000 - $25,000) = $50,000 LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.29

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 15.23 ($ in U.S. millions) (a)

Debt to total assets = Total debt ÷ Total assets $17,719.8 $29,341.5

60.4%

(b) Interest coverage = EBIT ÷ Interest expense ($1,975.9 + $271.6 + $1,050.7) $271.6

12.14 times

LO 7 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

15.30

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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Solutions Manual .

15.31

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.2 a.

3 years quarterly = 3 years x 4 payments/year = 12 payments

$500,000 × 4% × 3/12 = $5,000

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

2021 May 1

Cash.............................................. 447,123 Bonds Payable ........................ To record issuance of bonds.

447,123

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Solutions Manual .

15.32

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.3 a.

Market interest rate 5% ($1,000,000 × 0.61027) + ($1,000,000 × 3% × 15.58916) = $1,077,945 Using a financial calculator: PV I N PMT FV Type

Yields $1,077,945.81

$? 2.5% 20 $ (30,000) $ (1,000,000) 0

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.

Market interest rate 7% ($1,000,000 × 0.50257) + ($1,000,000 × 3% × 14.21240) = $928,942 Using a financial calculator: PV $ ? Yields $928,937.98 I 3.5% N 20 PMT $ (30,000) FV $ (1,000,000) Type 0

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Solutions Manual .

15.33

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 ........................ To record issuance of bonds.

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 ........................ To record issuance of bonds.

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 .

15.34

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.4 (Continued) c. (Continued) Cash.............................................. 382,940 Bonds Payable ........................ To record issuance of bonds.

382,940

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Solutions Manual .

15.35

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.5 a.

2021 Jan. 1

Cash.............................................. 400,000 Bonds Payable ........................ To record issuance of bonds.

400,000

2021 Dec. 31 Interest Expense1 ........................................... 32,000 Interest Payable ...................... 1 ($400,000 × 8%) To accrue interest expense.

32,000

2022 Jan. 1

Interest Payable ............................. 32,000 Cash ......................................... To record interest payment.

32,000

2021 Sept. 30 Interest Expense2 ........................................... 24,000 Interest Payable ..................... 2 ($400,000 × 8% × 9/12) To accrue interest expense.

24,000

2022 Jan. 1

Interest Expense3 .............................................. 8,000 Interest Payable ............................. 24,000 Cash ......................................... To record interest payment. 3 ($400,000 × 8% × 3/12)

32,000

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

Solutions Manual .

15.36

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

2021 Sept. 1 Cash ($600,000 × 96%)................. 576,000 Bonds Payable ........................ To record issuance of bonds.

576,000

2022 Feb. 28 Interest Expense ............................ 10,014 Bonds Payable ........................ Interest Payable1 ..................... 1 ($600,000 × 3% × 6/12) To accrue interest expense. d. 2022 Mar. 1 Interest Payable ............................... 9,000 Cash ......................................... To record interest payment.

1,014 9,000

9,000

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

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Chapter 15

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Accounting Principles, Eighth Canadian Edition

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.

2021 July 31 Cash ($500,000 × 102%) ............... 510,000 Bonds Payable ........................ To record issuance of bonds.

510,000

2022 Jan. 31 Interest Expense .............................. 9,077 Bonds Payable............................. 923 Cash ($500,000 × 4% × 6/12)... To record interest payment.

10,000

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

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15.38

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 it 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.

$400,000, as given in the description of the bonds.

The bonds’ amortized cost will be $400,000 at the maturity date.

Total interest payments = $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

2020 Apr. 1 Cash.............................................. 418,444 Bonds Payable ........................ To record issuance of bonds. 2020 Oct. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment. 2020 Dec. 31 Interest Expense ($4,000 - $875) Bonds Payable ($1,749 × 3/6) ... Interest Payable..................... To accrue interest expense.

Solutions Manual .

15.39

418,444

6,277 1,723 8,000

3,125 875 4,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.8 (Continued)

2021 Apr. 1 Interest Expense ........................ Bonds Payable ($1,749 - $875).. Interest Payable ......................... Cash ....................................... To record interest payment.

3,126 874 4,000 8,000

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Solutions Manual .

15.40

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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% (A) Date

Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024 Jan. 1, 2025 Jan. 1, 2026 Jan. 1, 2027 Jan. 1, 2028 1

(B)

(C)

Interest Payment $600,000 × 8%

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) $632,336 628,5991 624,601 620,323 615,746 610,848 605,607 600,000

Due to rounding

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

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15.41

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024 Jan. 1, 2025 Jan. 1, 2026 Jan. 1, 2027 Jan. 1, 2028

(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

(D) Bond Amortized Cost (D) + (C) $758,349 763,017 768,058 773,503 779,383 785,734 792,593 800,000

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

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15.42

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 2021 Jan.

1 Cash.............................................. 834,636 Bonds Payable ........................ To record issuance of bonds.

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, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024 Jan. 1, 2025 Jan. 1, 2026 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

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(D) Bond Amortized Cost (D) - (C) $834,636 828,368 821,786 814,875 807,619 800,000 Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.11 (Continued) c. 2022 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment. 2023 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment. 2024 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment. d. 2021 Oct. 31 Interest Expense 1...................... Bonds Payable 2......................... Interest Payable 3 .................. 1 ($41,732 x 10/12) 2 ($6,268 x 10/12) 3 ($48,000 x 10/12) To accrue interest expense.

41,732 6,268 48,000

41,418 6,582 48,000

41,089 6,911 48,000

34,777 5,223 40,000

LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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15.44

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 2021 Jan.

1 Cash.............................................. 461,103 Bonds Payable ........................ To record issuance of bonds.

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, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024 Jan. 1, 2025 Jan. 1, 2026 1 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 44,1751

$6,499 7,084 7,722 8,417 9,175

15.45

(D) Bond Amortized Cost (D) + (C) $461,103 467,602 474,686 482,408 490,825 500,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.12 (Continued) c. 2022 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... To record interest payment. 2023 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... To record interest payment. 2024 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... To record interest payment. d. 2021 Oct. 31 Interest Expense 1...................... Bonds Payable 2 .................... Interest Payable 3 .................. 1 ($41,499 x 10/12) 2 ($6,499 x 10/12) 3 ($35,000 x 10/12) To accrue interest expense.

41,499 6,499 35,000

42,084 7,084 35,000

42,722 7,722 35,000

34,583 5,416 29,167

LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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15.46

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.13 (1) 2021

June 30 Bonds Payable .............................. 117,500 Loss on Bond Redemption ....... 15,100 Cash ($130,000 x 102%) .......... To record redemption of bonds.

132,600

(2) 2021

June 30 Bonds Payable ........................... 151,000 Gain on Bond Redemption ... Cash ($150,000 x 98%) .......... To record redemption of bonds.

4,000 147,000

LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.47

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.14 a.

2021 July 1

Interest Expense ............................ 14,360 Bonds Payable ........................ Cash ......................................... To record interest payment.

2021 Dec. 31 Interest Expense ............................ 14,416 Bonds Payable ........................ Interest Payable ...................... To accrue interest expense. 2022 Jan. 1

2023 Jan. 1

1,860 12,500

1,916 12,500

Interest Payable ............................. 12,500 Cash ......................................... To record interest payment.

12,500

Bonds Payable ............................. 486,457 Loss on Bond Redemption 1................ 13,543 Cash ($500,000 × 100%).......... 1 ($500,000 – $486,457) To record redemption of bonds.

500,000

Bonds Payable ............................. 486,457 Gain on Bond Redemption 2... Cash ($500,000 × 96%)............ 2 ($486,457 – $480,000) To record redemption of bonds.

6,457 480,000

LO 3,4 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.48

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.15 a.

Semi-annual (A) Interest Cash Period Payment Dec. 31, 2021 June 30, 2022 $14,400 Dec. 31, 2022 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

2021 Dec. 31

Cash ................................................... 240,000 Mortgage Note Payable ............ To record issuance of note.

240,000

First Instalment Payment 2022 June 30

Interest Expense................................ Mortgage Note Payable ..................... Cash .......................................... To record payment on note.

8,400 6,000 14,400

Second Instalment Payment Dec. 31

Solutions Manual .

Interest Expense................................ Mortgage Note Payable ..................... Cash .......................................... To record payment on note.

15.49

8,190 6,000 14,190

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.15 (Continued) b.

Semi-annual (A) Interest Cash Period Payment Dec. 31, 2021 June 30, 2022 $11,239 Dec. 31, 2022 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

2021 Dec. 31

Cash ................................................... 240,000 Mortgage Note Payable ................. To record issuance of note.

240,000

First Instalment Payment 2022 June 30

Interest Expense................................ Mortgage Note Payable ..................... Cash .......................................... To record payment on note.

8,400 2,839 11,239

Second Instalment Payment Dec. 31

Interest Expense................................ Mortgage Note Payable ..................... Cash .......................................... To record payment on note.

8,301 2,938 11,239

LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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15.50

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.16 a.

This is a blended payment loan as the payments are constant at $23,097 per year.

The interest rate is 5% ($5,000 ÷ $100,000).

Interest Expense ............................................. 5,000 Notes Payable ............................................... 18,097 Cash........................................................ To record payment on note.

23,097

Current portion = $19,002 Non-current portion = $62,901

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 15.17 a.

This is a fixed principal loan as principal is being reduced by $21,750 each six-month period.

The annual interest rate is 8% ($6,960 ÷ $174,000) x 2.

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, 2025.

Interest Expense ............................................. 6,960 Notes Payable ............................................... 21,750 Cash........................................................ To record payment on note.

28,710

Current portion = $21,750 x 2 = $43,500 Non-current portion = $130,500 – $43,500 = $87,000

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 15.18 a.

Period Jan. 1, 2021 Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023

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. 2021 Jan. 1 Cash .......................................... Notes Payable ...................... To record issuance of note.

18,000 18,000

Dec. 31 Interest Expense ....................... Notes Payable ........................... Cash ...................................... To record payment on note.

1,260 5,599

Current liability ........................................ Non-current liability ................................

$5,991 6,410

6,859

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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15.52

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.19 a.

The amount of the annual principal payments will be $2,800 ($8,400 ÷ 3 years).

Period Jan. 1, 2021 Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023

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

c. 2021 Jan. 1 Cash .......................................... Notes Payable ...................... To record issuance of note.

8,400 8,400

Dec. 31 Interest Expense ....................... Notes Payable ........................... Cash ...................................... To record payment on note.

252 2,800

Current liability ........................................ Non-current liability ................................

$2,800 2,800

3,052

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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15.53

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.20 1.

2. Jan.

There is no journal entry to record the operating lease. Lease payments will be debited to Rent Expense.

1 Right-of-Use Asset......................... 118,000 Lease Liability ........................... 118,000 To record lease asset and liability.

LO 6 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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15.54

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.21 a.

[dollar figures in millions] 2017 Debt to total assets =

Interest coverage = 2016 Debt to total assets = Interest coverage =

$2,186.7 $1,934.3

113.0%

($519.4 + $39.9 + $196.3) $39.9

18.9 times

($445.6 + $33.0 + $166.8) = $33.0

19.6 times

$1,763.1 $1,863.5

94.6%

The debt to total assets ratio has increased, 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.

LO 7 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 15.22 a. RAY CORPORATION Balance Sheet (Partial) July 31, 2021 Non-current liabilities Bonds payable, due 2025 ......................................... $205,000 Note payable, net of current portion1 ....................................... 120,000 Lease liability, net of current portion2................................... 48,750 Total non-current liabilities ............................. $373,750 1 2

($140,000 – $20,000) = $120,000 ($65,000 – $16,250) = $48,750 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.

LO 7 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 15.1A a.

Because it is unsecured, the bond would be considered a debenture bond.

2021 b. May 1 Cash ............................................... 600,000 Bonds Payable ...................... To record issuance of bonds. c.

Dec. 31 Interest Expense1....................... Interest Payable..................... 1 ($600,000 x 9% x 8/12) = $36,000 To accrue interest expense.

600,000

36,000 36,000

d. HERRON CORP. Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable .......................................................

$36,000

Non-current liabilities Bonds payable, due 2026 ........................................

$600,000

2022 e. May 1 Interest Expense ........................ Interest Payable ......................... Cash ....................................... To record interest payment.

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18,000 36,000 54,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.1A (Continued)

Dec. 31 Interest Expense2....................... Interest Payable..................... 2 ($600,000 x 9% x 8/12) = $36,000 To accrue interest expense.

36,000 36,000

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 debt cannot be avoided. LO 1,2,3,7 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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 $1,400,000 face value of the bond.

The face value of the bond is $1,400,000.

Contractual interest rate = 6% $42,000 ÷ $1,400,000 = 3% semi-annually × 2 = 6 % annually

[1] [2] [3] [4] [5]

Market interest rate = 7% [2] $45,518 ÷ $1,300,514 = 3.5% semi-annually; 3.5% × 2 = 7% annually

$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

2021 Jan 1 Cash ............................................ 1,300,514 Bonds Payable ...................... 1,300,514 To record issuance of bonds. 2021 July 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... To record interest payment.

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45,518 3,518 42,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.2A (Continued)

2021 Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense.

45,641 3,641 42,000

i. GLOBAL SATELLITES Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable .......................................................

$42,000

Non-current liabilities Bonds payable, due 2031 ........................................... $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. LO 2,3,7 BT: AP Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.3A a.

The bonds are unsecured debenture bonds that are redeemable (callable).

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

2021 Jan. 1 Cash ............................................ 2,873,629 Bonds Payable ...................... 2,873,629 To record issuance of bonds.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.3A (Continued) c. PARIS PRODUCTS LTD. Bond Discount Amortization Table Effective-Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 6% Date

(A) Interest Payment $3,000,000 × 5%

Jan. 1, 2021 Jan. 1, 2022 $150,000 Jan. 1, 2023 150,000 Jan. 1, 2024 150,000 Jan. 1, 2025 150,000 Jan. 1, 2026 150,000 1 Rounded

(B)

(C)

Interest Expense (D) × 6%

Discount Amortization (B) – (A)

$172,418 173,763 175,189 176,700 178,3011

$22,418 23,763 25,189 26,700 28,3011

d. 2021 Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense. 2022 Jan. 1

172,418 22,418 150,000

Interest Payable ......................... Cash ....................................... To record interest payment.

150,000

Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense.

173,763

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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

150,000

23,763 150,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.3A (Continued) d. (continued) 2023 Jan. 1 Interest Payable ......................... Cash ....................................... To record interest payment. Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense. 2024 Jan. 1 Interest Payable ......................... Cash ....................................... To record interest payment.

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. LO 1,2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.4A a.

The bonds are secured bonds.

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

2021 Jan. 1 Cash ............................................ 1,880,133 Bonds Payable ...................... 1,880,133 To record issuance of bonds.

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.4A (Continued) 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 Payment Amortized $1,800,000 Expense Amortization Cost (D) - (C) × 5% (D) × 4% (A) – (B) Jan. 1, 2021 $1,880,133 Jan. 1, 2022 $90,000 $75,205 $14,795 1,865,338 Jan. 1, 2023 90,000 74,614 15,386 1,849,952 Jan. 1, 2024 90,000 73,998 16,002 1,833,950 Jan. 1, 2025 90,000 73,358 16,642 1,817,308 Jan. 1, 2026 90,000 72,692 17,308 1,800,000 d. 2022 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment. 2023 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment. 2024 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment.

Solutions Manual .

15.65

75,205 14,795 90,000

74,614 15,386 90,000

73,998 16,002 90,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.4A (Continued) 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. LO 1,2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.5A 2021 a. May 1 Cash ($900,000 × 98%) .................. 882,000 Bonds Payable ......................

882,000

b. The market rate of interest on May 1, 2021 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, 2021 May 1, 2022 May 1, 2023 May 1, 2024 May 1, 2025 May 1, 2026 1

Solutions Manual .

(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 67,1361

$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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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.5A (Continued) 2022 d. Apr. 30 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense.

66,100 3,100 63,000

May 1 Interest Payable ......................... Cash ....................................... To record interest payment.

63,000

Dec. 31 Interest Expense2....................... Bonds Payable3 ..................... Interest Payable4 ................... 2 ($66,100 x 8/12) 3 ($3,100 x 8/12) 4 ($900,000 × 7% x 8/12) To accrue interest expense.

44,067

May 1 Interest Expense5....................... Interest Payable ......................... Bonds Payable6 ..................... Cash ....................................... 5 ($66,100 x 4/12) 6 ($3,100 x 4/12) To record interest payment.

22,033 42,000

63,000

2,067 42,000

May 1 Bonds Payable .............................. 885,100 Loss on Bond Redemption7 ...... 50,900 Cash ($900,000 × 104%) ........ 7 ($936,000 – $885,100) To record redemption of bonds

Solutions Manual .

15.68

1,033 63,000

936,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.5A (Continued) 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. LO 2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.6A a. 2021 1. July

1 Cash ....................................... Bonds Payable .................. To record issuance of bonds.

4,327,029 4,327,029

b. WEBHANCER CORP. Bond Premium Amortization Table Effective Interest Method—Semi-Annual Interest Payments 5% Bonds Issued at market rate of 4%

Date

July 1, 2021 Jan. 1, 2022 July 1, 2022 Jan. 1, 2023 July 1, 2023 Jan. 1, 2024

(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

c. 2021 Dec. 31 Interest Expense...................... Bonds Payable......................... Interest Payable .................. To accrue interest expense. 2022 Jan.

Solutions Manual .

86,541 13,459 100,000

1 Interest Payable .............................. 100,000 Cash....................................... 100,000 To record interest payment.

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.6A (Continued) d. 2021 Aug. 31 Interest Expense1....................... Bonds Payable2.......................... Interest Payable3 ................... 1 ($86,541 x 2/6) 2 ($13,459 x 2/6) 3 ($4,000,000 × 2.5% x 2/6) To accrue interest expense. 2022 Jan.1

Interest Expense4....................... Interest Payable ......................... Bonds Payable5.......................... Cash ....................................... 4 ($86,541 x 4/6) 5 ($13,459 x 4/6) To record interest payment.

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 LO 2,3,4 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

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. DC LTD. Bond Premium Amortization Table Effective Interest Method—Semi-Annual Interest Payments 5% Bonds Issued at market rate of 4%

Date

Jan. 1, 2021 July 1, 2021 Jan. 1, 2022 July 1, 2022 Jan. 1, 2023

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

15.72

$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

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.7A (Continued) c. 2021 Jan. 1 Cash ............................................ 8,654,057 Bonds Payable ................... 8,654,057 To record issuance of bonds. July 1 Interest Expense .................... Bonds Payable ....................... Cash .................................... To record interest payment.

173,081 26,919

Dec. 31 Interest Expense .................... Bonds Payable ....................... Interest Payable.................. To accrue interest expense.

172,543 27,457

200,000

d. DC LTD. Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable ................................... Non-current liabilities Bonds payable, due 2031 ....................

2022 Jan. 1 Interest Payable ............................ 200,000 Cash ....................................... To record interest payment.

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$200,000 8,599,681

200,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.7A (Continued)

2023 Jan. 1

2031 Jan. 1

Bonds Payable .............................8,543,109 Gain on Bond Redemption1.... 383,109 Cash ($8,000,000 × 102%)....... 8,160,000 1 ($8,543,109 – $8,160,000) To record redemption of bonds

Bonds Payable .............................8,000,000 Cash ......................................... 8,000,000 To record maturity of bond.

The total amount of interest payments: 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 DC 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. LO 2,3,4,7 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.8A

2021 Jan. 1 Cash ($6,000,000 x .98) .............. 5,880,000 Bonds Payable ................... 5,880,000 To record issuance of bonds.

b. KERSHAW ELECTRIC Balance Sheet (Partial) December 31, 2021 Non-current liabilities Bonds payable, due 2031 ...........................................$5,888,000 c. 2023 Jan. 1 Bonds Payable ........................... 5,896,000 Loss on Bond Redemption .... 224,000 1 Cash ................................... 6,120,000 1 ($6,000,000 x 1.02) To record redemption of bonds. 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. LO 3,4,7 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.75

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.9A a.

2021 April 1 Cash........................................... 1,000,000 Notes Payable .................... 1,000,000 To record issuance of note.

Annual fixed principal payment is $250,000. ($1,000,000 ÷ 4)

c. (A) Cash Payment (B) + (C)

Period Apr. 1, 2021 Mar. 31, 2022 $300,000 Mar. 31, 2023 287,500 Mar. 31, 2024 275,000 Mar. 31, 2025 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. 2021 Dec. 31 Interest Expense ..................... Interest Payable ................. ($1,000,000 × 5% × 9/12) To accrue interest expense. 2022 Mar. 31 Notes Payable ......................... Interest Expense ..................... Interest Payable ...................... Cash .................................... To record payment on note.

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15.76

37,500 37,500

250,000 12,500 37,500 300,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.9A (Continued) e. 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 f. 2022 Dec. 31 Interest Expense ..................... Interest Payable ................. ($750,000 × 5% × 9/12) To accrue interest expense. 2023 Mar. 31 Notes Payable ......................... Interest Expense ..................... Interest Payable ...................... Cash .................................... To record payment on note.

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15.77

28,125 28,125

250,000 9,375 28,125 287,500

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.9A (Continued) Taking It Further: (A)

Date Apr. 1, 2021 Mar. 31, 2022 Mar. 31, 2023 Mar. 31, 2024 Mar. 31, 2025 1

Payment

(B) Interest Portion (D) × 5%

$ 282,012 282,012 282,012 282,012 $1,128,048

$50,000 38,399 26,219 13,4301 $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

Taking It Further: 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 amount paid is higher with blended payments, as the total interest cost is higher ($128,048 versus $125,000). LO 5,7 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.10A a. 2021 Sept. 30 Equipment ................................. 905,000 Mortgage Note Payable ....... 768,000 Cash ...................................... 137,000 To record purchase of equipment in exchange for cash and a note. 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

2021 Oct. 31 Interest Expense ........................ Mortgage Note Payable ............. Cash ....................................... To record payment on note.

2,304 11,702

Nov. 30 Interest Expense ........................ 2,269 Mortgage Note Payable ................. 11,737 Cash ....................................... To record payment on note.

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14,006

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 ....................................... To record payment on note.

2,304 12,800 15,104

Nov. 30 Interest Expense ........................ 2,266 Mortgage Note Payable ................. 12,800 Cash ....................................... To record payment on note.

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. LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.80

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.11A a. (A) Semi-annual Interest Period Dec. 31, 2021 June 30, 2022 Dec. 31, 2022 June 30, 2023 Dec. 31, 2023

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

2021 Dec. 31 Cash .............................................. 600,000 Mortgage Note Payable ....... To record issuance of note.

600,000

c. KINYAE ELECTRONICS Balance Sheet (Partial) December 31, 2021

Current liabilities Current portion of mortgage note payable1 ............................. $ 39,113 Non-current liabilities Mortgage note payable, net of current portion2..................... 560,887 1

$19,126 + $19,987 = $39,113 $600,000 – $19,126 – $19,987 = $560,887 or see Dec. 31, 2022 balance. 2

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.11A (Continued) d. 2022 June 30 Interest Expense ............................ 27,000 Mortgage Note Payable ................. 19,126 Cash ..................................... To record payment on note.

46,126

Dec. 31 Interest Expense ............................ 26,139 Mortgage Note Payable ................. 19,987 Cash ..................................... To record payment on note.

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. LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.82

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.12A a.

In order for Manitoba Enterprises to record a lease as a capital 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. Criteria 1 and 2 are not present in any of the three leases. Criteria 3 is present in the case of the vehicle lease and so it should be treated as a capital 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 .......................... 14,000 Cash ..................................................... To record rent payment.

14,000

Equipment Rental Expense ............................ 3,900 Cash ..................................................... To record rent payment.

3,900

Solutions Manual .

15.83

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.12A (Continued) b. (continued) The vehicle lease is a capital lease. The entry to record the finance lease on January 1, 2021 is as follows: Right-of-Use Asset ........................................ 74,800 Lease Liability ..................................... To record lease asset and liability.

74,800

Lease Liability ............................................... 14,981 Cash ....................................................................... 14,981 To record lease payment. c.

Since the manufacturing and office equipment leases do not qualify as capital 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 capital 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 2021. 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. The liability would be split between current and non-current portions. Interest expense accrued for 2021 would also appear on the income statement and interest payable on the balance sheet.

Solutions Manual .

15.84

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.12A (Continued)

Taking It Further: The adjusting entry on December 31, 2021 for the accrual of interest on the lease liability would be as follows: Interest Expense1 ...................................................................... 4,786 Interest Payable................................... 1 [($74,800 – $14,981) × 8% = $4,786] To accrue interest expense.

4,786

There would also be an adjusting entry for depreciation. Assuming straight-line with no residual value, the entry would be: Depreciation Expense2 ..................................................... 12,467 Accumulated Depreciation ................. 2 [($74,800 – $0) ÷ 6 = $12,467] To record depreciation expense.

12,467

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. LO 6 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.85

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.13A a.

($ in millions) Debt to total assets = Total debt ÷ Total assets 2017 2016

$22,054 ÷ $35,106 = 62.8% $21,408 ÷ $34,436 = 62.2%

Interest coverage = EBIT ÷ Interest expense 2017 2016 b.

($1,526 + $451 + $443) ÷ $451 = 5.4 times ($990 + $459 + $449) ÷ $459 = 4.1 times

The debt to total assets ratio deteriorated slightly. On the other hand, Loblaw’s interest coverage ratio improved. Loblaw’s solvency improved overall along with its improved profitability.

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 capital leases. This causes its interest coverage ratio to be higher than it would have been if the leases had been accounted for as capital leases. However, it would still appear that Loblaw does not have concerns about solvency. LO 7 BT: AN Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

15.86

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.14A a. SYKES LTD. Balance Sheet (Partial) October 31, 2021 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income tax payable............................................. Unearned revenue .............................................. Current portion of lease liability ........................ Current portion of note payable1 ....................... Total current liabilities ............................................

$57,000 15,000 5,900 10,000 26,430 9,675 124,005

Non-current liabilities Bonds payable, due 2024 ................................... Note payable, net of current portion2 ................ Lease liability, net of current portion3 ............... Total non-current liabilities .................................... Total liabilities .........................................................

500,000 220,536 13,813 734,349 858,354

$20,800 – $11,125 = $9,675 $230,211 – $9,675 = $220,536 3 $40,243 – $26,430 = $13,813 2

Solutions Manual .

15.87

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

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. LO 7 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

15.88

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.1B a.

Because it is unsecured, the bond would be considered a debenture bond.

2021 b. Mar.

1 Cash ............................................... 200,000 Bonds Payable ...................... To record issuance of bonds.

c. June 30 Interest Expense1....................... Interest Payable..................... 1 ($200,000 x 7% x 4/12) = $4,667 To accrue interest expense.

200,000

4,667 4,667

d. JADE CORP. Balance Sheet (Partial) June 30, 2021 Current liabilities Interest payable .......................................................

$4,667

Non-current liabilities Bonds payable, due 2026 ........................................

$200,000

e. 2021 Sept. 1 Interest Expense ........................ Interest Payable ......................... Cash ....................................... To record interest payment.

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2,333 4,667 7,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.1B (Continued) f. 2022 Mar.

1 Interest Expense2....................... Cash ...................................... 2 ($200,000 x 7% x 6/12) = $7,000 To record interest payment.

7,000 7,000

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 debt cannot be avoided. LO 1,2,3,7 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, when the carrying amount will equal the $2,500,000 face value of the bond.

The face value of the bond is $2,500,000.

Contractual interest rate = 5% $62,500 ÷ $2,500,000 = 2.5% semi-annually; 2.5% × 2 = 5% annually

[1] [2] [3] [4] [5]

Market interest rate = 4% [2] $54,088 ÷ $2,704,393 = 2% semi-annually; 2% × 2 = 4% annually

$2,695,981 + $8,412 = $2,704,393 $62,500 – $8,412 = $54,088 $62,500 $62,500 – $53,573 = $8,927 $2,678,649 – $8,927 = $2,669,722

f. 2021 Jan 1 Cash ............................................ 2,704,393 Bonds Payable ...................... 2,704,393 To record issuance of bonds. g. 2021 July 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... To record interest payment.

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54,088 8,412 62,500

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.2B (Continued) h. 2021 Dec. 31 Interest Expense ........................ Bonds Payable ........................... Interest Payable..................... To accrue interest expense.

53,920 8,580 62,500

i. PONASIS CORPORATION Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable .......................................................

$62,500

Non-current liabilities Bonds payable, due 2031 ........................................... $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. LO 2,3,7 BT: AP Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.3B a.

The bonds are unsecured debenture bonds that are redeemable (callable).

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

2021 Jan. 1 Cash ............................................ 2,162,218 Bonds Payable ...................... 2,162,218 To record issuance of bonds.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.3B (Continued) c. UNIVERSAL CORPORATION Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 4%

Date

Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024 Jan. 1, 2025 Jan. 1, 2026

(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

d. 2021 Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense. 2022 Jan. 1 Interest Payable ......................... Cash ....................................... To record interest payment. Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense.

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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

86,489 13,511 100,000

100,000 100,000

85,948 14,052 100,000

Chapter 15

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.3B (Continued) d. (continued) 2023 Jan. 1 Interest Payable ......................... Cash ....................................... To record interest payment. Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... To accrue interest expense. 2024 Jan. 1 Interest Payable ......................... Cash ....................................... To record interest payment.

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 represents additional interest expense to the business over the term of the bonds. 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. LO 1,2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.4B a.

The bonds are secured bonds.

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

2021 Jan. 1 Cash ............................................ 3,356,493 Bonds Payable ...................... 3,356,493 To record issuance of bonds.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.4B (Continued) c. GLOVER CORPORATION Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 6% Bonds Issued at market rate of 7% Date

(A) Interest Payment $3,500,000 × 6%

Jan. 1, 2021 Jan. 1, 2022 $210,000 Jan. 1, 2023 210,000 Jan. 1, 2024 210,000 Jan. 1, 2025 210,000 Jan. 1, 2026 210,000 1 Rounded by $1

(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

(D) Bond Amortized Cost (D) + (C) $3,356,493 3,381,448 3,408,149 3,436,719 3,467,289 3,500,0001

d. 2022 Jan.

2023 Jan.

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1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... To record interest payment.

234,955

1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... To record interest payment.

236,701

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24,955 210,000

26,701 210,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.4B (Continued) d. (continued) 2024 Jan. 1 Interest Expense ........................... 238,570 Bonds Payable ...................... Cash ....................................... To record interest payment.

28,570 210,000

Taking It Further: A bondholder would request security for the bonds to reduce the risk that the principal amount of the bond will not be collected at maturity. LO 1,2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.5B a.

2021 Oct. 1 Cash ($800,000 × 98%)................. 784,000 Bonds Payable ..................... To record issuance of bonds.

784,000

b. The market rate of interest on Oct 1, 2021 was 5.2623%. 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, 2021 Oct. 1, 2022 Oct. 1, 2023 Oct. 1, 2024

Solutions Manual .

(A) Interest Payment $800,000 × 5%

(B) Interest Expense (D) × 5.2623%

Discount Amortization (B) – (A)

$40,000 40,000 40,000

$41,256 41,323 41,392

$1,256 1,323 1,392

15.99

(C)

(D) Bond Amortized Cost (D) + (C) $784,000 785,256 786,579 787,971

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.5B (Continued) d.

2022 Sep. 30 Interest Expense ....................... Bonds Payable ..................... Interest Payable 1 ................. 1 ($800,000 × 5%) To accrue interest expense. 2022 Oct. 1 Interest Payable ........................ Cash ...................................... To record interest payment. 2021 Dec. 31 Interest Expense2....................... Bonds Payable3 ..................... Interest Payable4 ................... 2 ($41,256 x 3/12) 3 ($1,256 x 3/12) 4 ($800,000 × 5% x 3/12) To accrue interest expense. 2022 Oct. 1 Interest Expense5....................... Interest Payable ......................... Bonds Payable6 ..................... Cash ....................................... 5 ($41,256 x 9/12) 6 ($1,256 x 9/12) To record interest payment.

41,256 1,256 40,000

40,000 40,000

10,314 314 10,000

30,942 10,000

2022 Oct. 1 Bonds Payable ............................. 785,256 Gain on Bond Redemption7. Cash ($800,000 × 97%)......... 7 ($785,256 – $776,000) To record redemption of bonds.

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15.100

942 40,000

9,256 776,000

Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.5B (Continued)

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. LO 2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.6B a.

2021 July 1 Cash............................................... 3,449,427 Bonds Payable ..................... 3,449,427 To record issuance of bonds.

b. WAUBONSEE LTD. Bond Premium Amortization Table Effective Interest Method—Semi-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, 2021 Jan. 1, 2022 July 1, 2022 Jan. 1, 2023 July 1, 2023 Jan. 1, 2024 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 .................. To accrue interest expense. 2022 Jan 1 Interest Payable ........................ Cash ...................................... To record interest payment.

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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

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.6B (Continued) d.

2021 Oct. 31 Interest Expense1....................... Bonds Payable2.......................... Interest Payable3 ................... 1 ($86,236 x 4/6) 2 ($9,764 x 4/6) 3 ($3,200,000 × 6% x 4/12) To accrue interest expense. 2022 Jan. 1 Interest Expense4....................... Interest Payable ......................... Bonds Payable5.......................... Cash ....................................... 4 ($86,236 x 2/6) 5 ($9,764 x 2/6) To record interest payment.

57,491 6,509 64,000

28,745 64,000 3,255 96,000

Jan 1 Bonds Payable ............................3,439,663 Gain on Bond Redemption6 .. 175,663 Cash ($3,200,000 × 102%) ..... 3,264,000 6 ($3,439,663 – $3,264,000) To record redemption of bonds

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.6B (Continued) 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 LO 2,3,4 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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, 2021 July 1, 2021 Jan. 1, 2022 July 1, 2022 Jan. 1, 2023

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

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.7B (Continued)

c. 2021 Jan. 1 Cash ............................................ 4,781,198 Bonds Payable ................... 4,781,198 To record issuance of bonds. July 1 Interest Expense .................... Bonds Payable .................. Cash .................................... To record interest payment.

119,530

Dec. 31 Interest Expense .................... Bonds Payable .................. Interest Payable.................. To accrue interest expense.

120,018

19,530 100,000

20,018 100,000

d. VISION INC. Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable ................................... Non-current liabilities Bonds payable, due 2026 ....................

$100,000 4,820,746

e. 2022 Jan. 1 Interest Payable ............................ 100,000 Cash ...................................... To record interest payment.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.7B (Continued) f. 2023 Jan. 1 Bonds Payable ........................... 4,862,297 Loss on Bond Redemption1 ..... 37,703 Cash ($5,000,000 × 98%) ...... 4,900,000 1 ($4,900,000 – $4,862,297) To record redemption of bonds. g. 2026 Jan. 1 Bonds Payable ........................... 5,000,000 Cash ...................................... 5,000,000 To record bond maturity. 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. LO 2,3,4,7 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.8B a. 2021 Jan. 1 Cash ($600,000 x 1.05)............ Bonds Payable ................... To record issuance of bonds.

630,000 630,000

b. LOPEZ CO. Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable .......................................................

$27,000

Non-current liabilities Bonds payable, due 2031 ........................................

$628,000

c. 2023 Jan. 1 Bonds Payable ........................ Loss on Bond Redemption .... Bonds Payable1 .................. 1 ($600,000 x 1.05) To record redemption of bonds.

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. LO 3,4,7 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.9B a. 2021 May

1 Cash ......................................... Note Payable ....................... To record issuance of note.

120,000 120,000

b. (A) Cash Payment

Period May 1, 2021 Oct. 31, 2021 $22,520 Apr. 30, 2022 22,520 Oct. 31, 2022 22,520 Apr. 30, 2023 22,520 Oct. 31, 2023 22,520 Apr. 30, 2024 22,520 Total $135,120 1 rounded

(B) (C) Interest Principal Expense Reduction (D) × 7% × 6/12 (A) – (B) $4,200 3,559 2,895 2,208 1,497 7611 $15,120

$18,320 18,961 19,625 20,312 21,023 21,759 $120,000

(D) Balance (D) – (C) $120,000 101,680 82,719 63,094 42,782 21,759 0

c. 2021 Oct. 31

2022 Apr. 30

Solutions Manual .

Note Payable ................................ 18,320 Interest Expense ..................... 4,200 Cash..................................... To record payment on note.

Note Payable ................................ 18,961 Interest Expense ..................... 3,559 Cash..................................... To record payment on note.

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22,520

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.9B (Continued) d. 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

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 that of the fixed principal payment. LO 5,7 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.10B a. 2021 Sep. 30 Equipment .................................... 900,000 Cash ...................................... Mortgage Note Payable ....... To record purchase of equipment in exchange for cash and a note.

150,000 750,000

b. (A) Quarterly Interest Period Sep. 30, 2021 Dec. 31, 2021 Mar. 31, 2022

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

Dec. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ...................................... To record payment on note. 2022 Mar. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ...................................... To record payment on note.

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6,750 59,466 66,216

6,215 60,001 66,216

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

2021 Dec. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ...................................... To record payment on note. 2022 Mar. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ...................................... To record payment on note.

6,750 62,500 69,250

6,188 62,500 68,688

Taking It Further: Total payments ($66,216 × 4 × 3) Less: Principal repayment Total interest expense of note

$794,592 750,000 $ 44,592

LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.11B a. (A) Semi-annual Interest Period Dec. 31, 2021 June 30, 2022 Dec. 31, 2022 June 30, 2023 Dec. 31, 2023 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

2021 Dec. 31 Cash .............................................. 450,000 Mortgage Note Payable .......... To record issuance of note.

450,000

c. ELITE ELECTRONICS Balance Sheet (Partial) December 31, 2022

Current liabilities Current portion of mortgage note payable ................... $ 45,000 ($22,500 + $22,500 = $45,000) Non-current liabilities Mortgage notes payable, 7.5%1 ............................................................. 360,000 1

$405,000 – $45,000 = $360,000 or see Dec. 31, 2023 balance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.11B (Continued) d.

2022 June 30 Interest Expense ............................ 16,875 Mortgage Note Payable ................. 22,500 Cash ......................................... To record payment on note.

39,375

Dec. 31 Interest Expense ............................ 16,031 Mortgage Note Payable ................. 22,500 Cash ......................................... To record payment on note.

38,531

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. LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 15

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.12B a.

For Klippert Inc. to record a lease as a capital 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. Criteria 1, and 2 are not present in any of the three leases. Criteria 3 is 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 capital leases. It should be noted that only one condition needs to be met to require capitalization.

Equipment Rental Expense........................ Cash ..................................................... To record rent payment.

13,260

Equipment Rental Expense........................ Cash ..................................................... To record rent payment.

4,092

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13,260

4,092

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 15.12B (Continued) b. (continued) The vehicles lease is a capital lease. The entry to record the capital lease on January 1, 2021 is as follows:

Right-of-Use Asset ..................................... Lease Liability ..................................... To record lease asset and liability.

75,379

Lease Liability ............................................. Cash ..................................................... To record lease payment.

13,929

75,379

13,929

Since the manufacturing and office equipment leases do not qualify as capital 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 capital 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 2021. 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, 2021. This would be reduced by the principal portion of the annual lease payment. Interest expense accrued for 2021 would also appear on the income statement, along with the related interest payable on the balance sheet.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.12B (Continued) Taking It Further: The adjusting entry on December 31, 2021 for the accrual of interest on the lease liability would be as follows: Interest Expense1 ...................................................................... 4,302 Interest Payable................................... 1 (($75,379 – $13,929) × 7% = $4,302) To accrue interest expense.

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. LO 6 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 15.13B a.

(in millions of US$) Debt to total assets = Total debt ÷ Total assets 2017 2016

$14,241 ÷ $25,308 = 56.3% $14,951 ÷ $25,264 = 59.2%

Interest coverage = EBIT ÷ Interest expense 2017 2016 b.

($1,516 + $511 + $1,231) ÷ $511 = 6.4 times ($861 + $591 + $917) ÷ $591 = 4.0 times

With the substantial increase in profit in 2017, Barrick experienced a corresponding improvement in its ability to pay interest. In addition, the debt to total assets ratio improved slightly.

Taking It Further: The use of operating leases improves the company’s solvency ratios. Since operating leases are accounted for as rent expense, Barrick 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 capital leases. This causes its interest coverage ratio to be higher than it would have been had the leases been accounted for as capital leases. LO 7 BT: AN Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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PROBLEM 15.14B a. CAREY CORPORATION Balance Sheet (Partial) December 31, 2021 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income tax payable............................................. Unearned revenue .............................................. Current portion of lease liability ........................ Current portion of note payable1 ....................... Total current liabilities ............................................

$76,000 30,000 37,176 25,000 22,800 16,920 207,896

Non-current liabilities Bonds payable, due 2026 ................................... Note payable, net of current portion2 ................ Lease liability, net of current portion2 ............... Total non-current liabilities .................................... Total liabilities .........................................................

1,000,000 141,746 77,069 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

Carey’s debt to total assets and interest coverage show excellent solvency.

Taking It Further: Long-term creditors are more concerned with 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. LO 7 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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BYP15.1 FINANCIAL REPORTING PROBLEM dollar amounts are in thousands a.

Aritzia’s long-term debt

Feb. 25, 2018 $99,460

Feb. 26, 2017 $118,479

Total long-term debt decreased by $19,019 or 16.1 %. b.

Aritzia’s statement of cash flows indicates that no longterm debt was redeemed during the year.

c. 2017 Debt to total assets = Total debt ÷ Total assets Debt to total assets

$285,237 $486,485

58.6%

Aritzia ’s interest coverage is negative and not meaningful because of its large loss in 2016. Aritzia’s debt to total assets went from 58.6% in 2017 to 49.7% ($281,977/$567,678 in 2018. Therefore, its debt to total assets ratio improved. Its interest coverage in 2018 of 17.7 is excellent. This would suggest that solvency improved in 2018.

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BYP15.2 INTERPRETING FINANCIAL STATEMENTS a.

($ in millions) U.S. The Gap, Inc.

Debt to total assets Times interest earned

$2,384 $7,989

= 29.8%

($848 + $74 + $576) $74

= 20.2 times

lululemon athletica inc. Debt to total assets Times interest earned

$402

= 20.1%

$1,998 ($259 + $8 + 201) $8

= 58.5 times

The Gap, Inc. relied more heavily on debt financing; 29.8% of every dollar of assets was financed with debt versus only 20.1% by lululemon. With very low interest expense, lululemon has a much higher times interest coverage ratio than Gap. Both companies appear to be very solvent.

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 commitments the company must meet.

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BYP15.3 COLLABORATIVE LEARNING ACTIVITY All 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 of positive financial leverage. 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. Bonds 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 that have specific assets pledged as collateral secured by the bond issuer. b) Unsecured bonds, which are riskier 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 for 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.

Monthly payment = $261.07 Interest payable = $8,962 (rounded) (114 × $261.07 – $20,800 including grace period interest)

Monthly payment = $202.34 Interest payable = $14,407 (rounded) (174 × $202.34 – $20,800 including grace period interest)

The better option is dependent on the personal situation of the student making the choice. But from a financial perspective, paying the loan off faster is less expensive.

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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, 2022 Nov. 1, 2022 May 1, 2023 Nov. 1, 2023 May 1, 2024 Nov. 1, 2024 May 1, 2025 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, 2022 Nov. 1, 2022 $3,749 May 1, 2023 3,749 Nov. 1, 2023 3,749 May 1, 2024 3,749 Nov. 1, 2024 3,749 May 1, 2025 3,749 Totals $22,494 1 $1 rounding difference Solutions Manual .

(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

$420 353 286 216 146 731 $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.

2022 May 1 Equipment ................................. 25,000 Cash ...................................... Notes Payable ...................... To record purchase of equipment in exchange for cash and a note. Alternative 1 2022 Nov. 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... To record payment on note. 2023 May 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... To record payment on note.

4,000 21,000

3,500 420 3,920

3,500 350 3,850

Alternative 2 2022 Nov. 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... To record payment on note. 2023 May 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... To record payment on note.

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3,329 420 3,749

3,396 353 3,749

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BYP15.6 (Continued) d. 1

Current portion Non-current portion 1

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 2023 May 31 Interest Expense ....................... Interest Payable ................... ($14,000 × 4% × 1/12) = $47 To accrue interest expense.

47 47

Alternative 2 May 31 Interest Expense ....................... Interest Payable ................... ($14,275 × 4% × 1/12) = $48 To accrue interest expense. 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 Learning Objectives 1. Identify reasons to invest, and classify investments. 2. Demonstrate the accounting for debt investments that are reported at amortized cost. 3. Demonstrate the accounting for fair value investments. 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.

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Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

BT Item LO BT Item LO

1. 2. 3. 4.

1 1 1 1

K C C C

5. 6. 7. 8.

2 2 2 3

1. 2. 3. 4.

1 1 2 2

K C AP AP

5. 6. 7. 8.

2 3 3 3

1. 2. 3.

1 1 2

C C AP

4. 5. 6.

2 2 2

1. 2,5 AP 2. 2,3,5 AP

3. 4.

2,5 3,5

Solutions Manual .

Questions K 9. 3 K 10. 3 C C C C 11. 3 K 12. 4 C Brief Exercises AP 9. 3 AP AP 10. AP 3 AP 11. 4 AP AP 12. AP 4 Exercises AP 7. 3 AP AP 8. 3 AP AP AP 9. 3 Problems AP 5. 3,5 AP AP 6. 2,3,4,5 AP

16-2

Item LO BT Item LO BT 13. 4 14. 3,4 15. 4 16. 4

C C C K

17. 18. 19.

5 5 5

K K C

13. 14. 15. 16.

AP AP AP AP

10. 3,5 AP 13. 11. 4 AP 14. 12. 4,5 AP

5 5

AP AP

7. 8.

5 5

AP AP

4 5 5 5

3,4 AN 9. 4,5 AP 10.

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

Difficulty:

Time: AACSB

CPA CM

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Accounting Principles, Eighth Canadian Edition

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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Problems Set B

Chapter 16

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A

Description Record debt investments; 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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Accounting Principles, Eighth Canadian Edition

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 methods. 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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Accounting Principles, Eighth Canadian Edition

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

Solutions Manual .

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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Accounting Principles, Eighth Canadian Edition

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.

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

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.

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

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.

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

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.

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

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.

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

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.

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

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QUESTIONS (Continued) 7.

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 investor’s 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.

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

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.

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

Non-strategic investments in debt or equity should be designated and classified as fair value through profit or loss investments.

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

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 holding 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.

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

11.

The journal entries involved in the purchase and sale of these investments should be to a dedicated account for financial reporting called Investments at FVTOCI, 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—Holding Gain or Loss. 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.

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

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

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

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Accounting Principles, Eighth 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 for any changes in the financial performance of the investee or 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. LO 3,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

(a) Under the equity method, the investment is recorded at cost on the day the investment is made. The investment account is then increased or decreased by the investor’s share of the associate’s profit or loss for the period. The investing company would also reduce the carrying amount of its investment by any dividends received from the investee, since the value of the latter’s net assets decreases as it pays dividends. The investment account is not revalued to fair value at the balance sheet date. (b) Under the cost method, 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.

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

16. An investee is referred to as an associate in the case where significant influence is present over the associate by the investor. For the investee to be a subsidiary, the investor must control the investee by owning at least 50% plus one share of voting shares. LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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

Measurement method IFRS

Description

Non-strategic Amortized cost A debt security held to using the effective earn interest income. interest method Any investment in debt or Fair value; gains equity that is not an and losses included amortized cost in profit or loss investment or investment at FVTOCI. Includes those investments held for trading purposes. Any equity investment Fair value; gains that is designated by and losses included management to this in other category, that is not held comprehensive for trading purposes. income Strategic investments Strategic investment with Equity significant influence Strategic investment with Consolidation control

Measurement 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, cost, or equity method FVTP, cost, equity, or consolidation

LO 5 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 19. If the investor is a public company following IFRS, holding 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 strategic equity investment is going to be held and not sold, then it may be inappropriate to affect a company’s profit with the holding gains and losses on fair value adjustments caused by market fluctuations. LO 5 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 (a) (b) (c) (d)

4. Investments at amortized cost (AC) 1. Strategic investments 3. Investments at fair value through profit or loss (FVTPL) 2. Non-strategic investments

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

BRIEF EXERCISE 16-2

1. 120-day treasury bill 2. Common shares purchased by a bank for resale in the near future at a gain 3. 15% of the common shares of a public company designated as FVTOCI 4. Five-year bonds purchased by a company to hold and earn interest 5. 10-year bonds purchased to sell in the near future at a gain

(a) Reason Nonstrategic Nonstrategic

(b) (c) Classification Measurement Current asset Amortized cost

NonStrategic

Non-current asset

Fair value

Nonstrategic

Non-current asset

Amortized cost

Nonstrategic

Current asset Fair value

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

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-3 (a) Dec. 2 Investments at Amortized Cost, Treasury Bill .................................. 148,900 Cash ............................................. To record purchase of investment. (b) Dec. 31 Investments at Amortized Cost, Treasury Bill ............................. Interest Revenue ......................... To accrue interest revenue. (c) Apr. 1 Investments at Amortized Cost, Treasury Bill ............................. Interest Revenue1........................ 1 ($150,000 - $148,900 – $275) = $825 To accrue interest revenue.

148,900

275 275

825 825

Cash ..................................................... 150,000 Investments at Amortized Cost, Treasury Bill ............................. 150,000 To record maturity of treasury bill investment. LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-4 (a) Jan.

(b) July

1 Investments at Amortized Cost........ 600,000 Cash .................................................. 600,000 To record purchase of bond investment.

1 Cash ($600,000 × 4% × 6/12)................. Interest Revenue .............................. Collection of interest revenue.

(c) Dec. 31 Interest Receivable ............................... Interest Revenue .............................. To accrue interest revenue.

12,000 12,000

Since the bonds are held to earn interest income, there is no fair value adjustment at December 31. LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-5 (a) June 30 Investments at Amortized Cost.............297,000 Cash ($300,000 × .99)..................... 297,000 To record purchase of bond investment. (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. 6,000 Investments at Amortized Cost ......... 273 Interest Revenue ............................ To record collection of interest on bonds.

6,273

Since the bonds are being held to earned interest income, there is no fair value adjustment at December 31. LO 2 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-6 2021 July

1 Investments at Amortized Cost.............420,000 Cash................................................ 420,000 To record purchase of bond investment.

Dec. 31Interest Receivable1 ............................... Investments at Amortized Cost3 ... Interest Revenue2........................... 1 ($400,000 x 6% x 6/12 = $12,000) 2 ($420,000 x 5% x 6/12 = $10,500) 3 ($12,000 - $10,500 = $1,500) To accrue interest revenue.

12,000 1,500 10,500

2022 June 30Cash ....................................................... 24,000 Investments at Amortized Cost .... Interest Receivable ........................ Interest Revenue ............................ To record collection of interest on bonds.

1,500 12,000 10,500

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-7 (a) June 30 Investments at FVTPL ...........................300,000 Cash................................................ 300,000 To record purchase of investment. (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. Interest Revenue ............................ (c) Dec. 31 Loss on Fair Value Adjustment1........ Investments at FVTPL ................... 1 (($300,000 × .98) – $300,000) To record fair value adjustment.

6,000 6,000

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

BRIEF EXERCISE 16-8 Aug.

1 Investments at FVTPL ........................ 114,000 Cash................................................ To record purchase of investment.

Oct. 15 Cash (3,000 × $2.75) ........................... Investment Income or Loss........... Collection of dividend. Dec.

114,000

8,250

1 Cash .................................................... 120,000 Investments at FVTPL ................... Investment Income or Loss........... To record sale of investment.

8,250

114,000 6,000

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

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-9 Apr.

Dec.

1 Investments at FVTOCI1 ..................... Cash................................................ 1 (40,000 x $15) To record purchase of investment.

600,000

5 Cash (40,000 × $0.10) ......................... Dividend Revenue.......................... Collection of dividend.

4,000

600,000

Dec. 31 Investments at FVTOCI ...................... 80,000 2 OCI - Holding Gain or Loss .......... 2 [(40,000 x $17) - $600,000 = $80,000] To record fair value adjustment.

4,000

80,000

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

BRIEF EXERCISE 16-10 Jan. 15 Cash ........................................................... 690,000 OCI—Gain or Loss on Sale of Investments ............................... 10,000 Investments at FVTOCI ..................... 680,000 To record sale of investment. LO 3 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-11 Jan.

1 Investment in Associate ...................... 250,000 Cash ................................................. To record investment in associate.

250,000

Dec. 31 Investment in Associate ........................ 44,000 Income from Investment in Associate (20% × $220,000) ...... To record investment income.

44,000

Dec. 31 Cash (20% × $15,000)............................... 3,000 Investment in Associate ................. Collection of dividend.

3,000

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

BRIEF EXERCISE 16-12 Jan.

1 Investment in Associate ...................... 175,000 Cash ................................................. To record investment in associate.

175,000

Dec. 31 Cash ($12,000 × 25%)............................... 3,000 Dividend Revenue ........................... Collection of dividend.

3,000

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

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Accounting Principles, Eighth Canadian Edition

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 1

Investment in Associate, at equity Less dividend (20% × $20,000) Add: associate’s profit (20% × $250,000) Carrying amount of investment

(b) Cost Method

$300,000

$346,000

0 $50,000

$4,000

$300,000 (4,000) 50,000 $346,000

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

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BRIEF EXERCISE 16-14 ATWATER CORPORATION Statement of Comprehensive Income (Partial) Year Ended April 30, 2021 Profit from operations................................................ Other expenses Loss on fair value adjustment— FVTPL .............. Profit before income taxes ........................................ Income tax expense1 .................................................. Profit............................................................................ Other comprehensive income Other comprehensive income – holding gain or loss net of $24,7692 income tax.................................... Comprehensive income ............................................. 1 2

$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

LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-15 Financial Statement

Classification

Investments at FVTPL— bonds

Balance Sheet

Current assets

Dividend revenue

Income Statement

Other revenue

Investment in associate

Balance Sheet

Long-term investments

Investments at amortized cost— bonds

Balance Sheet

Long-term investments

Gain on sale of investments— FVTPL

Income Statement

Other revenue

Other comprehensive income—holding gain or loss

Statement of Comprehensive Income

Other comprehensive income

Investment income or loss

Income Statement

Other revenue or expense

Interest revenue

Income Statement

Other revenue

LO 5 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 16-16 SABRE CORPORATION Balance Sheet (Partial) November 30, 2021 Assets Current assets Investments at amortized cost, treasury bill .......... Investments at fair value through profit or loss1 ...

$25,125 74,000 99,125

Non-Current assets Investments at fair value through other comprehensive income ............................ 105,000 Investments at amortized cost ................................ 150,000 Investment in associate ............................................... 250,000 505,000 1 ($26,000 + $48,000) = $74,000 LO 5 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

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.

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

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Accounting Principles, Eighth Canadian Edition

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. 1

Bank of Montreal preferred shares Loblaw common shares Pizzutto Holdings common shares Kesha Inc., common shares – 22% interest 1

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

Assume exercises significant influence

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-3 a. Jan.

2 Investments at Amortized Cost, Treasury Bill ............................. 39,760 Cash............................................... To record purchase of investment.

39,760

May

1 Cash ................................................... 40,000 Investments at Amortized Cost, Treasury Bill ............................... 39,760 Interest Revenue ........................... 240 To record maturity of treasury bill investment.

Aug.

1 Investments at Amortized Cost, Money-Market Fund....................... 65,000 Cash............................................... To record purchase of investment. 31 Investments at Amortized Cost, Money-Market Fund.................. Interest Revenue ........................... To accrue interest revenue.

Sept. 30 Investments at Amortized Cost, Money-Market Fund ................ Interest Revenue ........................... To accrue interest revenue. Oct.

163 163

1 Investments at Amortized Cost, Treasury Bills .............................. 29,821 Cash............................................... To record purchase of investment. 15 Cash ................................................... Interest Revenue ........................... Investments at Amortized Cost, Money-Market Fund1 .................. 1 ($65,000 + $163 + $163) Cashed in money market fund.

Solutions Manual .

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65,000

29,821

65,408 82 65,326

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-3 (Continued) b. Oct. 31 Investments at Amortized Cost, Treasury Bills ............................. Interest Revenue2.......................... 2 ($29,821 x 2.4% x 1/12) To accrue interest revenue.

60 60

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-4 a. (1) Imperial (investor) July 1 Investments at Amortized Cost.............. 461,000 Cash................................................ 461,000 To record purchase of investment. (2) Acme (investee) July 1 Cash ........................................................ 461,000 Bonds Payable ............................... 461,000 To record issuance of bonds payable. b. (1) Imperial (investor) Dec. 31 Interest Receivable ($500,000 × 4% × 6/12)........................ Investments at Amortized Cost ......... Interest Revenue 1.......................... 1 ($461,000 × 5% × 6/12) To accrue interest revenue.

(2) Acme (investee) Dec. 31 Interest Expense................................. Bonds Payable ............................... Interest Payable ............................. To accrue interest expense. c. (1) Imperial (investor) Jan. 1 Cash .................................................... Interest Receivable ........................ Collection of interest receivable. (2) Acme (investee) Jan. 1 Interest Payable.................................. Cash................................................ To record payment of interest.

10,000 1,525 11,525

11,525 1,525 10,000

10,000 10,000

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-5 a.

The carrying amount at April 1, 2021 of $418,444 is higher than the face or maturity value of $400,000, which indicates that the bonds were purchased at a premium.

$400,000, as given in the description of the bonds.

The bonds’ amortized cost will be $400,000 at the maturity date.

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. 2021 Apr. 1 Investments at Amortized Cost ......... Cash................................................ To record purchase of investment. Oct. 1

Cash .................................................... Investments at Amortized Cost .. Interest Revenue.......................... To record collection of interest.

2022 Mar. 31 Interest Receivable............................. Investments at Amortized Cost .. Interest Revenue.......................... To accrue interest revenue. Apr. 1

Cash .................................................... Interest Receivable ...................... Collection of interest receivable.

418,444 418,444

8,000 1,723 6,277

8,000 1,749 6,251

8,000 8,000

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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EXERCISE 16-6 a. 2021 Jan. 1 Investments at Amortized Cost ............ 135,666 Cash .................................................... To record purchase of investment.

135,666

July 1 Cash ($120,000 × 7% × 6/12) ..................... 4,200 Investments at Amortized Cost ........ Interest Revenue ($135,666 x 5% x 6/12) To record collection of interest.

808 3,392

Dec. 31 Interest Receivable ................................... 4,200 Investments at Amortized Cost......... Interest Revenue1 ............................... 1 [($135,666 - $808) x 5% x 6/12] = $3,371 To accrue interest revenue. 2022 Jan. 1

829 3,371

Cash ........................................................... 4,200 Interest Receivable ............................ Collection of interest receivable.

4,200

July 1 Cash ........................................................... 4,200 Investments at Amortized Cost......... Interest Revenue2 ............................... 2 [($135,666 - $808 - $829) x 5% x 6/12] = $3,351 To record collection of interest. July 2 Cash ....................................................... 131,000 Loss on Sale of Investments .................... 2,180 Investments at Amortized Cost3 ....... 3 ($135,666 - $808 - $829 - $849) = $133,180 To record sale of bonds.

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849 3,351

133,180

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-6 (Continued) b.

Purchase price of bonds Jan. 1, 2021 Amortization of bond premium July 1, 2021 Amortization of bond premium Dec. 31, 2021 Balance of investments in bonds Dec. 31, 2021

$135,666 (808) (829) $134,029

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-7 a. 2021 Aug. 1

Investments at FVTPL ....................... 100,000 Cash................................................ 100,000 To record purchase of investment.

b. Dec. 31 Interest Receivable............................. Investment Income or Loss1 ......... 1 ($100,000 x 7% x 5/12) To accrue interest revenue. Dec. 31 Investments at FVTPL ....................... Investment Income or Loss........... To record fair value adjustment. c.

2,917 2,917

1,000 1,000

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. 2022 Jan. 31

e. 2022 Feb. 1

Cash ($100,000 x 7% x 6/12) .............. Interest Receivable ........................ Investment Income or Loss........... Collection of interest receivable.

3,500 2,917 583

Cash .......................................................102,000 Investment Income or Loss........... 1,000 Investments at FVTPL .................. 101,000 To record sale of bonds.

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-8 2021 Sept. 28 Investments at FVTPL ........................ 140,000 Cash (3,500 × $40)........................... 140,000 To record purchase of investment. Oct.

1 Investments at FVTPL ........................ 300,000 Cash................................................. 300,000 To record purchase of investment.

Nov. 12

Dec.

Cash (1,900 × $42) ............................... Investments at FVTPL1 ................... Investment Income or Loss............ 1 ($140,000 ÷ 3,500 × 1,900) To record sale of investment.

79,800

1 Cash [(3,500 – 1,900) × $1.50] ............. Investment Income or Loss............ Collection of dividend.

2,400

31 Interest Receivable.............................. Investment Income or Loss2 .......... 2 ($300,000 × 4% × 3/12) To accrue interest revenue.

3,000

31 Investment Income or Loss ................ Investments at FVTPL3................... 3 [(3,500 – 1,900) × ($40 – $38)] less (($300,000 × 1.01) – $300,000) To record fair value adjustment.

200

Solutions Manual .

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76,000 3,800

2,400

3,000

200

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-8 (Continued) 2022 Mar. 31

Cash (1,600 × $40) ............................... 64,000 Investment Income or Loss............ Investments at FVTPL (1,600 × $38) To record sale of investment.

3,200 60,800

1 Cash ($300,000 × 4% × 6/12) .................. 6,000 Interest Receivable ............................ Investment Income or Loss............... Collection of interest receivable.

3,000 3,000

1 Cash ($300,000 × 4% × 6/12) .................. Investment Income or Loss............... To record collection of interest.

6,000 6,000

Dec. 31 Interest Receivable................................. Investment Income or Loss ($300,000 × 4% × 3/12) ....................... To accrue interest revenue.

3,000

Apr.

Oct.

31 Investments at FVTPL ......................... Investment Income or Loss4 ......... 4 (($300,000 × 1.02) – $303,000) To record fair value adjustment.

3,000

3,000 3,000

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-9 a.

The cash amount received on the sale of the investment is the carrying amount 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. 2021 Dec. 31 Cash ......................................................... Investment Income or Loss .................... Investments at FVTPL......................... To record sale of investment. Dec. 31 Investments at FVTPL ......................... Investment Income or Loss............ To record fair value adjustment.

1,000 3,000 4,000

2,500 2,500

c. Investments at FVTPL Dec.31, 2020 Dec. 31, 2021 Purchases Dec.31, 2021

11,000 2,500 5,5001 15,000

Dec. 31, 2021

4,000

($11,000 + $2,500) - $4,000 = $9,500 $15,000 - $9,500 = $5,500 d.

Investments at FVTPL2........................ Cash................................................. To record purchase of investment.

5,500 5,500

($11,000 + $2,500) - $4,000 = $9,500 $15,000 - $9,500 = $5,500 LO 3 BT: AP Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-10 a. Dec. 31 Investment Income or Loss .................. OCI—Holding Gain or Loss .................. Investments at FVTPL .................... To record fair value adjustment.

1,000 4,000 5,000

b. YANIK INC. Balance Sheet (Partial) December 31, 2021

Current assets Investments at fair value through profit or loss ... $30,000 Investments at fair value through other comprehensive income ............................... 19,000 YANIK INC. Comprehensive Income Statement (Partial) Year Ended December 31, 2021

Other expenses Investment income or loss ....................................... $1,000 Other comprehensive income Holding gain or (loss) ............................................. $(4,000)

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-10 (Continued) c. 2022 Mar. 20 Cash .......................................................... 13,500 Investment Income or Loss .................. 500 Investments at FVTPL .................... To record sale of investment.

14,000

LO 3,5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-11 a. 2021 Jan.

2 Investment in Associate ......................... 216,000 Cash (30,000 × 40% × $18) .............. 216,000 To record purchase of investment.

June 15 Cash ($30,000 × 40%) ............................... 12,000 Investment in Associate.................. 12,000 To record collection of dividend from associate. Dec. 31 Investment in Associate ......................... 152,000 Income from Investment in Associate ($380,000 × 40%) ........ 152,000 To record investment income from associate. b. Investment in Associate Jan. 2, 2021 Dec. 31, 2021 Dec. 31, 2021

216,000 June 15, 2021 12,000 152,000 356,000

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-12 a. Jan.

1 Investment in Associate ........................ 480,000 Cash .............................................. 480,000 To record purchase of investment.

Dec. 31 Cash ($35,000 × 25%) .......................... 8,750 Investment in Associate............... 8,750 To record collection of dividend from associate. Dec. 31 Investment in Associate .......................... 70,000 Income from Investment in Associate ($280,000 × 25%) ...... 70,000 To record investment income from associate. b.

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 16-12 (Continued) c. Jan.

1 Investment in Associate ........................ 480,000 Cash .............................................. 480,000 To record purchase of investment.

Dec. 31 Cash ($35,000 × 25%) .......................... Dividend Revenue ........................ Collection of dividend.

8,750 8,750

Balance Sheet Non-current assets Investment in associate ........................

$480,000

Income Statement Other revenue Dividend revenue ..............................

$8,750

LO 4,5 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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EXERCISE 16-13 NEW BAY INC. Balance Sheet December 31, 2021

Assets Current assets Cash........................................................................... $ 22,000 Investments at fair value through profit or loss ................................................................... 48,500 Accounts receivable ...................................... $60,000 Less: Allowance for doubtful accounts ... 10,000 50,000 Interest receivable .................................................... 1,500 Total current assets ............................................. 122,000 Non-current assets Investments at fair value through other comprehensive income ...................................... 25,000 Note receivable, 5%, due April 21, 2024 .................. 60,000 Investments at amortized cost................................. 180,000 Investment in associate ........................................... 55,000 Equipment 66,000 Less: Accumulated depreciation............... 40,000 26,000 Total non-current assets ....................... 346,000 Total assets ..............................................................$ 468,000

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EXERCISE 16-13 (Continued) NEW BAY INC. Balance Sheet (Continued) December 31, 2021

Liabilities and Shareholders' Equity Current liabilities Accounts payable ..................................................... Interest payable ........................................................ Total current liabilities ......................................... Long-term liabilities Bonds payable, 8%, due 2023 .................................. 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 ...........

$ 35,000 18,000 53,000 268,000 321,000

100,000 45,000 2,000 147,000 $468,000

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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, 2021 Profit from operations....................................................... Other revenue Interest revenue .............................................................

$125,000 5,000 130,000

Other expenses Interest expense ............................................ $8,000 Investment income or loss............................ 6,000 14,000 Profit before income tax ................................................... 116,000 Income tax ($116,000 × 30%)......................................... 34,800 Profit................................................................................... 81,200 Other comprehensive income: Holding gain or loss (net of $9001 income tax)............ 2,100 Comprehensive income .................................................... $83,300 1

[$3,000 – ($3,000 × 30%)]

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 16-1A a. Jan.

1 Investments at Amortized Cost, Treasury Bill ..................................... 98,039 Cash ................................................... To record purchase of investment.

98,039

June 30 Cash......................................................... 100,000 Interest Revenue ............................... 1,961 Investments at Amortized Cost, Treasury Bill .................................. 98,039 To record maturity of treasury bill investment. July

Oct.

5 Investments at Amortized Cost, Money-Market Fund ............................. 25,000 Cash ................................................... To record purchase of investment. 1 Cash........................................................... 25,185 Investments at Amortized Cost, Money-Market Fund ....................... Interest Revenue ............................... Cash in money-market investment. 1 Investments at Amortized Cost, Term Deposit ....................................75,000 Cash ................................................... To record purchase of investment.

Dec. 31 Interest Receivable ($75,000 × 3% × 3/12) Interest Revenue ................................. To accrue interest revenue.

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25,000

25,000 185

75,000

563 563

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Accounting Principles, Eighth Canadian Edition

PROBLEM 16-1A (Continued) b. LIU CORPORATION Partial Balance Sheet December 31, 2021

Current assets Interest receivable...................................................... $ 563 Investments at amortized cost, term deposit ............... 75,000

LIU CORPORATION Income Statement (Partial) Year Ended December 31, 2021

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

$1,961 $98,039 4.0%

LO 2,5 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-2A 2021: a. Jan. 1 Investments at Amortized Cost.......... 627,660 Cash .............................................. To record purchase of investment.

627,660

b. Jul. 1 Cash ($600,000 × 4% × 6/12)................. 12,000 Investments at Amortized Cost Interest Revenue1 .................... 1 ($627,660 × 3% × 6/12) To record collection of interest on bonds. c. Dec. 31 Interest Receivable........................... 12,000 Investments at Amortized Cost Interest Revenue2 .................... 2 [($627,660 – $2,585) × 3% × 6/12] To accrue interest revenue.

2,585 9,415

2,624 9,376

d. MORRISON INC. Partial Balance Sheet December 31, 2021

Non-current assets Investments at amortized cost................................. ($627,660 – $2,585 – $2,624) e. 2022: Jan. 1 Cash .................................................. 12,000 Interest Receivable.................. Collection of interest receivable.

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$622,451

12,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 16-2A (Continued) f. 2026: Jan.

1 Cash..................................................... 600,000 Investments at Amortized Cost To record maturity of bond investment.

600,000

1 Investments at FVTPL ........................ 627,660 Cash................................................. To record purchase of investment.

627,660

g. 2021: Jan.

Jul.

1 Cash ($600,000 × 4% × 6/12)................. 12,000 Investments at FVTPL ............. Investment Income or Loss3 ... 3 ($627,660 × 3% × 6/12) To record collection of interest on bonds.

Dec. 31 Interest Receivable ............................... 12,000 Investments at FVTPL ............. Investment Income or Loss4 ... 4 [($627,660 – $2,585) × 3% × 6/12] To accrue interest revenue.

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2,585 9,415

2,624 9,376

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PROBLEM 16-2A (Continued) g. (continued) Dec. 31 Investment Income or Loss5 ............ Investments at FVTPL.................. To record fair value adjustment. Fair value adjustment:5 Carrying amount of bond, January 1 Amortization of premium, July 1 Amortization of premium, Dec. 31 Carrying amount of bond, Dec. 31 Fair value of bond, Dec.31 Fair value adjustment loss, Dec. 31

2,451 2,451

$627,660 (2,585) (2,624) 622,451 (620,000) $ 2,451

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

LO 2,3,5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-3A a. Finance Company paid $959,400 for the Power bonds purchased $4,797,000 ÷ 5 = $959,400 or ($4,797,000 ÷ $5,000,000 = 0.9594), and ($1,000,000 × 0.9594) = $959,400 b. 2021 – Finance Company Jan. 1 Investments at Amortized Cost.......... 959,400 Cash .............................................. To record purchase of investment.

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, 2021 July 1, 2021 Jan. 1, 2022 July 1, 2022 Jan. 1, 2023

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(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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PROBLEM 16-3A (Continued) d. 2021 – Finance Company 35,000 July 1 Cash ............................................. 3,376 Investments at Amortized Cost .. Interest Revenue ..................... To record collection of interest on bonds. Dec. 31 Interest Receivable ...................... Investments at Amortized Cost .. Interest Revenue ..................... To accrue interest revenue.

38,376

35,000 3,511

2022 – Finance Company Jan. 1 Cash ............................................. 35,000 Interest Receivable ................. Collection of interest receivable.

38,511

35,000

e. FINANCE COMPANY Balance Sheet (Partial) December 31, 2021

Non-current assets Investments at amortized cost...............................

$966,287

FINANCE COMPANY Income Statement (Partial) Year Ended December 31, 2021

Other revenues Interest revenue ($38,376 + $38,511) .......................

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$76,887

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PROBLEM 16-3A (Continued) f. 2021 – Power Ltd. Jan. 1 Cash................................................ 4,797,000 Bonds Payable ...................... To record issuance of bonds payable. g. 2021 – Power Ltd. Jul. 1 Interest Expense ($38,376 × 5).. 191,880 Bonds Payable ($3,376 × 5) .. Cash ($5,000,000 × 7% × 6/12) To record payment of interest on bonds. Dec. 31 Interest Expense ($38,511 × 5).. Bonds Payable ($3,511 × 5) .. Interest Payable ($5,000,000 × 7% × 6/12) ....... To accrue interest expense.

4,797,000

16,880 175,000

192,555 17,555 175,000

2022 – Power Ltd. Jan. 1 Interest Payable ......................... 175,000 Cash ....................................... 175,000 To record payment of interest payable on bonds.

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PROBLEM 16-3A (Continued) h. POWER LTD. Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable .......................................................

$175,000

Non-current liabilities Bonds payable, 7%, due 20261 ....................................................... $4,831,435 1 ($966,287 × 5) POWER LTD. Income Statement (Partial) Year Ended December 31, 2021

Other expenses Interest expense ($191,880 + $192,555) ..................

$384,435

Taking It Further: Cash received for interest $35,000 x 10 Cash received at maturity January 1, 2026 Total cash inflows

$ 350,000 1,000,000 $1,350,000

LO 2,5 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-4A a. Feb. 1

Mar. 1

Apr.

July 1

Aug. 1

Oct.

Investments at FVTPL ........................... 25,300 Cash ................................................... To record purchase of investment.

25,300

Investments at FVTPL ........................... 48,000 Cash ................................................... To record purchase of investment.

48,000

Investments at FVTPL ........................... 200,000 Cash ................................................... 200,000 To record purchase of investment. Cash (575 × $1.50) ................................. Investment Income or Loss.............. Collection of dividend.

863 863

Cash (250 × $48) .................................... 12,000 Investment Income or Loss.............. Investments at FVTPL1 ..................... 1 [($25,300  575) × 250] To record sale of investment.

1 Cash ($200,000 × 3% × 6/12) ................. Investment Income or Loss.............. Collection of interest revenue.

1,000 11,000

3,000 3,000

1 Cash......................................................... 205,000 Investment Income or Loss.............. 5,000 Investments at FVTPL....................... 200,000 To record sale of investment.

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PROBLEM 16-4A (Continued) a. (Continued) Dec. 31 Investment Income or Loss2 ................. Investments at FVTPL....................... 2 ($62,300 – $58,250) To record fair value adjustment. Common Shares IBF Raimundo

Cost $14,3001 48,000 $62,300 1 $25,300 – $11,000 b.

4,050

Fair Value $16,250 42,000 $58,250

4,050

(325 × $50) (1,500 × $28)

RAKAI CORPORATION Balance Sheet (Partial) December 31, 2021

Current assets Investments at fair value through profit or loss . $58,250

RAKAI CORPORATION Income Statement (Partial) Year Ended December 31, 2021

Other revenue Investment Income or Loss3 .............. 3

$5,813

($863 + $1,000 + $3,000 + $5,000 - $4,050)

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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. LO 3,5 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-5A a. FINANCIAL HOLDINGS Balance Sheet (Partial) December 31, 2020

Current assets Investments at fair value through profit or loss ........

$38,000

b. 2021 Jan. 15 Investments at FVTOCI.......................... 22,500 Cash (1,500 × $15) ............................ To record purchase of investment. Mar. 20 Cash.......................................................... 3,000 Investment Income or Loss.............. (2,000 × $1.50) Collection of dividend. June 15 Cash (750 × $15.75)................................ 11,813 Investment Income or Loss.............. Investments at FVTPL1 ..................... 1 ($13,500 ÷ 1,000 × 750) To record sale of investment. Aug. 5 Cash ....................................................... Investment Income or Loss2 ............ 2 (250 × $2.50) Collection of dividend.

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

Investments at FVTPL ........................... Investment Income or Loss3 ............ 3 ($31,500 – $27,875) To record fair value adjustment.

3,625

Dec. 31 OCI - Holding Gain or Loss4.................. Investments at FVTOCI..................... 4 ($22,500 – $21,000) To record fair value adjustment.

1,500

3,625

1,500

c. FINANCIAL HOLDINGS Income Statement (Partial) Year Ended December 31, 2021

Other revenue Investment income or loss1 ........................ 1

$8,938

($3,000 + $1,688 + $625 + 3,625)

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PROBLEM 16-5A (Continued) c. (Continued) FINANCIAL HOLDINGS Statement of Comprehensive Income (Partial) Year Ended December 31, 2021

Other comprehensive income: Holding gain or loss (net of tax) ........

$1,500

Taking It Further: 750 Sabo common shares cost ($15,000 x 750 ÷ 1,000)

$11,250

Investment income or loss Dec. 31, 2020 ($1,500 loss x 750 ÷ 1,000) .................. Investment income or loss June 15, 2021 ........ Net profit .............................................................

$(1,125) 1,688 $563

Profit as a percentage of cost ...........................

LO 3,5 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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

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Income Statement

Shareholders’ Equity + + NE + + NE + + NE + + NE

16-61 .

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, Eighth 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 holding 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 the investment with significant influence in Diane’s Cosmetics Inc. It could account for the investment using the equity method as given. It 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. LO 2,3,4,5 BT: AP Difficulty: C Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 16-7A a.

Kang purchased 30,000 shares [($1,320,000 – $120,000) ÷ $40].

Kang owns 25% (30,000 ÷ 120,000) of Sandhu’s shares.

The cash dividend per share was $3.00 ($90,000 ÷ 30,000 shares).

The fair value per share was $44 ($1,320,000 ÷ 30,000).

Because Kang can exercise significant influence over 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, 2021

$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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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, 2021 Other revenues Income from investment in associate .........

$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, 2021 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. LO 3,4 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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PROBLEM 16-8A a.

b. Jan.

The presence of significant influence is not just 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 To record purchase of investment. Cash ($65,000 x 35%)................................ 22,750 Investment in Associate ................... To record dividend received from associate.

22,750

Investment in Associate ......................... 105,000 Income from Investment in Associate ($300,000 x 35%)........... 105,000 To record investment income from associate. c. Cash ($80,000 x 35%)................................ 28,000 Investment in Associate ................... To record dividend received from associate.

28,000

Investment in Associate ........................... 84,000 Income from Investment in Associate ($240,000 x 35%)........... 84,000 To record investment income from associate.

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PROBLEM 16-8A (Continued) d. Beginning balance ......................... Purchase of shares ....................... Less dividends received................ Share of income of associate........ Ending balance ..............................

2021 2022 0 $607,250 $525,000 (22,750) (28,000) 105,000 84,000 $607,250 $663,250

e. NEITZCHE COMPANY Balance Sheet (Partial) December 31, 2021

Non-current assets Investment in associate ................................................ $607,250 NEITZCHE COMPANY Income Statement (Partial) Year Ended December 31, 2021 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. LO 4,5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-9A a. SILVER LINING CORPORATION Income Statement Year Ended September 30, 2021 (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 Investment income or loss 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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PROBLEM 16-9A (Continued) a. (Continued) SILVER LINING CORPORATION Statement of Comprehensive Income Year Ended September 30, 2021 (in millions) Profit Other comprehensive income Holding gain or loss (net of tax of $5) Comprehensive income

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. LO 5 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-10A STINSON CORPORATION Statement of Comprehensive Income Year Ended April 30, 2021

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 Interest revenue ......................................... 3,360 Investment income or loss........................ 3,000 17,360 225,860 Other expenses Interest expense.............................................................. 7,500 Profit before tax ................................................................... 218,360 Income tax expense ........................................................... 82,860 Profit ..................................................................................... 135,500 Other comprehensive income Holding gain or loss, 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, 2021

Assets Current assets Cash............................................................................. $ 100,480 Investments at fair value through profit or loss1 ......................................................... 76,000 Accounts receivable ................................................... 48,000 Interest receivable........................................................... 1,680 Total current assets ................................................... 226,160 Non-current assets Long-term investments Investments at fair value through other comprehensive income $220,000 Investment in associate ................................. 170,000 Investments at amortized cost ..................... 24,000 Total investments ....................................................... 414,000 Property, plant, and equipment Equipment ...................................................... 275,000 Less: Accumulated depreciation................ 72,000 203,000 Total assets ................................................................... $843,160 1

($15,000 + $61,000 = $76,000)

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PROBLEM 16-10A (Continued) STINSON CORPORATION Balance Sheet (Continued) April 30, 2021

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 2025 ............................................ 150,000 Total liabilities ......................................................... 240,000 Shareholders' equity Share capital Common shares, no par value, unlimited authorized, 200,000 shares issued ..................................................... Retained earnings1 ................................................... Accumulated other comprehensive income2 Total shareholders' equity .................................... Total liabilities and shareholders' equity ............ 1

300,000 297,160 6,000 603,160 $843,160

$161,660 + $135,500 profit = $297,160

2 $18,000 – $12,000 = $6,000

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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. LO 5 BT: APN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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PROBLEM 16-1B a. Feb.

1 Investments at Amortized Cost, Term Deposit ..................................... 50,000 Cash ................................................. 50,000 To record purchase of term deposit investment.

Aug. 1 Cash ....................................................... 51,250 Investments at Amortized Cost, Term Deposit ............................... 50,000 Interest Revenue ............................. 1,250 To record maturity of term deposit investment. Aug.

1 Investments at Amortized Cost, Money-Market Fund ....................... 55,000 Cash ................................................. To record purchase of money-market fund.

Dec. 1 Cash........................................................ 55,735 Investments at Amortized Cost, Money-Market Fund ..................... Interest Revenue ............................. To record cashed-in money-market fund. 1 Investments at Amortized Cost, Treasury Bill ..................................... 99,260 Cash ................................................. To record purchase of investment. 31 Investments at Amortized Cost, Treasury Bill ($99,508 – $99,260)..... Interest Revenue ............................. To accrue interest revenue.

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55,000

55,000 735

99,260

248 248

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PROBLEM 16-2B (Continued) b. LANNAN CORP. Partial Balance Sheet (Partial) December 31, 2021

Current assets Investments at amortized cost .....................................$99,508

LANNAN CORPORATION Income Statement (Partial) Year Ended December 31, 2021

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% LO 2,5 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-2B 2021: a. July 1

Investments at Amortized Cost... 275,400 Cash ($300,000 × .918) ............ To record purchase of investment.

b. Dec. 31 Interest Receivable ($300,000 × 3% × 6/12) ................. Investments at Amortized Cost .. Interest Revenue1 .................... 1 ($275,400 × 4% × 6/12) To accrue interest revenue.

275,400

4,500 1,008 5,508

c. GIVARZ CORPORATION Partial Balance Sheet (Partial) December 31, 2021

Current assets Interest receivable .................................................... Non-current assets Investments at amortized cost................................. ($275,400 + $1,008) 2022: d. Jan. 1

e. July 31

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$4,500 $276,408

Cash .............................................. 4,500 Interest Receivable.................. Collection of interest receivable.

4,500

Cash .............................................. 4,500 1,028 Investments at Amortized Cost... 2 Interest Revenue .................... 2 [($275,400 + $1,008) × 4% × 6/12] To record interest collected on bonds.

5,528

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PROBLEM 16-2B (Continued) f. 2031: July 1

Cash ................................................ 300,000 Investments at Amortized Cost To record maturity of bonds.

300,000

Investments at FVTPL .................... 275,400 Cash ($300,000 × .918) ............ To record purchase of investment.

275,400

g. 2021: a. July 1

b. Dec. 31 Interest Receivable ($300,000 × 3% × 6/12) ................. Investments at FVTPL ............. Interest Revenue3 .................... 3 ($275,400 × 4% × 6/12) To accrue interest revenue.

4,500 1,008 5,508

Dec. 31 Investments at FVTPL1 ................................. 11,592 Investment Income or Loss ... To record fair value adjustment.

11,592

Fair value adjustment: Carrying amount of bond, July 1 Amortization of discount, Dec. 31 Carrying amount 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 1,008 276,408 (288,000) $ 11,592

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Accounting Principles, Eighth 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

LO 2,3,5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-3B a. Treasury Ltd. paid $2,080,000 for the Surge bonds purchased ($2,000,000 × 1.04) b. 2021 – Treasury Ltd. Jan. 1 Investments at Amortized Cost . 2,080,000 Cash ......................................... 2,080,000 To record purchase of investment. c. Bond Premium Amortization Table Effective-Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 4.5%

Date

Jan. 1, 2021 July 1, 2021 Jan. 1, 2022 July 1, 2022 Jan. 1, 2023

(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. 2021 – Treasury Ltd. July 1 Cash ............................................. 50,000 Investments at Amortized Cost .. Interest Revenue ..................... To record collection of interest on bonds.

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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

3,200 46,800

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Accounting Principles, Eighth Canadian Edition

PROBLEM 16-3B (Continued) d.

(Continued)

Dec. 31 Interest Receivable ...................... Investments at Amortized Cost .. Interest Revenue ..................... To accrue interest revenue.

50,000

2022 – Treasury Ltd. Jan. 1 Cash ........................................... 50,000 Interest Receivable ............... Collection of interest receivable.

3,272 46,728

50,000

TREASURY LTD. Balance Sheet (Partial) December 31, 2021

Non-current assets Investments at amortized cost ...................................$2,073,528

TREASURY LTD. Income Statement (Partial) Year Ended December 31, 2021

Other revenues Interest revenue ($46,800 + $46,728) .......................

e. 2021 – Surge Ltd. Jan. 1 Cash ($6,000,000 × 1.04) ................ 6,240,000 Bonds Payable ...................... To record issuance of bonds payable.

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$93,528

6,240,000

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PROBLEM 16-3B (Continued) f. 2021 – 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 To record interest payment on bonds.

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 To accrue interest expense. 2022 – Surge Ltd. Jan. 1 Interest Payable ......................... Cash ....................................... Payment of interest payable.

150,000 150,000

g. SURGE LTD. Balance Sheet (Partial) December 31, 2021 Current liabilities Interest payable............................................................. $150,000 Non-current liabilities Bonds payable, 5%, due 20313 ......................................................... $6,220,584 3 ($6,240,000 - $9,600 - $9,816)

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PROBLEM 16-3B (Continued) g. (continued) SURGE LTD. Income Statement Year Ended December 31, 2021

Other expenses Interest expense ($140,400 + $140,184) ..................

$280,584

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, 2021, the bonds were trading at a lower price of 103. Over time, the bonds will trade at a lower price as the maturity date arises, but that is not for another several years. The effective interest rate had therefore increased since January 1, 2021. 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, despite 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. LO 2,5 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-4B a. Feb. 1 Investments at FVTPL ........................ Cash ................................................ To record purchase of investment. Mar. 1 Investments at FVTPL ........................ Cash ................................................ To record purchase of investment. Apr.

63,600 63,600

7,500 7,500

1 Investments at FVTPL.............................100,000 Cash ................................................ 100,000 To record purchase of investment.

July 1 Cash (2,400 × $2) ................................ Investment Income or Loss........... Collection of dividend.

4,800

Aug. 1

Cash (1,600 × $25) .............................. Investment Income or Loss ............... Investments at FVTPL.................... ($63,600 ÷ 2,400 × 1,600) To record sale of investment.

40,000 2,400

1 Cash ($100,000 × 4% × 6/12) .............. Investment Income or Loss........... Collection of interest revenue.

2,000

Oct.

Cash .................................................... Investment Income or Loss........... Investments at FVTPL.................... To record sale of investment.

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4,800

42,400

2,000 101,000 1,000 100,000

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PROBLEM 16-4B (Continued) a. (Continued) Dec. 31 Investments at FVTPL1 ..................... Investment Income or Loss..... 1 ($30,800 – $28,700) To record fair value adjustment. Number of Shares Lemelin 2,400 – 1,600 = 800 RSD 600 Total 2 $63,600 – $42,400 b.

Cost $21,2002 7,500 $28,700

2,100

Fair Value $22,400 8,400 $30,800

2,100

(800 × $28) (600 × $14)

MEAD INVESTMENT CORPORATION Balance Sheet (Partial) December 31, 2021

Current assets Investments at fair value through profit or loss............................................................

$30,800

MEAD INVESTMENT CORPORATION Income Statement (Partial) Year Ended December 31, 2021

Other revenues Investment income or loss1 ............................................................. $7,500 1 ($4,800 + $2,000 + $2,100 + $1,000 - $2,400)

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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. LO 3,5 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-5B a. COMMERCIAL INC. Balance Sheet (Partial) December 31, 2020

Current assets Investments at fair value through profit or loss...............................................................

$55,500

b. 2021 Apr. 15 Cash (1,250 × $27).................................. 33,750 Investment Income or Loss.............. Investments at FVTPL1 ..................... 1 [($39,000 ÷ 1,500) × 1,250] To record sale of investment.

1,250 32,500

June 15 Investments at FVTPL ........................... 27,500 Cash (1,000 × $27.50) ........................ To record purchase of investment.

27,500

July 31 Investments at FVTOCI.......................... 16,000 Cash (4,000 × $4)............................... To record purchase of investment.

16,000

Aug. 5 Cash ......................................................... 5,000 Investment Income or Loss (2,000 × $2.50) .................................. Collection of dividend.

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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 per share ($16,000 ÷ 8,000). Dec. 31 Investment Income or Loss ..................... Investments at FVTPL ...................... ($50,500 – $49,500) To record fair value adjustment.

1,000

Dec. 31 OCI—Holding Gain or Loss2 ................. Investments at FVTOCI..................... 2 ($16,000 – $12,800) To record fair value adjustment.

3,200

Number of Shares Market Price $30.00 1,2503 6.00 2,000

Fahim PLJ Total 3 1,500 – 1,250 + 1,000 = 1,250 4 $39,000 – $32,500 + $27,500 = $34,000 Hopeful

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$1.60

8,000

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1,000

3,200

Carrying Amount $34,0004 16,500 $50,500

Fair Value $37,500 12,000 $49,500

$16,000

$12,800

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PROBLEM 16-5B (Continued) c. COMMERCIAL INC. Statement of Comprehensive Income (Partial) Year Ended December 31, 2021

Profit from operations Other revenue Investment income or loss1 ........................................................................ $ 5,250 Profit................................................................................... Other comprehensive income: Holding gain or loss (net of tax) ....................................... (3,200) Comprehensive income .................................................... 1

$1,250 + $5,000 - $1,000 = $5,250

Taking It Further: Commercial Inc. has decided to report the Hopeful Industries common shares as fair value through other comprehensive income investments because the holding 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. LO 3,5 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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

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Income Statement

Shareholders’ Equity + – NE + + – – + NE + NE + NE + –

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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 + 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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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. The loss on the sale of the Hegal shares would be reported in the income statement under other expenses and losses as would the holding loss on the fair value adjustment at the end of the year for Hegal. The holding gain on the Baudillard’s shares would appear in the income statement under other revenues and expenses. 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. It 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. LO 2,3,4,5 BT: AP Difficulty: C Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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.

Hadley would have received 20% of any dividends declared by Letourneau, or $40,000 ($200,000 × 20%).

Hadley purchased 80,000 common shares of Letourneau 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, 2021

Profit................................................................................ Other comprehensive income: Holding gain or loss net of tax of $34,0001 .............................. $136,000 Comprehensive income ................................................. 1 ($970,000 - $800,000) x 20% = $34,000

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PROBLEM 16-7B (Continued) d. (Continued) The investment would be reported at its fair value of $970,000 on the balance sheet. 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. LO 3,4 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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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 To record purchase of investment. Cash ($35,000 x 15%) ............................ 5,250 Investment in Associate ................... To record dividend received from associate.

5,250

Investment in Associate ........................... 22,500 Income from Investment in Associate ($150,000 x 15%)........... 22,500 To record investment income from associate. c. Cash ($45,000 x 15%) ............................ 6,750 Investment in Associate ................... To record dividend received from associate.

6,750

Investment in Associate ........................... 48,750 Income from Investment in Associate ($325,000 x 15%)........... 48,750 To record investment income from associate. 2021 2022 Beginning balance ......................... 0 $242,250 Purchase of shares ....................... $225,000 Less dividends received................ (5,250) (6,750) Share of income of associate........ 22,500 48,750 Ending balance .............................. $242,250 $284,250

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PROBLEM 16-8A (Continued) e. CARNEGIE INC. Balance Sheet (Partial) December 31, 2021

Non-current assets Investment in associate ................................................ $242,250 CARNEGIE INC. Income Statement (Partial) Year Ended December 31, 2021 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. LO 4,5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-9B a. INVESTMENTS R US COMPANY Income Statement Year Ended November 30, 2021 (in millions) Revenues Operating expenses Profit from operations Other revenue Gain on sale of land Interest revenue Income from investment in associate Dividend revenue Other expenses Interest expense Investment income or loss Other expenses Profit before income tax Income tax expense Profit

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$7,240 4,616 2,624 $ 26 6 4 3

299 192 21

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39 2,663

512 2,151 781 $1,370

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PROBLEM 16-9B (Continued) a.

(Continued) INVESTMENTS R US COMPANY Statement of Comprehensive Income Year Ended November 30, 2021 (in millions)

Profit Other comprehensive income: Holding gain or loss (net of tax) Comprehensive income

Accumulated other comprehensive loss: ($150 + $68)

$1,370 68 $1,302

$218 million

Taking It Further: Holding gains and losses 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 investments at FVTOCI, 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 holding 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. LO 5 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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PROBLEM 16-10B VLADIMIR CORPORATION Statement of Comprehensive Income Year Ended December 31, 2021 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 Investment income or loss........................ 3,600 Interest revenue ......................................... 3,300 46,900 289,900 Other expenses Interest expense ........................................ 12,500 Profit before tax.............................................. 277,400 Income tax expense ........................................................... 79,290 Profit ..................................................................................... 198,110 Other comprehensive income Holding gain or loss, 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, 2021

Assets Current assets Cash ............................................................................... $150,000 Investments at FVTPL 1 ............................................ 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 2024.............................. 75,000 Investments at amortized cost ........................ 36,000 Investments at fair value through other comprehensive income 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 1

($37,000 + $82,500 = $119,500)

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PROBLEM 16-10B (Continued) VLADIMIR CORPORATION Balance Sheet (Continued) December 31, 2021

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, due 2026 ............................................. 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 2 Accumulated other comprehensive income ......... 40,000 Total shareholders' equity ................................... 684,500 Total liabilities and shareholders' equity ........... $1,040,500 2

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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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. LO 5 BT: APN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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CUMULATIVE COVERAGE: CHAPTERS 13 TO 16 a. Jan.

7 Cash ..................................................... 25,000 Preferred Shares ............................ 25,000 Issued preferred shares for cash.

Mar. 16 Investments at FVTPL ......................... 19,200 Cash (800 × $24) ............................. 19,200 To record purchase of investment. July

1 Investments at Amortized Cost .......... 108,200 Cash ($100,000 × 108.2) ................. 108,200 To record purchase of investment in bonds.

Aug.

2 Cash (800 × $25) .................................. 20,000 Investments at FVTPL .................... Investment Income or Loss ........... Sold Osborne common shares.

19,200 800

5 Investments at Amortized Cost, Money-Market Fund ......................... 20,000 Cash ................................................ 20,000 To record purchase of investment. Sep. 25 Preferred Shares ($25,000 ÷ 1,000 × 500) ........................ 12,500 Common Shares............................. 12,500 To record preferred share conversion into common shares. Oct. 24 Cash ..................................................... 20,200 Investments at Amortized Cost, Money-Market Fund ..................... 20,000 Interest Revenue ............................ 200 Cashed in money-market investment.

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CUMULATIVE COVERAGE (Continued) a. (Continued) Nov. 30 Cash ..................................................... 50,000 Notes Payable................................. 50,000 Borrowed cash from bank and signed a note. Dec.

1 Cash Dividends - Preferred ..................1,000 Dividends Payable (500 x $2) ........ Declared dividend on preferred shares.

1,000

31 Interest Expense ($50,000 × 6% × 1/12) ...............................250 Notes Payable ($1,521 – $250)..............1,271 Cash ................................................ 1,521 Paid interest and principal on notes payable. 31 Investment in Associate ($20,000 × 40%) .............................. 8,000 Income from Investment in Associate ................................... 8,000 Record investment income from associate. 31 Cash.................................................. 480 Investment in Associate ($1,200 × 40%).................................. Collection of dividend from associate. 31 Interest Receivable ($100,000 × 5% × 6/12) ..........................2,500 Investments at Amortized Cost ($2,500 – $2,164) ................. Interest Revenue ($108,200 × 4% × 6/12).................. To accrue interest revenue.

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480

336 2,164

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CUMULATIVE COVERAGE (Continued) a. (Continued) Dec. 31 Interest Expense ($126,025 × 7%) 8,822 Bonds Payable ($8,822 – $7,800).... Interest Payable ($130,000 × 6%) ... To accrue interest expense.

1,022 7,800

31 OCI—Holding Gain or Loss1 ........................... 2,000 Investments at FVTOCI .................. 2,000 1 $28,000 (fair value) – $30,000 (carrying amount) = $2,000 To record fair value adjustment.

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CUMULATIVE COVERAGE (Continued) b. PLANKTON CORPORATION Trial Balance December 31, 2021 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 Investments at amortized cost ($108,200 – $336) ......................................... 107,864 Investments at FVTOCI ($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 2026) ($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, 2021 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 Investment income or loss .......................... 800 OCI—holding gain or loss ................................ 2,000 Totals $1,267,665 $1,267,665 c.

Revenues Sales....................................................... Interest revenue..................................... Income from investment in associate. ......................................... Investment income or loss ...................

$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................... To record income tax expense. 16-104

8,000 800 $761,539

370,000 180,000 15,322

565,322 196,217

2,979 2,979

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Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) c.

(Continued) PLANKTON CORPORATION Trial Balance December 31, 2021

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 Investments at amortized cost ($108,200 – $336) ......................................... 107,864 Investments at FVTOCI ($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 2026) ($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, 2021 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 Investment income or loss .......................... 800 OCI—holding gain or loss ................................ 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, 2021 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 Investment income or loss ................................ 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, 2021 Profit............................................................................ Other comprehensive income Holding gain or loss (net of tax) .............................. 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, 2021

Preferred Shares Balance, January 1, 2021 Issued shares for cash Preferred shares converted Cash dividends–preferred Comprehensive income Balance, December 31, 2021

$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, 2021

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 Investments at fair value through other comprehensive income.......................... 28,000 Investments at amortized cost ......................... 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, 2021

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 20241..................................... $ 32,972 Bonds payable, 6%, due 2026 ........................ 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 1

($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 holding 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)

If Plankton Corporation were a private company reporting 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 investment at FVTOCI in common shares 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 amount.

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BYP16-1 FINANCIAL REPORTING PROBLEM

The carrying amount for the loans and receivables is arrived at using amortized cost, while bonds designated and classified as fair value through profit and loss and the bonds that are available for sale have carrying values equal to the quoted market value at the balance sheet date.

The carrying amount of the mortgage loans would be arrived at using amortized cost. The carrying amount of the stocks, except for the equity method stock investments, would be at the quoted market value at the balance sheet date. Finally, the carrying amount of the stock investment accounted for using the equity method would be the balance in the investment account at the balance sheet date. The investments at amortized cost have carrying values that are different from the fair value, while those investments whose carrying values correspond to the market value have the same carrying value as the fair value. b.

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The investment in stock at equity method represents investment in shares of companies over which Great West Life exercises significant influence.

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BYP 16-1 (Continued) c.

A financial asset is designated as fair value through profit or loss on initial recognition if it eliminates or significantly reduces an accounting mismatch. A financial asset is classified as fair value through profit or loss on initial recognition if it is part of a portfolio that is actively traded for the purpose of earning investment income. Some of the reported stocks are listed as available-for-sale, at cost because their fair value cannot be reliably measured.

d. The investment income of $5,616 million included $1,147 million in gains from fair value adjustments. e. Fair values for bonds classified and designated as fair value through profit or loss or available-for-sale are determined with reference to quoted market bid prices primarily provided by third-party independent pricing sources. Fair values for stocks traded on an active market are generally determined by the last bid price for the security from the exchange where it is principally traded. f. The consolidated statement of comprehensive income reports unrealized losses on available-forsale assets of $76 million, before tax benefits of $17 million. Realized gains or losses occur from the sale of investments.

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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.

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.

The Royal Bank chooses to report long-term strategic equity investment holding 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 measurement 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 holding 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.

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.

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).

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.

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. 2023 Feb. 1 Investments in Associate ......................... 30,000 Cash................................................. To record purchase of investment.

30,000

1 Investments at Amortized Cost................ 21,487 Cash .................................................. To record purchase of investment.

21,487

1 Investments at FVTPL............................... 25,368 Cash ($13,718 + $11,650) ................. To record purchase of investments.

25,368

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BYP 16-6 (Continued) e. Loblaw WestJet Total

Number of Shares Market Price $72.15 200 25.50 400

Carrying Amount $13,718 11,650 $25,368

2023 May 31 Investment Income or Loss1 ................ Investments at FVTPL ..................... 1 ($25,368 - $24,630 =$738) To record fair value adjustment. 31 Interest Receivable2 ............................. Investments at Amortized Cost....... Interest Revenue3............................. To accrue interest revenue. 2 ($20,000 x 5% x 4/12 = $333) 3 ($21,487 x 3% x 4/12 = $215)

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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

Learning Objectives 1. Discuss the usefulness, content, and format of the cash flow statement. 2. Prepare a cash flow statement using the indirect method. 3. Prepare the operating section of the cash flow statement using the direct method. 4. Analyze the cash flow statement.

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Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

BT Item LO BT Item LO

1. 2. 3. 4.

1 1 1,4 1

C K C K

5. 6. 7. 8.

2 2 2 2

1. 2. 3. 4.

1 1 2 2

AP C AP AP

5. 6. 7. 8.

2 2 2 2

1. 2. 3. 4.

1 1 2 2

AP AP AP AP

5. 6. 7. 8.

2 2 2 2

1. 2. 3.

1 2,3 2,3

K AP AP

4. 5. 6.

2 2,4 2,4

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BT Item LO

Questions C 9. 2 C 13. C 10. 3 C 14. C C 15. 11. 3 C 12. 3 C 16. Brief Exercises AP 9. 2 AP 13. AP 10. 2 AP 14. AP 11. 2 AP 15. AP 12. 2 AP 16. Exercises 2 AP 13. AP 9. AP 10. 2 AP 14. AP 11. 2 AP 15. AP 12. 2 AP 16. Problems AP 7. 2 AP 10. AP 8. 3 AP 11. AP 9. 2,3 AP 12.

17.2

BT Item LO

2 2 4 4

C C C C

3 3 3 3

AP AP AP AP

17. 18. 19. 20.

3 3 4 4

AP AP AP AN

3 3 3 3

AP AP AP AP

17. 18. 19. 20.

3 3,4 4 4

AP AP AN AN

2,3 2,3 4

AP AP AN

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

Difficulty:

Time: AACSB

CPA CM

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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.

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, 11A 11B

4. Analyze the cash flow statement.

19, 20

5A, 6A, 12A

2. Prepare a cash flow statement using the indirect method.

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5, 6, 7, 8, 9, 13, 14, 15

16, 17

1, 2

17.4

1, 2, 3

Problems Set B

5B, 6B, 12B

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Accounting Principles, Eighth Canadian Edition

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 a cash flow statement–indirect method.

Moderate

20-25

Prepare a cash flow statement–direct method.

Moderate

20-25

Prepare cash flow statements–indirect method and direct method.

Moderate

50-60

10A

Prepare cash flow statements–indirect method and direct method.

Moderate

50-60

11A

Prepare cash flow statements–indirect and direct methods

Moderate

40-50

12A

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 a cash flow statement–indirect method.

Moderate

20-25

Prepare a cash flow statement–direct method.

Moderate

20-25

Prepare cash flow statements–indirect method and direct method.

Moderate

50-60

10B

Prepare cash flow statements–indirect method and direct method.

Moderate

50-60

11B

Prepare cash flow statements–indirect and direct methods.

Moderate

40-50

12B

Calculate free cash flow and evaluate cash.

Simple

10-15

Solutions Manual .

17.6

Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objective 1. Discuss 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 P17.1A P17.1B

Comprehension Q17.1 Q17.3 Q17.4 BE17.2

Application BE17.1 E17.1 E17.2 E17.3

Q17.5 Q17.6 Q17.7 Q17.8 Q17.9 Q17.13 Q17.14 Q17.15

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 P17.11 A P17.2B P17.3B P17.8B P17.9B P17.10B P17.11B

Prepare the operating section of the 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

BE17.19 P17.5A P17.6A

Broadening Your Perspective

Solutions Manual .

BYP 17.6 Santé Smoothie Saga

17.7

Analysis

Synthesis

BE17.20 E17.19 E17.20 P17.12A P17.12B BYP17.1 BYP17.2 BYP17.3 BYP17.4

Evaluation

BYP17.5

Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

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

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.

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

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. The above are the groupings of activities using ASPE. When using IFRS instead of ASPE, a choice is allowed. Interest paid can be recognized as a financing activity, interest and dividends received can be recognized as investing activities, and dividends paid can be recognized as an operating activity on the cash flow statement.

LO 1,4 BT: C Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 17

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 4.

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 cash. 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. Consequently, cash transactions relating to this note payable would be classified as financing activities.

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

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.

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

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.

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

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Chapter 17

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 7.

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.

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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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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.

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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.

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

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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.

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

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 discloses less competitive information about the company, and (4) it is the format most familiar to users of financial statements.

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

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.

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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.

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

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 or equity to finance growth.

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

16.

If the net cash used by investing activities exceed the cash provided by operating activities, the free cash flow will be negative.

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 17.1 (a) (b) (c) (d) (e) (f) (g) (h) (i)

− + − − NE + + NE NE

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

BRIEF EXERCISE 17.2 (a) (b)

(O) (I)

(F) (O) (O)

(f) (g) (h) (i)

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

Operating activity Investing activity (Note: The sale of land is an investing activity. If using the indirect method, a loss is added back, and a gain is deducted under operating activities to cancel its impact on profit.) Financing activity Operating activity Operating activity. If using the indirect method, a gain is deducted under operating activities to cancel its impact on profit.) Operating activity Operating activity Investing activity Financing activity

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 17.3 (a) (b) (c) (d) (e) (f) (g) (h)

+ – + − + + + +

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

BRIEF EXERCISE 17.4 DIAMOND LTD. Cash Flow Statement (Partial) Year Ended November 30, 2021

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

Solutions Manual .

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 17.5 Montalvo Company Cash Flow Statement (Partial)—Indirect Method Year Ended May 31, 2021

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

BRIEF EXERCISE 17.6 Chas Company Cash Flow Statement (Partial)—Indirect Method Year Ended June 30, 2021 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 LO 2 BT: AP Difficulty: M Time:10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 17.7 MIRZAEI LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended March 31, 2021

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

Solutions Manual .

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 17.8 Indirect method: Operating activities: Loss on sale of equipment

$ 1,500

Investing activities: Sale of equipment1

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). 1

Cash ................................................ 17,000 Loss on Disposal of Equipment .... 1,500 Accumulated Depreciation ............ 5,500 Equipment ............................... 24,000 To record disposal of equipment.

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BRIEF EXERCISE 17.9 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. LO 2 BT: AP Difficulty: M Time:5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 17

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Accounting Principles, Eighth Canadian Edition

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, 2021 $237,000 Balance, Jan. 1, 2021 ........................................ (148,000) Cost of equipment purchased ............................ $89,000

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BRIEF EXERCISE 17.11 Dividends paid $46,000 Proof: Retained earnings December 31, 2021 .............. Profit..................................................................... Retained earnings, December 31, 2020 ............. Dividends declared during 2021......................... Increase in dividends payable............................ Cash payment for dividends ..............................

$(261,000) 197,000 114,000 50,000 (4,000) $ 46,000

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 17.12 Financing activities Sale of common shares 1 ................................................ $ 10,000 Repayment of mortgage notes 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 note payable of $300,000. LO 2 BT: AP Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 17.13 Sales revenue ............................................. $640,000 Add: Decrease in accounts receivable ..... 13,650 Cash receipts from customers .................. $653,650 LO 3 BT: AP Difficulty: S Time:5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 .............................................. $89,500 Add: Increase in inventory ................................. 5,600 Less: Increase in accounts payable .................. (7,200) Cash payments to suppliers............................... $87,900 LO 3 BT: AP Difficulty: M Time:5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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

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

BRIEF EXERCISE 17.16 Salaries expense .................................................$188,000 Add: Decrease in salaries payable ..................... 1,500 Cash payments to employees ............................$189,500 LO 3 BT: AP Difficulty: S Time:5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 17.17 Income tax expense ..............................................$90,000 Less increase in income tax payable .................. (9,000) Cash payments for income tax .............................$81,000 LO 3 BT: AP Difficulty: S Time:5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 17.18 ANGUS MEAT CORPORATION Cash Flow Statement (Partial) Year Ended December 31, 2021

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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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 17.19 Free cash flow = Cash provided (used) by operating activities – Cash used by investing activities (outlays for capital expenditures) = $360,000 – $250,000 = $110,000 LO 4 BT: AP Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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. LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

17.22

Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 17.1 1. Payment of interest on notes payable 2. Exchange of land for patent 3. Sale of building at book value 4. Payment of dividends 5. Depreciation 6. Receipt of dividends on investment 7. Receipt of interest on notes receivable 8. Issuance of common shares 9. Amortization of patent 10. Issuance of bonds at par for land 11. Purchase of land 12. Conversion of bonds into common shares 13. Sale of land at a loss: Proceeds from sale of land Loss on sale of land 14. Sale of Wellman bonds

operating noncash investing investing financing operating operating operating financing operating noncash investing financing investing noncash financing investing operating financing

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 17.2 a. Classification

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 $200,000 worth of bonds at par. 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.

b. Cash Inflow or Outflow +$1,000

−$5,000

NC F O

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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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 17.3 1. a.

2. a.

3. a.

4. a.

Cash .......................................................... 15,000 Land................................................. Gain on Disposal ............................ To record sale of land.

12,000 3,000

Operating activities: deduct gain from profit; Investing activities: show proceeds of $15,000 from sale of land

Cash .......................................................... 20,000 Common Shares ............................. Issued common shares for cash.

20,000

Financing activities: add issuance of common shares $20,000

Depreciation Expense.............................. 17,000 Accumulated Depreciation - Building To record depreciation expense.

17,000

Operating activities: add depreciation expense to profit.

Salaries Expense ....................................... 9,000 Cash ................................................ To pay salaries to employees.

9,000

Operating activities: No entry as amount of salaries expense already included in profit

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 17.3 (Continued) 5. a.

Equipment .................................................. 8,000 Common Shares ............................. 8,000 Purchased equipment in exchange for shares.

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.

6. a.

Cash........................................................ Accumulated Depreciation - Equipment Loss on Disposal ................................... Equipment ....................................... To record disposal of equipment.

1,200 7,000 1,800 10,000

Operating activities: add loss of $1,800 to profit. Investing activities: show proceeds of $1,200 from sale of equipment

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Chapter 17

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 17.4 PESCI LTD. Cash Flow Statement (Partial) Year Ended November 30, 2021

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 LO 2 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.5 SCOOTERS RENTALS Cash Flow Statement (Partial) Year Ended December 31, 2021 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 LO 2 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 17.6 CHARRON INC. Cash Flow Statement (Partial) Year Ended October 31, 2021 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 LO 2 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

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 equipment1...................................... 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 To record disposal of equipment. LO 2 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.8 DUPRÉ CORP. Cash Flow Statement (Partial) Year Ended December 31, 2021

Investing activities Sale of equipment1...................................... $ 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 ...

Cost of equipment sold .................................. Accumulated depreciation............................... Net carrying amount ........................................ Loss on sale of equipment .............................. Cash proceeds from sale.................................

(8,000) (8,000)

$46,000 38,000 8,000 3,000 $ 5,000

Cash .................................................................. 5,000 Accumulated Depreciation - Equipment......... 38,000 Loss on Disposal.............................................. 3,000 Equipment ......................................................................... 46,000 To record disposal of equipment. LO 2 BT: AP Difficulty: M Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.9 LU CORPORATION Cash Flow Statement—Indirect method Year Ended December 31, 2021

Operating activities Profit ................................................................................ $22,630 Adjustments to reconcile profit to net cash provided (used) 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.......................................................... Cash, January 1................................................................. Cash, December 31 ...........................................................

3,600 10,700 $ 14,300

LO 2 BT: AP Difficulty: M Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.10 PREFERRED HOMES LTD. Cash Flow Statement (Partial) Year Ended September 30, 2021

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, 2020 50,000 Land purchase 65,000 Sept. 30, 2021 110,000

(2) Transactions involving Common Shares: Common Shares Oct. 1, 2020 Issuance Sept. 30, 2021

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150,000 85,000 235,000

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.10 (Continued) (3) Transactions involving Equipment: Equipment Oct. 1, 2020 Purchases Sept. 30, 2021

125,000 20,000 139,000

Disposal

6,000

Accumulated Depreciation Disposal

5,000

Oct. 1, 2020 Sept. 30 Sept. 30, 2021

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

Cash1 ................................................................. Accumulated Depreciation-Equipment........... Gain on Disposal .......................................... Equipment ..................................................... To record disposal of equipment.

3,000 5,000 2,000 6,000

(4) Transactions involving Retained Earnings: Retained Earnings Dividends

70,000

Oct. 1, 2020 Profit Sept. 30, 2021

80,000 210,000 220,000

Dividends Payable Dividends paid

80,000

Oct. 1, 2020 Dividends Sept. 30, 2021

20,000 70,000 10,000

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.11 SAVARY LIMITED Cash Flow Statement Year Ended December 31, 2021

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 dividends1........................................ (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 1

Profit was $200,000, and retained earnings only increased by $150,000, so $50,000 in dividends must have been declared and paid. LO 2 BT: AP Difficulty: M Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.12 MACGREGOR COMPANY Cash Flow Statement Year Ended December 31, 2021 Operating activities Cash receipts Cash receipts from customers 1................................................. $132,000 Cash payments for operating expenses 2 ............................. (55,000) Net cash provided by operating activities ......................... $77,000 1

Revenues .......................................................... $192,000 Less ending balance accounts receivable ....... (60,000) Cash receipts from customers ......................... $132,000 2

Operating expenses ........................................... $78,000 Less ending balance accounts payable ........... (23,000) Cash payments for operating expenses**.......... $55,000 LO 3 BT: AP Difficulty: S Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.13 FLYPAPER AIRLINES INC. Cash Flow Statement Year Ended March 31, 2021 Operating activities Cash receipts Cash receipts from customers1 .................................................. $254,000 Dividends on investments ...................................... 14,000 268,000 Cash payments To suppliers ........................................... $(110,000) For operating expenses ....................... (28,000) For salaries ........................................... (51,000) For interest ........................................... (8,000) For income tax .......................................... (7,500) (204,500) Net cash provided by operating activities ......... 63,500 Investing activities Sale of aircraft ............................................... 212,000 Purchase of land .......................................... (174,000) Purchase of equipment............................... (22,000) Net cash provided by investing activities ................... 16,000 Financing activities Payment of cash dividends ........................ (14,000) Net cash used by financing activities ..................... (14,000) Net increase in cash .............................................................. 65,500 Cash, April 1, 2020 ............................................................. 35,000 Cash, March 31, 2021 ........................................................$ 100,500 Note X: Land costing $35,000 was acquired by issuing common shares. 1 $53,000 + $201,000 = $254,000 LO 3 BT: AP Difficulty: M Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.14 HUDSON LTD. Cash Flow Statement (Partial) Year Ended December 31, 2021

Operating activities Cash receipts from customers1 ..................................................... $787,200 Cash payments: To suppliers2.................................... $(416,800) For operating expenses3 ................. (249,600) 4 For income taxes ............................ (27,200) (693,600) Net cash provided by operating activities .............. $93,600 1.

Sales revenue ............................................ Add: Decrease in accounts receivable .... Cash receipts from customers .................

$758,400 28,800 $787,200

Cost of goods sold .................................... Add: Increase in inventory ...................... Add: Decrease in accounts payable ....... Cash payments to suppliers .....................

$392,000 15,200 9,600 $416,800

Operating expenses .................................. Add: Increase in prepaid expenses ......... Cash payments for operating expenses ..

$248,000 1,600 $249,600

Income tax expense .................................. Add: Decrease in income taxes payable.. Cash payments for income tax.................

$24,000 3,200 $27,200

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.15 a.

Sales revenue ........................................... Less: Increase in accounts receivable .. Cash receipts from customers ................

$275,000 (14,100) $260,900

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

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

Interest expense....................................... Add: Decrease in interest payable .......... Cash payments for interest expense ......

$18,000 4,000 $22,000

2,000 $54,500

LO 3 BT: AP Difficulty: S Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.16 McTAVISH LTD. Cash Flow Statement (partial)—Direct Method Year Ended September 30, 2021

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 ...........

4,000 (500) 3,500

$ 38,500 (9,800) $ 28,700

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

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.17 REGENT INC. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2021 Operating activities Cash receipts Cash receipts from customers 1................................................. $168,560 Cash payments To suppliers 2 ................................................................ $(103,460) For operating expenses 3..................... (25,956) 4 For income taxes ............................... (9,520) (138,936) Net cash provided by operating activities ............ $29,624 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 ...........

$175,000 (6,440) $168,560 $109,200 (3,780) (1,960) $103,460 $24,640 476 840 $25,956 $8,120 1,400 $9,520

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

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.18 a. STORM ADVENTURES LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2021

Operating activities Profit ................................................................................ $69,900 Adjustments to reconcile profit to net cash provided (used) 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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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.18 (Continued) a. (Continued) (1) Transactions involving Retained Earnings: Retained Earnings Dividends

32,500

Jan. 1, 2021 Profit Dec.31, 2021

103,600 69,900 141,000

Dividends Payable Dividends paid

30,000

Jan. 1, 2021 Dividends Dec.31, 2021

5,000 32,500 7,500

LO 3 BT: AP Difficulty: M Time:30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

EXERCISE 17.18 (Continued) b. STORM ADVENTURES LTD. Cash Flow Statement—Direct Method Year Ended December 31, 2021

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

Chapter 17

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Accounting Principles, Eighth 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

LO 2,3 BT: AP Difficulty: M Time:40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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. LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth 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

$2,908

$16,584

(3,155)

(12,540)

1,996 $ 1,749

(2,932) $ 1,112

Bank of Montreal

Scotiabank

b. ($ in millions)

− = c.

Cash provided (used) by operating activities Cash provided (used) by investing activities Free cash flow

$2,908

$ 16,584

(3,155) $(247)

(12,540) $4,044

Scotiabank appears to be in a much stronger financial position. Its profit and cash provided by operating activities are both considerably higher than Bank of Montreal. Scotiabank’s free cash flow is positive while Bank of Montreal’s is negative. When we look closer at the sources of the change in the cash balance, we see that Scotiabank generated its cash from operations which was in turn used for investing and financing activities. Bank of Montreal also generated cash from operating activities as well as from financing activities that were used for investing activities.

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Accounting Principles, Eighth 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.

LO 4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Accounting Principles, Eighth 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.1 Sold an investment, at a gain.1 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.2 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.2 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.2 Received dividends on an investment in associate.2 Issued common shares. Issued preferred shares. 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 O

+ + +

− + + −

Chapter 17

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.1A (Continued) 1

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, 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, not when cash is collected. LO 1 BT: K Difficulty: S Time:35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.2A a.

MOLLOY LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended September 30, 2021

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, 2021

Operating activities Cash receipts From customers (1)..................................... Cash payments To suppliers ................................ $(337,000) (2) For operating expenses ......... (87,000) (3) For income taxes.................... (44,000) (4) Net cash provided by operating activities

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$595,000

(468,000) $127,000

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Accounting Principles, Eighth Canadian Edition

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 goods purchased........................... 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. LO 2,3 BT: AP Difficulty: M Time:40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.3A a. HANALEI INTERNATIONAL INC. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2021

Operating activities Profit .............................................................................. $123,750 Adjustments to reconcile profit to net cash provided (used) 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, 2021

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, Eighth 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. LO 2,3 BT: AP Difficulty: M Time:35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4A TRUDEAU INC. Cash Flow Statement (Partial) Year Ended December 31, 2021 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)

Profit reported by Trudeau Inc. In 2021 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4A (Continued) Calculations: (1) Transactions involving Equipment: Equipment Jan. 1, 2021 Purchases Dec. 31, 2021

340,000 75,000 393,000

Disposal

22,000

Accumulated Depreciation—Equipment Disposal

19,125

Jan. 1, 2021 Depreciation Dec. 31, 2021

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 ..................................................... To record disposal of equipment.

3,875 19,125

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17.54

1,000 22,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4A (Continued) Calculations: (Continued) (2) Transactions involving Building: Building Jan. 1, 2021 Purchases Dec. 31, 2021

750,000 150,000 850,000

Disposal

50,000

Accumulated Depreciation—Building Disposal

17,500

Jan. 1, 2021 Depreciation Dec. 31, 2021

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 ........................................................ To record disposal of building.

22,500 17,500 10,000 50,000

(3) Transactions involving Notes Payable: Notes Payable Repayments

Solutions Manual .

35,000

17.55

Jan. 1, 2021 New notes Dec. 31, 2021

310,000 65,000 340,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4A (Continued) Calculations: (Continued) (4) Transactions involving Mortgage Payable: Mortgage Payable Repayments

Jan. 1, 2021

585,000

Dec. 31, 2021

545,000

40,000

(5) Transactions involving Retained Earnings: Retained Earnings Closing div.

25,000

Jan. 1, 2021 Profit (b) Dec. 31, 2021

100,000 125,000 200,000

Dividends decl. Dec. 31, 2021

Cash Dividends 25,000 Closing entry 0

25,000

Dividends Payable Dividends paid

21,250

Jan. 1, 2021 2,500 Dividends decl. 25,000 Dec. 31, 2021 6,250

(6) Transactions involving Common Shares: Common Shares Jan. 1, 2021 Issuance Dec. 31, 2021

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17.56

685,000 122,000 807,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4A (Continued) e.

Cash December 31, 2021 Cash December 31, 2020 Net increase in cash for fiscal year 2021 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. LO 2 BT: AP Difficulty: C Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.5A a. GIL COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2021

Operating activities Profit ................................................................................ $32,000 Adjustments to reconcile profit to net cash provided (used) 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.5A (Continued) a. (Continued) (1) Transactions involving Equipment: Jan. 1, 2021 Dec. 31, 2021

Equipment 78,000 Disposal 60,000

18,000

Accumulated Depreciation—Equipment Disposal

9,500

Jan. 1, 2021 Depreciation Dec. 31, 2021

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 ..................................................... To record disposal of equipment.

8,500 9,500 18,000

b. Free cash flow = Cash provided (used) by operating activities – Cash used by investing activities = $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. LO 2,4 BT: AP Difficulty: S Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.6A a. STRONG SHOES Cash Flow Statement—Indirect Method Year Ended December 31, 2021

Operating activities Profit ................................................................................ $28,300 Adjustments to reconcile profit to net cash provided (used) 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.6A (Continued) a. (Continued) (1) Transactions involving Equipment:

Jan. 1, 2021 Dec. 31, 2021

Equipment 70,000 Disposal 60,000

10,000

Accumulated Depreciation-Equipment Disposal

1,200

Jan. 1, 2021 Depreciation Dec. 31, 2021

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 used by investing activities = $44,600 - $2,700 = $41,900

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. LO 2,4 BT: AP Difficulty: S Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.7A COYOTE LTD. Cash Flow Statement—Indirect Method Year Ended May 31, 2021

Operating activities Profit ................................................................................ $108,000 Adjustments to reconcile profit to net cash provided (used) 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, 2020.............................................................. 43,000 Cash, May 31, 2021 ............................................................. $ 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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Accounting Principles, Eighth Canadian Edition

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, 2020 Profit May 31, 2021

215,500 108,000 261,350

Dividends Payable Dividends paid

59,650

June 1, 2020 5,000 Dividends decl. 62,150 May. 31, 2021 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. LO 3 BT: AP Difficulty: M Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.8A CHARLIE’S CHOCOLATE COMPANY Cash Flow Statement—Direct Method Year Ended May 31, 2021

Operating activities Cash receipts From customers (1).......................

$664,300

Cash payments To suppliers (2) ............................. $(415,850) For operating expenses (3)........... (63,250) For interest (4) ............................... (5,300) For income tax (5) ......................... (41,675) (526,075) Net cash provided by operating activities ............ 138,225 Investing activities Sale of land ($51,250 – $19,300) ...................... 31,950 Purchase of equipment (6) ........................... (120,000) Purchase of land (Note X)............................. (56,250) Net cash used by investing activities........................ (144,300) Financing activities Sale of common shares............................... 51,250 Payment of cash dividends (8) ...................... (59,750) Net cash used by financing activities ....................... (8,500) Net decrease in cash ............................................................ (14,575) Cash, June 1, 2020.............................................................. 45,250 Cash, May 31, 2021 ............................................................. $ 30,675 Note X: Land with a cost of $103,000 was purchased by paying $56,250 cash and issuing a mortgage note payable for $46,750.

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Accounting Principles, Eighth Canadian Edition

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............

$673,600 (9,300) $664,300 $399,800 19,750 419,550 (3,700) $415,850 $97,700 (32,950) (1,500) $ 63,250 $ 5,300 $ 37,875 3,800 $ 41,675

(6) Increase in equipment ($325,000 – $190,000) (7) Increase in accumulated depreciation ($71,200 - $38,250) = $32,950

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.8A (Continued) Calculations: (Continued) (8) Transactions involving Retained Earnings: Retained Earnings Div. (derived)

61,250

June 1, 2020 Profit May 31, 2021

226,450 113,625 278,825

Dividends Payable Dividends paid

59,750

June 1, 2020 5,300 Dividends decl. 61,250 May. 31, 2021 6,800

Taking It Further: If Charlie’s Chocolate Company 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. LO 3 BT: AP Difficulty: M Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.9A a. E-PERFORM LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2021 Operating activities Profit ................................................................................ $141,180 Adjustments to reconcile profit to net cash provided (used) 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 equipment1....................................... 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 2 ......................................... Retirement of note payable (100,000) 3 .......................................... 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.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.9A (Continued) a. (Continued) 1

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 2

Notes payable, 2020 ............................................ Note issued for equipment.................................. Notes payable retired .......................................... Notes payable, 2021 ............................................

Retained earnings, 2020 ...................................... Profit ..................................................................... Dividends declared and paid .............................. Retained earnings, 2021 ......................................

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17.68

$150,000 60,000 210,000 (100,000) $110,000 $105,450 141,180 246,630 (12,630) $234,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.9A (Continued) b. E-PERFORM LTD. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2021

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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Accounting Principles, Eighth Canadian Edition

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. LO 2,3 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.10A a. WETASKIWIN LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2021

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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Accounting Principles, Eighth Canadian Edition

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.10A (Continued) b. WETASKIWIN LTD. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2021 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.10A (Continued) Taking It Further: Yes. A small change can be 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 2021 are lower at $14,000). LO 2,3 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11A a. DIATESSARON INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2021 Operating activities Profit ................................................................................ $68,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense1 ................................................ $43,500 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 equipment3 .................................................... (105,000) Sale of equipment 2............................................................... 6,000 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11A (Continued) a. (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

Cash from sale of equipment Carrying amount of equipment ...................................... $9,000 Less: Loss on sale........................................................ (3,000) Cash received ................................................................. $6,000

Purchase of equipment is $535,000 – $460,000 + $30,000 = $105,000.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11A (Continued) b. DIATESSARON INC. Cash Flow Statement – Direct Method Year Ended December 31, 2021

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 (5) 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11A (Continued) b. (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 - refer to (a)........... (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

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. LO 2,3 BT: AP Difficulty: M Time:50 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.12A a.

Net cash provided (used) by operating activities − net cash (provided) used by investing activities = free cash flow ($ in millions) Manulife: $17,791 − $16,287 = $1,504 Great-West: $5,638 − $3,984 = $1,654

Although Great-West generated more profit than Manulife and slightly more free cash flow, Manulife generated considerably more cash through its operating activities. This permitted Manulife to make greater investments than Great-West, which has considerably less cash and cash equivalents by the end of the year. Manulife appears to be in the stronger financial position.

Taking It Further: Manulife appears to be in a growth stage as it spent more than $16 million on investing activities. In addition, Manulife did not borrow additional funds to finance its investing activities. On the other hand, Great-West was able to fund outflows in financing activities but its cash and cash equivalents at the end of the year are considerably lower than Manulife’s. LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.1B

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 land for cash, at a gain.1 Acquired land by issuing common shares. Paid a cash dividend to preferred shareholders. Performed services for cash. Performed services on account. Purchased inventory for cash. Purchased inventory on account. Paid income tax. Made principal repayment on a trade note payable. Paid semi-annual bond interest. Received rent from a tenant in advance. Recorded depreciation expense. 2 Reacquired common shares at a price greater than the average cost of the shares. Issued preferred shares for cash. Collected cash from customers on account. Issued a note payable. Paid insurance for the month.

a. Classification O I NC

b. Cash

−

O O O O O

+ NE − NE −

−

O O O

− + NE

−

F O F O

+ + + −

− + NE

Interest paid can be classified as a financing activity. 1

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.1B (Continued) 2

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 use 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. LO 1 BT: K Difficulty: S Time:35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.2B a.

LUI INC. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2021

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, 2021

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.2B (Continued) Calculations (1)

(2)

(3)

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

(4)

Cash payments for interest Interest expense ............................................... 7,500 Less: increase in interest payable ..................... (3,500) Cash payments for interest .................................. $4,000

(5)

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.3B a. SABLE ISLAND LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2021

Operating activities Profit .............................................................................. $169,500 Adjustments to reconcile profit to net cash provided (used) 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, 2021

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.3B (Continued) Calculations: (1)

Cash receipts from customers Fees earned .............................................. $900,000 $8,000 Add: Decrease in accounts receivable .. 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. LO 2,3 BT: AP Difficulty: M Time:35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4B BIRD CORP. Cash Flow Statement (Partial) Year Ended December 31, 2021 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 2021 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 Repurchase of common shares (6) ........... (29,300) 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4B (Continued) Calculations: (1) Transactions involving Equipment: Equipment Jan. 1, 2021 Purchases Dec. 31, 2021

480,000 40,000 492,000

Disposal

28,000

Accumulated Depreciation—Equipment Disposal

22,000

Jan. 1, 2021 Depreciation Dec. 31, 2021

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 ..................................................... To record disposal of equipment.

1,000 22,000 5,000

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28,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4B (Continued) Calculations: (Continued) (2) Transactions involving Buildings: Building Jan. 1, 2021 Purchases Dec. 31, 2021

1,250,000 130,000 1,310,000

Disposal

70,000

Accumulated Depreciation—Building Disposal

52,500

Jan. 1, 2021 Depreciation Dec. 31, 2021

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 ......................................................... To record disposal of building.

35,500 52,500 18,000 70,000

(3) Transactions involving Notes Payable: Notes Payable Repayments

Solutions Manual .

157,000

17.88

Jan. 1, 2021 New note Dec. 31, 2021

216,000 155,000 214,000

Chapter 17

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4B (Continued) Calculations: (Continued) (4) Transactions involving Mortgage Payable: Mortgage Payable Repayments

Jan. 1, 2021

350,000

Dec. 31, 2021

335,000

15,000

(5) Transactions involving Retained Earnings: Retained Earnings Jan. 1, 2021 Profit (b) Dec. 31, 2021

240,000 66,250 300,000

Cash Dividends—Preferred Dividends decl. 6,250 Closing entry Dec. 31, 2021 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.4B (Continued) Calculations: (Continued) (6) Transactions involving Common Shares: Common Shares Reacquisition

Jan. 1, 2021

154,000

Dec. 31, 2021

123,200

30,800

Contributed Surplus—Reacquisition of Common Shares Jan. 1, 2021 0 Reacquisition 1,500 Dec. 31, 2021 1,500 Common Shares ................................................... 30,800 Contributed Surplus—Reacquisition of Common Shares ................................ Cash.............................................................. To record repurchase of common shares. e.

Cash December 31, 2021 Cash December 31, 2020 Net increase in cash for fiscal year 2021 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. LO 2 BT: AP Difficulty: C Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.5B a. GAUDETTE COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2021

Operating activities Profit ................................................................................ $38,000 Adjustments to reconcile profit to net cash provided (used) 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.5B (Continued) a. (Continued) (1) Transactions involving Equipment: Equipment Jan. 1, 2021 Purchases Dec. 31, 2021

78,000 5,000 70,000

Disposal

13,000

Accumulated Depreciation—Equipment Disposal

3,000

Jan. 1, 2021 Depreciation Dec. 31, 2021

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

10,000 3,000 13,000

b. Free cash flow = Cash provided (used) by operating activities – net cash used for investing activities = $13,000 + $5,000 = $18,000

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Accounting Principles, Eighth Canadian Edition

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. LO 2,4 BT: AP Difficulty: S Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.6B a. WANWRIGHT COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2021

Operating activities Profit ................................................................................ $102,660 Adjustments to reconcile profit to net cash provided (used) 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.6B (Continued) a. (Continued) (1) Transactions involving Plant Assets: Plant Assets Jan. 1, 2021 Purchases Dec. 31, 2021

205,000 141,000 310,000

Disposal

36,000

Accumulated Depreciation Disposal

26,000

Jan. 1, 2021 Depreciation Dec. 31, 2021

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 used for investing activities = $80,800 – $103,500 = $(22,700) 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 depreciation, that do not use cash. The company may have significant operating expenses that have not used cash because the company has not yet paid for the expenses, and has instead increased its liabilities. Finally, the company may be collecting its accounts receivable, which increases cash but not profit. LO 2,4 BT: AP Difficulty: S Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.7B KING CORP. Cash Flow Statement—Indirect Method Year Ended July 31, 2021

Operating activities Profit ................................................................................ $106,500 Adjustments to reconcile profit to net cash provided (used) 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

Net increase in cash.......................................................... 13,200 Cash, Aug. 1, 2020............................................................. 11,000 Cash, July 31, 2021 ........................................................... $ 24,200

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Accounting Principles, Eighth Canadian Edition

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, 2020 Purchases July 31, 2021

170,000 80,000 225,000

Disposal

25,000

Accumulated Depreciation—Equipment Disposal

5,000

Aug. 1, 2020 Depreciation July 31, 2021

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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Accounting Principles, Eighth Canadian Edition

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

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.8B CARLA’S CLEANING COMPANY Cash Flow Statement—Direct Method Year Ended May 31, 2021 Operating activities Cash receipts From customers (1)........................................

$665,300

Cash payments To suppliers (2) ............................. $(426,350) For operating expenses (3)........... (57,750) For interest (4) ............................... (6,300) For income tax (5) ......................... (40,675) (531,075) Net cash provided by operating activities ............ 134,225 Investing activities Sale of land ($53,750 – $20,300) ...................... 33,450 Purchase of land (Note X)............................... (58,750) Purchase of equipment (7) .......................... (120,000) Net cash used by investing activities (145,300) Financing activities Sale of common shares............................... Payment of cash dividends (8) ................... Net cash used by financing activities

53,750 (62,250)

Net decrease in cash......................................................... Cash, Aug. 1, 2020............................................................. Cash, July 31, 2021 ...........................................................

(8,500) (19,575) 47,750 $ 28,175

Note X: Land was purchased for $113,000 with a cash down payment of $58,750 and a mortgage note payable for $54,250.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.8B (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 (6) .......................... 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............

$675,600 (10,300) $665,300

$401,800 27,250 429,050 ( 2,700) $426,350 $99,700 (40,450) (1,500) $57,750 $6,300 $36,875 3,800 $40,675

(6) Increase in accumulated depreciation ($81,200 - $40,750) = $40,450 (7) Increase in equipment = $323,000 – $203,000 = $120,000

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PROBLEM 17.8B (Continued) Calculations: (Continued) (8) Transactions involving Retained Earnings: Retained Earnings Div. (derived)

63,750

June 1, 2020 Profit May 31, 2021

237,950 110,625 284,825

Dividends Payable Dividends paid

62,250

June 1, 2020 6,300 Dividends decl. 63,750 May. 31, 2021 7,800

Taking It Further: If Carla’s Cleaning was reporting under IFRS instead of ASPE, the interest paid could be classified as financing activities and the dividends paid could be classified as operating activities. LO 3 BT: AP Difficulty: M Time:25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.9B a. WAYFARER INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2021 Operating activities Profit ................................................................................ $75,600 Adjustments to reconcile profit to net cash provided (used) 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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Accounting Principles, Eighth Canadian Edition

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, 2021

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.9B (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 .............

$1,137,600 (46,800) $1,090,800 $772,200 111,600 883,800 (40,500) $843,300 $265,500 (69,300) $196,200 $25,200 3,600 $28,800

*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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Accounting Principles, Eighth Canadian Edition

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, 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. However, the rationale for the purchase is important since the company may be setting aside funds for a future capital project. LO 2,3 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.10B a. GALENTI INC. Cash Flow Statement—Indirect Method Year Ended December 31, 2021 Operating activities Profit ................................................................................ $90,310 Adjustments to reconcile profit to net cash provided (used) 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 ............................................ To record disposal of 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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Accounting Principles, Eighth Canadian Edition

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, 2021 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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Accounting Principles, Eighth Canadian Edition

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. LO 2,3 BT: AP Difficulty: M Time:60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11B a. MILK RIVER LTD. Cash Flow Statement – Indirect Method Year Ended December 31, 2021

Operating activities Profit ................................................................................ $29,750 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense1 ........................... $ 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 2........................................... Repayment of note 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11B (Continued) a. (continued) 1

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 note (calculated) ...................... (26,750) Notes payable, ending .............................................. $42,000

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11B (Continued) b. MILK RIVER LTD. Cash Flow Statement – Direct Method Year Ended December 31, 2021

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 note 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11B (Continued) b. (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 refer to (a) ....... 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 taxes payable .... Cash payments for income tax ...................

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$ 9,250 2,000 $11,250

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.11B (Continued)

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, this level of detail is lost. LO 2,3 BT: AP Difficulty: M Time:50 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 17.12B a.

Net cash provided (used) by operating activities − net cash (provided) used by investing activities = free cash flow ($ in thousands) Reitmans: $53,897 − $33,954 = $19,943 Le Château: $(7,428) - $4,516 = $(11,944)

Reitmans has the much stronger financial position. It generates strong cash from operating activities to expand and invest as well as repay debt.

Taking it Further: Reitmans appears to be in a growth stage, while Le Château is downsizing. Although both companies are making investments, Reitmans has better control of its growth from generating strong cash flows from operating activities. On the other hand, Le Château must obtain more financing to allow any of its investments to be made, as the cash flow from operating activities is negative for the year. LO 4 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

BYP17.1 FINANCIAL REPORTING PROBLEM a.

For the purpose of its cash flow statement, Aritzia uses cash and cash equivalents, which consist of cash and term deposits with maturities of less than three months at the date of purchase.

Per Aritzia’s 2018 cash flow statement, cash and cash equivalents increased by $32,948,000 ($112,475,000$79,527,000).

The one significant investing activity reported in Aritzia’s cash flow statement was the purchase of property and equipment in the amount of $61,061,000.

The most significant financing activity on Aritzia’s cash flow statement was the repayment of long-term debt in the amount of $15,321,000.

As indicated by note 20 to the financial statements, Aritzia had no significant noncash investing and financing activities in 2018.

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Accounting Principles, Eighth Canadian Edition

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

$25.6 (20.5) (5.1) $ 0

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 more ($3.8 million) in cash from operating activities compared to 2016. This 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 or lower 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 = $25.6 million − $20.5 million = $5.1 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 2017 fiscal year.

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Accounting Principles, Eighth Canadian Edition

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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Accounting Principles, Eighth Canadian Edition

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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Accounting Principles, Eighth Canadian Edition

BYP17.5 “ALL ABOUT YOU” ACTIVITY a.

Your cash position at August 31, 2021 is close to half of the cash you had at September 1, 2020. If you were to maintain the same spending patterns over the next year you could be completely out of cash by August 31, 2021.

b. My Cash Flow Statement Year Ended August 31, 2022 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

2021

$ 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

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2022

17.120

7,500

7,500 1,500

(1,000) 6,500

1,000 10,000

(4,700) 2,100 $(2,600)

(1,900) 4,000 $2,100

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Accounting Principles, Eighth Canadian Edition

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.

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.

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.

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, 2022

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

$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, 2022

Coffee Beans Ltd. Year Ended December 31, 2021

$235,279 (157,833) $ 77,446

Coffee Beans Ltd. Year Ended December 31, 2021

$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 2021 from 2020. 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.

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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CHAPTER 18 Financial Statement Analysis Learning Objectives 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability. 7. Recognize the limitations of financial statement analysis.

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

BT Item

1. 2. 3. 4.

1 1 1 2

K K C K

1. 2. 3. 4. 5.

1 1 2 2 2

K C AP AP AP

1. 2. 3. 4.

2 2 3 2,3

AP AN AP AN

1. 2,7 AN 2. 1,3,6 AN 3. 2,3,7 AN

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BT Item LO BT Item LO BT Item LO BT Questions 5. 2 9. 4 5 C AN 13. C 17. 4,5,6 C 6. 3 4 5 7 K 10. K 14. C 18. C 7. 3 C 11. 4 C 15. 6 K 19. 7 AN K 12. K 16. K 20. C 8. 4 5 6 7 Brief Exercises 6. 3 4 6 AP 11. AP 16. AP 21. 4,6 AP AP 12. C 17. AP 22. 4,7 AP 7. 3 5 6 8. 4 5 6 C 13. AP 18. AN 9. 4 5 AN 14. AN 19. 4,5,6 K AP 15. C 20. 4,5,6 C 10. 4 6 Exercises 5. 3 AN 9. 4 AN 13. 6 AP 17. 4,5,6 AP 6. 4 AN 10. 5 AP 14. 6 AN 18. 4,5,6 AN 7. 4 AP 11. 5 AN 15. 1,4,5,6 C 19. 6,7 AN AN 12. AP 16. 4,5,6 AN 8. 4 6 Problems 4. 4,5,6 AP 7. 1,4,5,6 AN 10. 4,5,6 AN 5. 1,4,5,6 AN 8. 4,5,6,7 AN 11. 4,5,6 AN 6. 4,5,6 AP 9. 4,5,6 AN

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Accounting Principles, Eighth Canadian Edition

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

Difficulty:

Time: AACSB

CPA CM

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 statement analysis.

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 statement 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

18-6

Synthesis Evaluation

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

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

(a) An intracompany basis of comparison uses data from one company. It compares an item to the same item from prior periods, or with other financial items in the same period, for that company. A store may compare this year’s sales to last year’s sales, for example. (b) An intercompany basis of comparison uses data from two or more companies. It compares an item to the same item for one or more other companies. 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.

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

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 and ratio analysis can be used in both intraand intercompany comparisons.

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

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.

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Chapter 18

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 5.

Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or decrease of an item over 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.

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

(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%.

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Yes, it can. By converting the accounting numbers to percentages, companies of vastly different sizes can be more readily compared.

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

(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.

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

A high current ratio might be hiding liquidity problems with inventory or accounts receivable. For example, a high level of inventory will cause the current ratio to increase. Increases in inventory can occur when 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.

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Chapter 18

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Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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.

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

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 are 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.

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

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 its debt. (b) Long-term lenders such as banks, mortgage companies, and leasing companies would be the most interested users of solvency ratios.

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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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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.

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

15.

(a) Profitability ratios measure the profit or operating success of a company for a specific period. (b) Shareholders and potential investors would be most interested in profitability ratios.

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

QUESTIONS (Continued) 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.

LO 6 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

(a) Asset turnover (b) Acid-test ratio (c) Operating cycle (d) Return on equity (e) Interest coverage

LO 4,5,6 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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.

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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 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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Chapter 18

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Accounting Principles, Eighth 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, Eighth 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)

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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

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BRIEF EXERCISE 18.3 Cash Accounts receivable Inventory Prepaid expenses Total current assets

2021 120% 179% 154% 100% 157%

2020 225% 151% 148% 0% 146%

2019 150% 131% 122% 45% 122%

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Chapter 18

2018 100% 100% 100% 100% 100%

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.4 2021 (50%) 15% 47% 23% 25%

Cash Accounts receivable Inventory Prepaid expenses Total current assets

2020 31% 12% (13%) 44% 0%

2019 15% 25% (15%) (10%) (2%)

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BRIEF EXERCISE 18.5 2021

2020

Change

as a %

(a) Profit

$450,000

$500,000

$(50,000)

-10%

(b) Profit

2022 $522,000

2021 $450,000

Change $72,000

as a % 16%

(c) The change was a decrease in 2021 and an increase in 2022. LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 18

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Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.6 2021 Current assets Property, plant, and equipment Goodwill Total assets

Amount $1,530,000

Percentage 32.8%

3,130,000

67.0%

10,000 $4,670,000

0.2% 100.0% 2020

Current assets Property, plant, and equipment Goodwill Total assets

Amount $1,175,000 2,800,000

Percentage 28.9% 68.9%

90,000 $4,065,000

2.2% 100.0%

2019 Amount Percentage $1,225,000 30.1% 2,850,000 69.9% $4,075,000

0.0% 100.0%

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18-14

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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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18-15

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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: An 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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18-16

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.9 (a) Current 1. 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 slightly higher than the recommended 2:1. The acid-test ratio is less than half of the current ratio. That is not unusual for companies with inventory. Inventory makes up more than 50% of the current assets. If they have an issue with slow-moving inventory, the acid-test ratio indicates they may run into liquidity issues. LO 4 BT: AN Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

18-17

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.10 (a) 2021 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

2020 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. LO 4 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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18-18

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.11 (a) Beginning inventory Purchases Ending inventory Cost of goods sold

(1)

Inventory turnover

365 ÷

4.3

2020 $4,581,000 = = ($860,000 + $940,000) ÷ 2

(2) Days sales in = inventory

(b)

2020 $860,000 4,661,000 (940,000) $4,581,000

2021 $4,260,000 = = ($940,000 + $1,020,000)÷2

(2) Days sales = in inventory

(1)

2021 $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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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.12 (a)

Improvement: A 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, debt repayment, or dividends.

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

BRIEF EXERCISE 18.13 ($ in thousands) Debt to total (a) assets

Interest (b) coverage

$2,186,697 $1,934,339 $755,5621

113.0%

18.9

times

$39,877 $755,562 = $519,410 + $39,877 + $196,275

(c) Free cash flow = $637,334 - $131,224 = $506,110 LO 5 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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18-20

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 2020. Culleye’s interest coverage ratio has improved. The business can pay its interest expense more times in 2021 than it could in 2020.

(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 2021. LO 5 BT: AN Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.16 ($ in thousands) (a)

2017 (1) Gross profit margin (2)

Profit margin

$21,640 $403,777

2016 (1) Gross profit margin (2) Profit margin

$403,777 – $191,709 $403,777

= =

= 52.5% =

5.36%

$290,830 – $145,206 $290,830

50.1%

$26,485 =

9.11%

$290,830 (b)

While gross profit margin improved slightly, the profit margin decreased significantly. The 2017 performance indicates that operating costs appeared to have increased.

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.17 Asset (a) turnover

Return on (b) assets

Return on (c) equity

$750,000

1.4

$60,000 $550,000

10.9%

$60,000 $380,0002

15.8%

$550,0001

times

Average total assets ($600,000 + $500,000) ÷ 2 =$550,000 Average shareholders’ equity ($450,000 + $310,000) ÷ 2 = $380,000

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BRIEF EXERCISE 18.18 Ignoring all other factors, if an investor wants to purchase shares for growth, eBay would be the better choice of the two as indicated by the higher price-earnings ratio. Although eBay does not pay out any of its profits as dividends, it is viewed to have more future earnings potential than Apple since eBay has a higher priceearnings ratio. If instead, the investor is looking for income, Apple would be a better choice since it pays 26% of its profits as dividends whereas eBay does not pay any dividends. In addition, Apple is considered a less risky investment as it has a lower priceearnings ratio. LO 6 BT: AN Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.19 Ratio Acid-test ratio 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

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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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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.21 (a)

2021

Average accounts receivable

$1,090 + $965 2

= $1,027.50

2020

Average accounts receivable

$965 + $880 2

2021

Average total assets

$27,510 + $26,760 2

2020

Average total assets

$26,760 + $23,815 = $25,287.50 2

2021

Average shareholders' equity

2020

Average shareholders' equity

(b)

$922.50

= $27,135.00

$12,830 + $12,575 2

$12,702.50

$11,752.50

$12,575 + $10,930 2

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

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

BRIEF EXERCISE 18.21 (Continued) (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-of-period figures with end-ofperiod figures, or period figures with period figures, do not require averaging.

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 4,7 BT: AN Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

2021 $120,000 400,000 90,000 145,000 150,000 135,000

2020 $ 80,000 350,000 70,000 125,000 115,000 120,000

2019 $100,000 300,000 65,000 150,000 100,000 85,000

(a) Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings

2021 120% 133% 138% 97% 150% 159%

2020 80% 117% 108% 83% 115% 141%

2019 100% 100% 100% 100% 100% 100%

2021

Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings

50% 14% 29% 16% 30% 13%

2020 (20%) 17% 8% (17%) 15% 41%

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.2 Net sales increased by 10% in 2020 but then fell back within 1% of the level of net sales of 2019. 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 2020 than sales but declined in 2021 below the 2019 level. This means that operating expenses were brought under control in 2021, 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 2020 and 2021 numbers are calculated based on the hypothetical numbers from 2019 and the percentages. Net sales Cost of goods sold Gross profit Operating expenses Profit from operations and before income tax Income tax expense Profit

2021 101% $2,020 100% 1,200 820 99% 495 325

2020 110% $2,200 111% 1,332 868 112% 560 308

2019 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. LO 2 BT: AN Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

18-30

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

2021 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%

2020 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. LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.4 a. BLACKBERRY LIMITED Balance Sheet February 28, (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

2018

2017

$2,548 1,232 $3,780

$1,717 1,579 $3,296

$831 (347) $484

48.4% -22.0% 14.7%

$464 811 1,275 2,505

$621 618 1,239 2,057

$ (157) 193 36 448

-25.3% 31.2% 2.9% 21.8%

$3,780

$3,296

$484

14.7%

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.4 (Continued) b. BLACKBERRY LIMITED Balance Sheet February 28, (in U.S. millions)

2018 Amount Percent $2,548 67.4% 1,232 32.6% $3,780 100.0%

2017 Amount Percent $1,717 52.1% 1,579 47.9% $3,296 100.0%

$ 464 811 1,275 2,505

12.3% 21.5% 33.7% 66.3%

$ 621 618 1,239 2,057

18.8% 18.8% 37.6% 62.4%

$3,780

100.0%

$3,296

100.0%

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. c.

The most significant changes from 2017 to 2018 include the increase in the working capital, improving the liquidity for the business. Current assets increased from 52.1% of total assets to 67.4% in 2018. Current liabilities decreased from 18.8% of total assets to 12.3% in 2018. BlackBerry has considerably fewer non-current assets as shown by the decline from 47.9% of total assets in 2017 to 32.6% of assets in 2018. Finally, shareholders’ equity increased from 62.4% of assets in 2017 to 66.3% in 2018 from the improvement in profitability.

LO 2,3 BT: AN Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.5 Assuming there are no other factors impacting the income statement than those stated in the data provided, we can determine the vertical percentage of profit for each year as follows: 2021: 100.0% – 59.4% – 19.6% – 4.2% = 16.8% 2020: 100.0% – 60.5% – 20.4% – 3.8% = 15.3% 2019: 100.0% – 60.0% – 20.0% – 4.0% = 16.0% It would appear that profit declined as a percentage of net sales between 2019 and 2020 and increased from 2020 to 2021. Profit as a percentage of sales increased from 2019 to 2021. LO 3 BT: AN Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.6 a. (1) and (2) Receivables turnover Collection period

Receivables turnover Collection period

2021 $6,420,000 = = ($850,000 + $750,000) ÷ 2 =

365 ÷

8.0

2020 $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

2021 $4,540,000 = = ($1,020,000 + $980,000) ÷2

Days sales = in inventory

Inventory turnover

365 ÷

4.5

2020 $4,550,000 = = ($980,000 + $840,000) ÷ 2

Days sales = in inventory

365 ÷

5.0

(5) Operating cycle = Days sales in inventory + Collection period 2021: 127 days = 81 days + 46 days 2020: 114 days = 73 days + 41 days Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.6 (Continued) b.

Management should be concerned that inventory is moving more slowly in 2021 than it did in 2020, by an extra 8 (81 – 73) days, and it is taking an extra 5 (46 – 41) days to collect accounts receivable. Taken together, the company’s operating cycle has increased (deteriorated) by 13 (127 – 114) days in 2021. 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. It is possible the company may have decided to increase the amount of inventory that is kept on hand. Management needs to review and address these issues.

LO 4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.7 ($ in millions) a. 2021

2020

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. Current ratio 2. Acid-test ratio 3. Receivables turnover 4. Collection period 5. Inventory turnover 6. Days sales in inventory 7. Operating cycle

Worse Worse Better Better Better Better Better

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

Since the inventory turnover is declining, it is evident the company is selling its inventory more slowly.

Overall, the company’s liquidity has deteriorated. The increase in the current ratio is most likely caused by the increase in inventory and receivables which is 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.

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

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

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.10 All figures in thousands, except ratios a. 2021 Debt to total = assets

$2,177 $3,886

Free cash flow

$925

($406 + $27 + $174) = $27

Interest coverage

–

$475

56.0%

$450

22.5 times

2020 Debt to total = assets

$1,959 $3,708

Free cash flow

= $580

Interest coverage

–

52.8%

$300 =

$280

($375 + $17 + $152) = $17

Debt to total assets Free cash flow Interest coverage

32.0 times

Worse Better Worse

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.11 a.

The debt to total assets has gradually improved over the past three years.

The interest coverage has deteriorated over the past three years.

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.

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.12 ($ in thousands) 2021 $750 – $480 = 36.0% $750

Gross profit margin

Profit margin

Asset turnover

$750 1.4 = times ($600 + $500) 2

Return on assets

$60 = 10.9% ($600 + $500) 2

Return on shareholders’ equity

$60 = 15.8% ($450 + $310) 2

$60 $750

= 8.0%

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.13 a. ($ in thousands) 2021 Gross profit margin Profit margin

2020

$500 – $375 = 25.0% $500

$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

Gross profit margin Profit margin Asset turnover Return on assets Return on equity

$30.0 ($100 + $50) 2

= 40.0%

Worse Worse Better Worse Worse

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

18-42

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.14 a.

Best Buy is more profitable than Nordstrom. Its profit margin of 3.1% is higher than that of Nordstrom’s, at 2.4%. On the other hand, Nordstrom’s return on equity is higher at 40.7% compared to that of Best Buy at 27.0%. This inconsistency is likely due to varying capital structures of the retailers. Note that earnings per share are not comparable between companies because of differing capital structures.

Investors favour Nordstrom. Nordstrom has a higher priceearnings ratio of 21.3 times earnings compared to Best Buy’s 11.3 times.

Investors would purchase shares in Nordstrom for dividend income. The payout ratio is considerably higher with Nordstrom.

LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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.

LO 1,4,5,6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.16 ($ in thousands except for share price) a. b. Asset $1,555,067 1. turnover P = ($1,855,168 + $1,728,186) ÷ 2 2.

Current ratio

= .87 times

$245,172 = 0.48

$515,324 3.

Debt to total assets

$1,143,392 $1,855,168

= 61.6%

Earnings per share

$70,346 63,474

$1.11

Free cash flow

$(45,195)

Interest coverage

Priceearnings ratio

Profit margin

$154,352

–

$199,547

$70,346 + $22,734 + $27,490 $22,734

= 5.3 times

$36.74

= 33 times

$1.11

$70,346 $1,555,067

= 4.5%

$70,346 ($1,855,168 + $1,728,186) ÷ 2

= 3.9%

$70,346 ($711,776 + $751,895) ÷ 2

= 9.6%

Return on assets

Return on 10. equity

LO 4,5,6 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

18-45

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.17 a.

$35,5001 Current ratio = $10,370 1 $ 5,300 + $21,200 + $9,000 = $35,500 Acid-test ratio

= 3.4

$ 5,300 + $21,200

2.6

$120,000 = ($21,200 + $23,400) ÷ 2

5.4

Times

= 68

Days

8.8

Times

= 41

Days

$10,370 c.

Receivables turnover

Collection period

Inventory turnover

= f.

Days sales in inventory =

365

5.4

$70,000 ($9,000 + $7,000) ÷ 2 365

8.8

Profit margin

Asset turnover

$14,000 $120,000

= 11.7%

Return on assets

$120,000 ($110,500 + $120,100) ÷ 2

= 1.0 times

Return on equity

$14,000 ($110,500 + $120,100) ÷ 2

= 12.1%

$14,000 ($100,1302 + $89,0003) ÷ 2

= 14.8%

Solutions Manual .

18-46

Chapter 18

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Accounting Principles, Eighth Canadian Edition

EXERCISE 18.17 (Continued) k.

Debt to total assets

$10,370 $110,500

= 9.4%

2($75,000 + $25,130) = $100,130 3($69,000 + $20,000) = $89,000

LO 4,5,6 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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.

Inventory turnover is calculated as cost of goods sold ÷ average inventory. So, cost of goods sold is $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.

Current assets of $365,000 + non-current assets of $435,000 = total assets of $800,000.

Current ratio is current assets ÷ current liabilities = 2:1. So current assets of $365,000 ÷ 2 = current liabilities $182,500.

Debt to total assets ratio = 70% so total assets of $800,000 × 70% = $560,000.

Non-current liabilities = total liabilities of $560,000 less current liabilities of $182,500 = $377,500.

Total liabilities and shareholders’ equity = total assets of $800,000.

Shareholders’ equity = Total liabilities and shareholders’ equity of $800,000 – total liabilities (f) above of $560,000 = $240,000.

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE 18.18 (Continued) Summary of results: MAIN RIVER CORP. Balance Sheet December 31, 2021 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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Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 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 2021. If, however, we analyze the change in the total comprehensive income, we see a significant increase in 2020, compared to a significant decrease in profit in 2019. Total comprehensive income declined significantly in 2021 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. LO 6,7 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 18.1A a. WESTJET AIRLINES LTD. Income Statement Horizontal Analysis Year Ended December 31, 2016 2015 Revenue Operating expenses Profit from operations Other expenses Profit before income taxes Income tax expense Profit

113% 113% 110% 89% 112% 117% 110%

110% 106% 143% 185% 140% 149% 136%

WESTJET AIRLINES LTD. Balance Sheet Horizontal Analysis December 31, 2016 2015 Assets Current assets 129% Non-current assets 160% Total assets 149% Liabilities and Shareholders’ Equity Current liabilities 115% Non-current liabilities 216% Total liabilities 161% Shareholders' equity 130% Total liabilities and shareholders' equity 149%

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18-50

2014

2013

109% 107% 119% 315% 105% 103% 106%

100% 100% 100% 100% 100% 100% 100%

2014

2013

98% 139% 124%

113% 111% 112%

100% 100% 100%

110% 141% 124% 123%

95% 133% 112% 112%

100% 100% 100% 100%

124%

112%

100%

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.1A (Continued) b.

In a horizontal analysis of the income statement over the past four years, WestJet’s 13% increase in revenue has generated an increase in profit of 10%. Profit from operations and profit reached a peak in 2015 and then declined in 2016 because the increase in operating expenses grew at a rate higher than that of revenues. In a horizontal analysis of the balance sheet, the current assets increase of 29% outpaced the 15% increase in current liabilities over the same period. In spite of a 10% increase in profit, the shareholders’ equity increased 30%. Non-current liabilities more than doubled to finance the 60% increase in non-current assets.

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 implementation of the new accounting standards requiring that lease assets and lease liabilities be included in the balance sheet will have the following effect on ratios for future fiscal years: Asset turnover decrease Debt to total assets increase Free cash flow decrease Gross profit margin decrease Interest coverage increase Return on assets decrease LO 2,7 BT: AN Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.2A a.

CHEN INC. AND CHUAN LTD. Income Statements Year Ended December 31, 2021

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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Accounting Principles, Eighth Canadian Edition

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%

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.

The analysis in (c) is an intercompany comparison, which involves comparing ratios for different companies.

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Accounting Principles, Eighth Canadian Edition

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. LO 1,3,6 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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 2019 and 2020. However, cost of goods sold increased significantly as a percentage of net sales in 2021 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.

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.

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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Accounting Principles, Eighth Canadian Edition

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.

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, Eighth Canadian Edition

PROBLEM 18.4A a. 2021 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 53,000

$4.74

$203,000 55,000

$3.69

14.2

times

17.3

times

25.7

days

17.3

21.1

days

8.1

times

Collection period Inventory turnover

2020

$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

$1,011,500 $133,000 + $115,500 2

_ Solutions Manual

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.4A (Continued) 2021 7.

Days sales in inventory

Return on common shareholders’ equity =

Return on assets

10.

Current ratio

11.

Acid-test ratio

12.

Asset turnover

6.7

$251,475 $618,175 + $566,700 2

54.5

42.4%

days

365

÷ 8.1 =

$203,000 $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

$ $

$485,650 - $216,800 $328,175

0.82

$369,900 - $133,000 $208,500

13. Debt to total assets

365

$2,055,750 = $1,136,350 + $970,200 2 $518,175 $1,136,350

2020

1.95

= 45.6%

times

369,900 208,500

$1,818,500 $970,200 + $852,800 2 $403,500 $970,200

45.1

days

39.3%

22.3%

1.77

1.14

2.00

times D

= 41.6%

* b. D denotes deterioration, while I denotes improvement _ Solutions Manual

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Accounting Principles, Eighth 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 2021. Ratio No. 7 shows the business has days sales in inventory of 54.5 days in 2021. Combined (25.7 + 54.5) is 80.2 days for the operating cycle. This result is worse than the 75-day operating cycle of its 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. LO 4,5,6 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual .

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.5A a. 2021 1.

Profit margin

Asset turnover

Earnings per share

Payout ratio

Debt to total assets

Gross profit margin

$700,000

$30,000 $650,000

6.4%

1.13

$45,000 32,000

$1.41

5.67

55.6%

$30,000 31,000

$25,000

$45,000

1.15

times

= $0.97

$5.00

$1.41

4.6%

$600,000 + $533,000 2

$8.00

$650,000

times

$640,000 + $600,000 2

Price4. earnings ratio = 5.

$45,000 $700,000

2020

times

5.15 times

60.0%

27.5%

38.5% _

$0.97 2

$18,000

$30,000

= $155,000 $640,000

24.2%

40.0%

$165,000 $600,000

= $280,000 $700,000

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18-60 .

$250,000 $ 650,000

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.5A (Continued) a. (Continued) The dividends paid were calculated from the statement of income and the retained earnings balances on the balance sheet: Retained Earnings Dec. 31, 2020 Add Profit for 2021 Less Retained Earnings Dec. 31, 2021 Dividends declared and paid in 2021 Retained Earnings Dec. 31, 2019 Add Profit for 2020 Less Retained Earnings Dec. 31, 2020 Dividends declared and paid in 2020 b.

$125,000 45,000 170,000 145,000 1 $25,000 $113,000 30,000 143,000 125,000 2 $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 2021, the financial position of the company has improved in that there is less debt compared to total assets. Despite 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. LO 1,4,5,6 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth 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 = ($113,2001 + $107,9002) ÷2 1 $113,200 = $107,800 + $5,400 2 $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, Eighth Canadian Edition

PROBLEM 18.6A (Continued) Solvency Ratios Debt to 8. total assets

Interest coverage

$312,500 $998,200

$407,0003

31.3%

14.5 times

$28,000 $407,000 = $265,300 + $113,700 + $28,000

cash 10. Free flow

Profitability Ratios Gross profit 11. margin = Profit 12. margin

Solutions Manual .

$161,300

$154,900

$923,000 $1,948,500

47.4%

$265,300 $1,948,500

13.6%

$1,948,500 = ($998,200 + $852,800) ÷ 2

Asset 13. turnover

14. Return on assets

$ 316,200 –

$265,300 = ($998,200 + $852,800) ÷ 2 =

18-63

2.1 times

28.7%

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. LO 4,5,6 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7A a. and b.

Liquidity Ratios Current 1. ratio Acid-test 2. ratio

Receivables 3. turnover

2021

$364,0001 $187,000

Change

2020 $343,0002 $182,000

= 1.9

$209,0003 = = 1.1 $187,000 3 $209,000 = $95,000 + $114,000

$195,0004 = 1.1 $182,000 4 $195,000 = $85,000 + $110,000

$675,0005 = = 5.8 ($118,0007 + $115,0008) ÷ 2

$630,0006 times = 5.6 ($115,0009 + $111,00010) ÷ 2 9 115,000 = $110,000 + $5,000 10 $111,000 = $108,000 + $3,000

7 8

Collection 4. period =

$118,000 = $114,000 + $4,000 $115,000 = $110,000 + $5,000 365

5.8

= 63

days

365

5.6

= 65

times

days

1$754,000 - $390,000 2$648,000 - $305,000 5Net Credit Sales 2021= $900,000 x .75 = $675,000 6Net Credit Sales 2020= $840,000 x .75= $630,000

_ Solutions Manual

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7A (Continued) a. and b. (Continued) Liquidity Ratios (Continued) Inventory 5. = turnover

Days sales in inventory

Operating = cycle

b. Change

2021

2020

$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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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7A (Continued) a. and b. (Continued) b. 2021 Solvency Ratios Debt to 8. total assets = Interest coverage

Free cash 10. flow

$377,000 $754,000

Change

2020 = 50.0%

$332,000 $648,000

51.2%

$111,00011 = 3.2 times $35,000 11 $111,000 = $57,250 + $35,000 + $18,750

$105,00012 = 5.3 times $20,000 12 $105,000 = $65,000 + $20,000 + $20,000

$103,500 – $115,500

$129,000 – $35,000 =

= $(12,000)

$94,000

_ Solutions Manual

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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7A (Continued) a. and b. (Continued) 2021 Profitability Ratios Gross profit 11. margin = Profit 12. margin

Asset 13. turnover

Return on 14. assets Return on 15. equity

b. Change

2020

$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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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7A (Continued) a. and b. (Continued) Profitability Ratios (Continued) Earnings 16. per share =

2021 $57,250 20,000

17. Payout ratio =

$3,000 ÷

b. Change

2020 = $2.86

$65,000 20,000

$57,250 = 5.2%

$8,000

$65,000

= $3.25

= 12.3%

_ Solutions Manual

18-69 .

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 2021 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. LO 1,4,5,6 BT: AN Difficulty: M Time: 65 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.8A a.

Changretta Inc.

Liquidity Ratios

Solomon 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

18-71 .

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

Solomon Ltd. $10,552 $44,934

N/A no interest expense

= 23.5%

$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.

Changretta 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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Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.8A (Continued) b.

Liquidity: When looking at the liquidity ratios, one can conclude that Changretta is more liquid than Solomon. Where there is a large discrepancy in the performance is in the collection of accounts receivable. It is taking Solomon more than four times longer to collect accounts receivable compared to Changretta. Changretta has also outpaced Solomon for its operating cycle. Solvency: The debt to total assets ratio is similar between Changretta and Solomon. Changretta is noticeably better in its absence of any interest expense. Profitability: In spite of a much better gross profit margin, Changretta realizes very little profit. Solomon 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. LO 4,5,6,7 BT: AN Difficulty: M Time:60 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.9A a.

Accounts receivable management can be assessed by reviewing a 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. 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.

Inventory management 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.

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, Eighth 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 assets ratio of 35% (compared to Supplies Unlimited’s debt to total assets ratio of 30.3%). However, 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.

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.

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.9A (Continued) Taking It Further: Financial leverage is said to be positive if a company can 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. Fournitures Ltée is using financial leverage more effectively. LO 4,5,6 BT: AN Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 18.10A a.

DavidsTea is more liquid, with a much better current ratio and acid-test ratio than those of Starbucks. On the other hand, DavidsTea turns over inventory more slowly than Starbucks.

The debt to total assets of 31% for DavidsTea compared to Starbucks’ 69% indicates that Davids Tea is the more solvent of the two beverage retailers. However, DavidsTea incurred huge losses and cannot pay its interest without increasing the loss.

The gross profit margin is higher at Starbucks making the overall profitability better with Starbucks. The current year losses for DavidsTea generated a negative profit margin and return on assets.

Taking It Further: Investors are willing to buy shares of Starbucks at a share price that is over 27 times that of the current earnings for each share. This multiple indicates a higher than average confidence on the part of shareholders that Starbucks can grow its operations in the future and generate a good return on the investment made by shareholders. LO 4,5,6 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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.

Net sales of $1,250,000 less gross profit of $500,000 = cost of goods sold of $750,000.

Profit from operations of $166,250 plus operating expenses of $333,750 = gross profit of $500,000.

Profit before income taxes $155,750 plus interest expense $10,500 = profit from operations of $166,250.

Income tax rate is 20%. Profit after income tax is $124,600 so profit before income tax $124,600 ÷ .8 (100% – 20%) = $155,750.

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, 2021 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

Chapter 18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

Inventory turnover is 8 times and so cost of goods sold of $750,000 ÷ 8 = inventory of $93,750.

Current ratio is 3:1 so current liabilities of $63,333 × 3 = current assets of $190,000(rounded).

Total assets of $833,333 less current assets of $190,000 = property, plant, and equipment of $643,333.

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.

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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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.11A (Continued) Summary of results: SCHWENKE CORPORATION Balance Sheet December 31, 2021 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. LO 4,5,6 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.1B a. LULULEMON ATHLETICA INC. Income Statement Fiscal Year Ended,

Revenue Cost of goods sold Gross profit Other expenses Profit before income taxes Income tax expense Profit

2018 147% 142% 153% 177% 120% 140% 108%

2017 130% 130% 131% 146% 110% 83% 127%

2016 115% 120% 109% 118% 96% 71% 111%

2015 100% 100% 100% 100% 100% 100% 100%

Jan. 29 2017

Jan. 31 2016

Feb. 1 2015

122% 143% 128%

96% 115% 101%

100% 100% 100%

151% 119% 144% 125%

141% 130% 139% 94%

100% 100% 100% 100%

128%

101%

100%

LULULEMON ATHLETICA INC. Balance Sheet Horizontal Analysis Jan.28 2018 Assets Current assets 151% Non-current assets 163% Total assets 154% Liabilities and Shareholders’ Equity Current liabilities 183% Non-current liabilities 230% Total liabilities 194% Shareholders' equity 147% Total liabilities and shareholders' equity 154%

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.1B (Continued) b.

lululemon athletica has seen some significant revenue growth over the four-year period. The increase in revenues exceeds the increase in cost of goods sold. Revenue increased 47% and cost of goods sold increased 42%, providing for an increase in gross profit of 53%. Other expenses, although not as a significant a dollar amount, increased more dramatically and lead to a more modest increase in profit. The horizontal analysis of the balance sheet adds additional insight into lululemon’s financial performance and position. Current assets have increased at the essentially the same rate as revenues. The shareholders’ equity increase has far exceeded the trend of profit. The increase in current liabilities raises a liquidity concern at its increase outpaced the increase in current assets. Noncurrent liabilities are small in comparison to non-current assets but have more than doubled since 2015.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.1B (Continued) Taking It Further: lululemon could review the items included in the operating costs and determine where they may be able to reduce costs. Alternatively, lululemon may have look at ways to increase their revenues or at increasing prices as a means to improve the revenue figure. LO 2,7 BT: AN Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.2B a.

Income Statement Year Ended June 30, 2021 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%

Solutions Manual .

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%

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 a lower operating expenses as a percentage of sales, 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.

The comparison in (c) above is an intercompany comparison, which involves comparing ratios for different companies.

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Accounting Principles, Eighth Canadian Edition

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. LO 1,3,6 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

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, although 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.

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.

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 such as Canada Goose Holdings Inc., 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 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. LO 2,3,7 BT: AN Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.4B a. 2021

2020

$1,033,750 $2,153,650

= 48.0%

$818,000 $1,828,500

= 44.7%

$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

$2,153,650 $142,600 + $122,800 2

16.23 times

16.21

times

Collection period

16.23

22.5

days

22.5

days

Inventory turnover

$1,119,900 $170,000 + $113,000

7.91

times

8.84

times

Gross profit margin

Profit margin

365

$1,828,500 $122,800 + $102,800 2 365

16.21

$1,010,500 $113,000 + $115,500

* D denotes deterioration, while I denotes improvement, NC denotes no change

_ Solutions Manual

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.4B (Continued) 2020

2021 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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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.4B (Continued)

Taking It Further: As calculated in ratio e, the collection period for Andy’s Art Company is 22.5 days in 2021. Ratio g shows the business has days sales in inventory of 46 days in 2021. 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. LO 4,5,6 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.5B a. 2021 1.

Gross profit margin

Asset turnover

$290,000 $710,000

2020 =

$710,000

$260,000 $660,000

40.8%

1.15

$660,000

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

$40,000 31,000

$1.72

$35,000

$55,000

1.17

times

= $1.29

$5.00

$1.72

39.4%

$600,000 + $533,000 2

$8.00

4.65

63.6%

times

3.88 times

70.0%

$1.29 2

$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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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.5B (Continued) a. (Continued) The dividends paid were calculated from the statement of income and the retained earnings balances on the balance sheet: Retained Earnings Dec. 31, 2020 Add Net income for 2021 Less Retained Earnings Dec. 31, 2021 Dividends declared and paid in 2021 Retained Earnings Dec. 31, 2019 Add Net income for 2020 Less Retained Earnings Dec. 31, 2020 Dividends declared and paid in 2020 b.

$125,000 55,000 180,000 145,000 1 $35,000 $113,000 40,000 153,000 125,000 2 $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 2021 the financial position of the company has improved in that there is less debt compared to total assets. Although the dividend payout has reduced as a percentage of net income, shareholders still bid up the market price of the shares, making the price-earnings ratio increase. The priceearnings ratio remains modest.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.5B (Continued) 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. LO 1,4,5,6 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

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Accounting Principles, Eighth Canadian Edition

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

$154,1001 = $180,150 * $154,100 = $49,380 + $104,720

= 0.9

$790,000 = 7.6 ($110,2202 + $98,3003) ÷2 2 $110,220 = $104,720 + $5,500 3 $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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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.6B (Continued) Solvency Ratios Debt to total 8. assets

Interest coverage

$73,270 + $12,930 + $3,200 = 27.9 times $3,200

cash 10. Free flow

$116,780

Profitability Ratios Gross profit 11. margin = Profit 12. margin

–

$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

Solutions Manual .

= 37.7%

$250,000 $790,000

Asset 13. turnover

Return on 15. equity

$270,150 $715,800

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PROBLEM 18.6B (Continued) Profitability Ratios (Continued) Earnings 16. per share

$73,270 15,000

$23,620

Payout ratio

= $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. LO 4,5,6 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7B a and b. 2021

Liquidity Ratios

Current 1. ratio

$415,000

2020

$360,000

= 1.2

$337,750 Acid-test 2. ratio

Receivables 3. turnover =

Collection 4. period

= 1.1

= 0.4

$315,000

$50,000 + $100,000 $337,750

Change

$42,000 + $87,000 $315,000

= 0.4

$1,000,000 = 10.2 times ($105,0001 + $91,0002) ÷2 1 $105,000 = $100,000 + $5,000 2 $91,000 = $87,000 + $4,000

$940,000 = 11.0 ($91,0003 + $80,0004) ÷2) 3 $91,000 = $87,000 + $4,000 4 $80,000 = $77,000 + $3,000

times

days

= 365

10.2

= 36

days

365

11.0

= 33

_ Solutions Manual

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7B (Continued) Liquidity Ratios (Continued) 2021 5.

Inventory turnover

Days sales in inventory =

Operating cycle

2020

$650,000 = 3.0 ($240,000 + $200,000) ÷ 2

times

Change

$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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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7B (Continued) Solvency Ratios 2021 8.

Debt to total assets

Interest coverage

Free cash 10. flow

$437,750 $1,240,000

2020 = 35.3%

$415,000 $1,135,000

Change

= 36.6%

$150,0005 $125,0006 = 4.3 times = 3.6 times = $35,000 $35,000 5 6 $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

_ Solutions Manual

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7B (Continued) Profitability Ratios 2021 Gross 11. profit margin

$350,000 $1,000,000

Profit 12. margin

$97,750 $1,000,000

Asset 13. turnover

Return 14. on assets

2020 = 35.0%

$305,000 $940,000

= 32.4%

= 9.8%

$76,500 $940,000

= 8.1%

=0.9 times

= 6.9%

$940,000

$1,000,000 = 0.8 times ($1,240,000 + $1,135,000)÷2

($1,135,000 + $1,075,000) ÷2

$97,750

$76,500

Change

= 8.2% ($1,135,000 + $1,075,000)÷2

($1,240,000 + $1,135,000)÷2

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7B (Continued) Profitability Ratios (Continued)

Return on 15. equity

2021 $97,750 = 12.8% = ($802,250 + $720,000) ÷ 2

Earnings 16. per share

$97,750 100,000

2020 $76,500 ($720,000 + $659,000) ÷ 2 $76,500 100,000

= $0.98

Change

= 11.1%

= $0.77

= 20.3%

17. Payout ratio = $15,500

$97,750

= 15.9%

$15,500

$76,500

_ Solutions Manual

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.7B (Continued) c. (1) Liquidity: Deteriorated Track’s overall liquidity has deteriorated in 2021 compared to 2020 despite 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 2021 compared to 2020 which resulted in a large decrease in free cash flow. (3) Profitability: Improved Profitability, with the exception of the asset turnover ratio and payout ratio, both of which decreased slightly, has improved overall.

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.8B a. ($ in millions) Hudson’s Bay

Liquidity Ratios 1.

Current ratio

Receivables = turnover

Collection period

Inventory turnover

Days sales = in inventory 4.

Operating cycle

365

Nordstrom

$4,302 $3,500

= 1.23

$14,349 $386

= 37.2

times

= 10

days

= 2.5

times

37.2

$8,514 $3,371.5

$3,503 $3,289

= 1.07

$15,478 $172

= 90.0

times

= 4

days

= 5.0

times

365 ÷

90.0

$9,890 $1,961.5

365

2.5

= 146

days

365

÷ 5.0

= 73

days

146

= 156

days

= 77

days

= 73

_ Solutions Manual

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.8B (Continued) a. (Continued) Solvency Ratios 5. 6.

Hudson’s Bay

Debt to total assets = Interest coverage

$9,827 $12,234

Profit margin

Asset turnover

Return on 10. assets Return on 11. equity

$7,138 $8,115

= 80.3%

Profitability Ratios: 7. Gross profit = margin 8.

Nordstrom

$437 + $136+$353 $136

$5,835 $14,349

$5,588 $15,478

40.7%

$(581) $14,349

= (4.0)%

$14,349 $12,219

= 1.2

$(581) $12,219 $(581) $2,408.5

= 88.0% times

= 6.8

36.1%

$437 $15,478

= 2.8%

$15,478 $7,986.5

= 1.9

= (4.8)%

$437 $7,986.5

= 5.5%

= (24.1)%

$437 $923.5

= 47.3%

times

= =

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Accounting Principles, Eighth Canadian Edition

PROBLEM 18.8B (Continued) b. Liquidity: Nordstrom is the better performer.

Hudson’s Bay has a stronger current ratio than Nordstrom. Nordstrom collects its receivables 2.5 times faster than Hudson’s Bay. Receivables are small for both companies, likely because most of their sales are cash or bank credit cards. Nordstrom’s inventory turnover is twice 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 as Hudson’s Bay has an overall loss for the year. 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. The overall loss has generated negative return on assets and return on equity ratios for Hudson’s Bay.

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Accounting Principles, Eighth 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.

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 ÷ 9.9 times) times for Flavour, it appears that Refresh is turning over its inventory at a much slower rate than its competitor.

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.

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.

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 can earn a higher return on equity by using borrowed money in its operations than it must 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 smaller excess return of 14.5%. LO 4,5,6 BT: AN Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth 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.

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.

Shaw has the better profit margin but Rogers shows the better asset turnover, return on assets and return on equity ratios. These results might be affected by the different capital structures of the two companies. 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 price-earnings ratio. This is consistent with (c) as investors would likely favour a company with a better return on equity. LO 4,5,6 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Accounting Principles, Eighth Canadian Edition

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.

Gross profit is 40% of net sales of $11,000,000 or $4,400,000.

Gross profit of $4,400,000 less operating expenses of $1,600,000 equals profit from operations of $2,800,000.

Profit from operations of $2,800,000 less profit before income taxes of $2,357,000 equals interest expense of $443,000.

Profit of $1,650,000 plus income tax expense of $707,000 equals profit before income taxes of $2,357,000.

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, 2021 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

Chapter 18

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Accounting Principles, Eighth Canadian Edition

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.

Receivables turnover is 10 times and so net sales of $11,000,000 ÷ 10 = accounts receivable of $1,100,000.

Inventory turnover is 8 times and so cost of goods sold of $6,600,000 ÷ 8 = inventory of $825,000.

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.

Return on assets is 22% so profit of $1,650,000 ÷ 22% equals total assets of $7,500,000.

Current ratio is 2:1 and so current assets (g) of $2,650,000 ÷ 2 equals current liabilities of $1,325,000.

Total liabilities of $4,100,000 less current liabilities (l) of $1,325,000 equals non-current liabilities of $2,775,000.

Total liabilities and shareholders’ equity of $7,500,000 less shareholders’ equity of $3,400,000 equals total liabilities of $4,100,000.

Total liabilities and shareholders’ equity equals total assets of $7,500,000.

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PROBLEM 18.11B (Continued) Summary of results: VIEUX CORPORATION Balance Sheet December 31, 2021 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. LO 4,5,6 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

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BYP18.1 FINANCIAL REPORTING PROBLEM a. Aritzia Inc. Consolidated Statements of Financial Position (in thousands) February 25, 2018 Amount Percentage

ASSETS Current Cash and cash equivalents Accounts receivable Inventory Income taxes recoverable Prepaid expenses Total current assets Property and equipment Intangible assets Goodwill Other assets Deferred tax assets Total assets

$112,475 2,413 78,833 1,728 15,307 210,756 135,672 61,387 151,682 1,664 6,517 $567,678

19.8% 0.4% 13.9% 0.3% 2.7% 37.1% 23.9% 10.8% 26.7% 0.3% 1.1% 100.0%

February 26, 2017 Amount Percentage $79,527 2,624 74,184 12,743 169,078 95,695 58,484 151,682 2,052 9,854 $486,845

16.3% 0.5% 15.2% 0.0% 2.6% 34.7% 19.7% 12.0% 31.2% 0.4% 2.0% 100.0%

Note: The percentages shown throughout this solution do not always add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place.

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Accounting Principles, Eighth Canadian Edition

Aritzia Inc. Consolidated Statements of Financial Position (in thousands) February 25, 2018 Amount Percentage

LIABILITIES Current Accounts payable Income taxes payable Current portion of lease obligations Current portion of long- term debt Deferred revenue Total current liabilities Other non-current liabilities Deferred tax liabilities Lease obligations Long-term debt Total liabilities SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings (deficit) Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity

$66,195 399 19,127 19,308 105,029 59,566 17,922 99,460 281,977

11.7%

171,130 76,522 38,613 (564) 285,701 $567,678

February 26, 2017 Amount Percentage

0.1% 3.4% 3.4% 18.5% 10.5% 3.2% 17.5% 49.7%

$50,484 19,222 766 15,288 15,749 101,509 47,711 16,555 983 118,479 285,237

10.4% 3.9% 0.2% 3.1% 3.2% 20.9% 9.8% 3.4% 0.2% 24.3% 58.6%

30.1% 13.5% 6.8% -0.1% 50.3% 100.0%

131,853 88,612 (18,480) (377) 201,608 $486,845

27.1% 18.2% -3.8% -0.1% 41.4% 100.0%

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BYP18.1 (Continued) a. (Continued) Aritzia Inc. Consolidated Statements of Operations Years Ended February 25 and February 26 (in thousands) 2018 Amount Percentage Net revenue $743,267 100.0% Cost of sales 447,776 60.2% Gross profit 295,491 39.8% Selling, general and administrative 183,857 24.7% Stock-based compensation expense 17,240 2.3% Total operating expenses 201,097 27.1% Income (loss) from operations 94,394 12.7% Finance expense 5,221 0.7% Other expense (income), net 1,890 0.3% Income before income taxes 87,283 11.7% Income tax expense 30,190 4.1% Net income (loss) $57,093 7.7%

2017 Amount $667,181 401,658 265,523 178,773 103,044 281,817 (16,294) 10,455 (1,362) (25,387) 30,722 $(56,109)

Percentage 100.0% 60.2% 39.8% 26.8% 15.4% 42.2% -2.4% 1.6% -0.2% -3.8% 4.6% -8.4%

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BYP18.1 (Continued) b.

The focus of interest on Aritzia’s statement of financial position is the elimination of the deficit with the net income generated in 2018 leaving a strong balance in retained earnings. Liquidity is not of concern as demonstrated by the current assets being double the current liabilities in 2018. Long-term liabilities for lease obligation were eliminated in 2018. Property and equipment increased and long-term debt decreased demonstrating that the profits were reinvested into the business. Solvency would not appear to be an issue with total liabilities representing 49.7% of total assets in 2018, down from 58.6% in 2016. Debt to total assets was very near 50% in 2018. On the income statement, the item that is instrumental in achieving profitability in 2018 was the reduction of stockbased compensation expenses, which were unusually high in 2017 and represented 15.4% of the net revenue. This item likely explains the unusual situation where, although there was a loss before income taxes, there was a large income tax expense in 2017, and a large current liability on the statement of financial position.

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BYP18.2 INTERPRETING FINANCIAL STATEMENTS a.

In terms of liquidity, both companies have very low current ratios and 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.

CN has more 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.

CN is more profitable as demonstrated by the profit margin. With the exception of return on equity, all its ratios are the same or better than those of CP.

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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 to draw more informed conclusions. The purpose of Canadian Tire’s MD&A 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.

The quoted closing price for CTC.A on the TSX Composite Index was as follows at the given dates: December 29, 2017 $163.90 December 30, 2016 $139.27

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BYP18.5 (Continued) c. 2016 1.

Current ratio

Inventory turnover

Debt to total assets

Interest coverage

5. 6.

1.8

4.8

$9,565.5 $15,302.8

62.5%

$747.5 + $93.9 + $263.5 $93.9

11.8

$4,392.5 $ 12,681.0

34.6%

$747.5 $12,681.0

5.9%

4.9%

13.0%

15.1

$747.5 =

21.1%

Gross profit margin Profit margin Return on assets

= 8.

$8,637.7 $4,680.9

Return on equity Price-earnings = ratio =

$8,288.5 $1,710.7 + $1,764.5 2

$747.5 $15,302.8 + $14,987.8 2 $747.5 $5,737.3 + $5,789.7 2 $139.27

times

$9.25

10.

Payout ratio

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$157.5

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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

2017 1.9:1 5.1 times 64.3% 9.1 times 34.5% 6.1% 5.3% 14.5% 15.3 times 20.7%

2016 1.8:1 4.8 times 62.5% 11.8 times 34.6% 5.9% 4.9% 13.0% 15.1 times 21.1%

Comparison Better Better Worse Worse Worse Better Better Better Better Worse

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.

Ratios and stock performance show mostly positive trends.

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 its increased earnings and profits. Mark’s Work Warehouse and Forzani acquisitions of the past explain much of the growth of the business.

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BYP18.5 (Continued) 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 Santé has as many receivables as the larger, public company. Its inventory turnover is much lower, which seems unusual for a bakery.

Both companies have good debt to total asset ratios, and correspondingly strong times interest earned ratios. Overall, Santé Smoothies & Sweets Ltd. remains in the better solvency position.

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 2021, Okanagan Fruit & Vegetable Corp.’s ratios in 2020 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.

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).

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 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 short-term return may not be the most appropriate option. To maintain liquidity and reduce its risk, Santé 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

Learning Objectives 1. Explain the different types of sales tax. 2. Record sales taxes collected by businesses on goods and services. 3. Record sales taxes paid on the purchase of goods and services. 4. Record the remittance of sales taxes.

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Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

BT Item LO

1. 2. 3. 4.

1 2 2 2

C AP AP AP

5. 6. 7. 8.

2 2 3 3

1. 2.

2,3 2,3

AP AP

3. 4.

2,3 2,3

1. 2.

2,3 2,3

AP AP

3. 4.

2,3 2,3

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BT Item LO BT Item LO BT Item LO BT Brief Exercises AP 9. 3 AP 13. 3 AP 17. 4 AP 10. 3 AP 14. 3 AP AP 11. 3 AP 15. 3 AP AP 12. 3 AP 16. 4 AP Exercises AP 5. 2,3 AP 7. 2,3,4 AP 9. 2,3,4 AP AP 6. 2,3 AP 8. 2,3,4 AP Problems AP 5. 2,3,4 AP AP 6. 2,3,4 AP

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

Difficulty:

Time: AACSB

CPA CM

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

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BRIEF EXERCISE B.2 Accounts Receivable .................................... 1,839.60 Sales......................................................... GST Payable ($1,600 × 5%) .................... QST Payable ($1,600 × 9.975%)............. To record sales on account. Cost of Goods Sold ....................................... Merchandise Inventory .......................... To record cost of goods sold.

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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 ............................ To record sales return.

800.00 40.00 79.80

Merchandise Inventory ................................ Cost of Goods Sold ............................... To record cost of goods returned.

450.00

919.80

450.00

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

BRIEF EXERCISE B.4 Accounts Receivable ................................... 1,839.60 Sales........................................................ GST Payable ($1,600 × 5%) ................... QST Payable ($1,600 × 9.975%)............ To record sales on account. Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. QST Payable ($800 × 9.975%)...................... Accounts Receivable ............................ To record sales return.

1,600.00 80.00 159.60

800.00 40.00 79.80 919.80

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

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BRIEF EXERCISE B.5 Accounts Receivable .................................... Service Revenue ..................................... To record revenue for services performed.

450 450

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

BRIEF EXERCISE B.6 Accounts Receivable .................................... Service Revenue ..................................... GST Payable ($700 × 5%) ....................... To record revenue for services performed.

735 700 35

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

BRIEF EXERCISE B.7 Merchandise Inventory ................................. GST Recoverable ($4,100 × 5%) ................... Accounts Payable................................... Purchase on account.

4,100 205 4,305

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

BRIEF EXERCISE B.8 Accounts Payable .......................................... GST Recoverable ($500 × 5%) ............... Merchandise Inventory .......................... To record credit for goods returned.

525 25 500

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

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BRIEF EXERCISE B.9 Merchandise Inventory ................................. HST Recoverable ($4,100 × 15%) ................. Accounts Payable................................... To record purchase on account.

4,100 615 4,715

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

BRIEF EXERCISE B.10 Accounts Payable .......................................... HST Recoverable ($500 × 15%) ............. Merchandise Inventory .......................... To record credit for goods returned.

575 75 500

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

BRIEF EXERCISE B.11 Supplies ($600 × 1.06) ................................... GST Recoverable ($600 × 5%) ...................... Cash ......................................................... To record cash purchase of supplies.

636 30 666

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

BRIEF EXERCISE B.12 Supplies .......................................................... HST Recoverable ($600 × 15%) .................... Cash ......................................................... To record cash purchase of supplies.

600 90 690

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

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BRIEF EXERCISE B.13 Vehicles .......................................................... HST Recoverable ($32,000 × 15%) ............... Accounts Payable................................... To record purchase of truck on account.

32,000 4,800 36,800

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

BRIEF EXERCISE B.14 Vehicles ($32,000 × 1.07) .............................. GST Recoverable ($32,000 × 5%) ................. Accounts Payable................................... To record purchase of truck on account.

34,240 1,600 35,840

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

BRIEF EXERCISE B.15 Merchandise Inventory ................................. Supplies ($300 × 1.08) ................................... GST Recoverable ($5,300 × 5%) ................... Accounts Payable................................... To record purchase of inventory and supplies on account.

5,000 324 265 5,589

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

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BRIEF EXERCISE B.16 GST Payable ................................................... GST Recoverable .................................... Cash ......................................................... To record GST remittance.

6,120

PST Payable ................................................... Cash ......................................................... To record PST remittance.

8,570

940 5,180

8,570

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

BRIEF EXERCISE B.17 Cash ................................................................ HST Payable ................................................... HST Recoverable .................................... To record collection of HST recoverable.

690 3,920 4,610

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

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SOLUTIONS TO EXERCISES EXERCISE B.1 Province of Manitoba GENERAL JOURNAL Account Titles and Explanation May

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Debit

Rent Expense ................................................ 7,300 GST Recoverable ($7,300 × 5%)................ 365 Cash ...................................................... Payment of rent.

Credit

7,665

Accounts Receivable—Marvin .................. 28,250 Sales ...................................................... GST Payable ($25,000 × 5%) ............... PST Payable ($25,000 × 8%) ............... To record sales on account.

25,000 1,250 2,000

Cost of Goods Sold .................................... 18,600 Merchandise Inventory........................ To record cost of goods sold.

18,600

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EXERCISE B.1 (Continued) Province of Manitoba GENERAL JOURNAL Account Titles and Explanation May

Debit

Sales Returns and Allowances ............... GST Payable ($800 × 5%)......................... PST Payable ($800 × 8%) ......................... Accounts Receivable—Marvin ......... To record sales allowance.

Credit

800 40 64 904

Merchandise Inventory ............................ 11,000 GST Recoverable ($11,000 × 5%)............ 550 Accounts Payable—Macphee........... To record purchase on account. Furniture ($600 × 1.08) ............................. GST Recoverable ($600 × 5%)................. Cash ................................................... To record cash purchase of furniture.

648 30

GST Payable.............................................. GST Recoverable ............................... Cash ................................................... To record GST remittance.

7,480

11,550

678

1,917 5,563

LO 2,3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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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 .................................................. Payment of rent.

Debit

Credit

7,300 365 7,665

3 Accounts Receivable—Marvin ................. 26,250 Sales.................................................. 25,000 GST Payable ($25,000 × 5%) ........... 1,250 To record sales on account. Cost of Goods Sold ..................................... 18,600 Merchandise Inventory ................... 18,600 To record cost of goods sold.

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EXERCISE B.2 (Continued) Province of Alberta GENERAL JOURNAL Account Titles and Explanation

Date May

Debit

5 Sales Returns and Allowances ................ GST Payable ($800 × 5%) .......................... Accounts Receivable—Marvin ......... To record sales allowance.

Credit

800 40 840

7 Merchandise Inventory.............................. 11,000 GST Recoverable ($11,000 × 5%) ............. 550 Accounts Payable—Macphee.......... 11,550 To record purchase on account. 12 Furniture ..................................................... GST Recoverable ($600 × 5%) .................. Cash ................................................... To record cash purchase of furniture.

600 30

31 GST Payable ............................................... GST Recoverable .............................. Cash ................................................... To record GST remittance.

7,480

630

1,917 5,563

LO 2,3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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EXERCISE B.3 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date May

Debit

Credit

1 Rent Expense ..................................... HST Recoverable ($7,300 × 13%) ..... Cash .............................................. Payment of rent.

7,300 949

3 Accounts Receivable—Marvin ......... Sales ............................................. HST Payable ($25,000 × 13%)..... To record sales on account.

28,250

Cost of Goods Sold ........................... Merchandise Inventory ............... To record cost of goods sold.

18,600

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8,249

25,000 3,250

18,600

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EXERCISE B.3 (Continued) Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date May

Debit

Credit

5 Sales Returns and Allowances ........ HST Payable ($800 × 13%) ................ Accounts Receivable—Marvin ... To record sales allowance.

800 104

7 Merchandise Inventory ..................... HST Recoverable ($11,000 × 13%) ... Accounts Payable—Macphee ..... To record purchase on account.

11,000 1,430

12 Furniture ............................................. HST Recoverable ($600 × 13%) ........ Cash .............................................. To record cash purchase of furniture.

600 78

31 HST Payable ....................................... HST Recoverable ......................... Cash .............................................. To record HST remittance.

7,480

904

12,430

678

1,917 5,563

LO 2,3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.16

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.4 Province of Manitoba GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Solutions Manual .

Debit

Rent Expense ........................................... GST Recoverable ($5,500 × 5%) ............. Cash .................................................... To record payment of rent.

5,500 275

Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................ To record purchase on account.

8,000 400

Accounts Payable—Comet ..................... Purchase Returns and Allowances GST Recoverable ($500 x 5%) To record credit for goods returned.

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%) ............. To record sales on account.

10,000 500 800

Equipment ($1,200 × 1.08) ....................... GST Recoverable ($1,200 × 5%) ............. Cash .................................................... To record cash purchase of computer.

1,356

B.17

1,296 60

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.4 (Continued) Province of Manitoba (continued)

Date Nov. 30

GENERAL JOURNAL Account Titles and Explanation GST Payable ............................................. GST Recoverable ............................... Cash .................................................... To record GST remittance.

Debit

Credit

2,520 985 1,535

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.18

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.5 Province of Alberta GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Debit

1 Rent Expense ............................................. GST Recoverable ($5,500 × 5%) ............... Cash .................................................... Cash payment for rent.

5,500 275

4 Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................ Purchase on account.

8,000 400

6 Accounts Payable—Comet ..................... Purchase Returns and Allowances... GST Recoverable ($500 x 5%) .......... To record credit for goods returned.

525

Credit

5,775

8,400

500 25

7 Accounts Receivable—Solar Star ............ 10,500 Sales.................................................. 10,000 GST Payable ($10,000 × 5%) ........... 500 To record sales on account. 12 Equipment...................................................... 1,200 GST Recoverable ($1,200 × 5%) ............... 60 Cash ................................................... To record cash purchase of computer.

Solutions Manual .

B.19

1,260

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.5 (Continued) Province of Alberta (continued) Nov.

30 GST Payable ............................................... GST Recoverable .............................. Cash ................................................... To record GST remittance.

2,520 985 1,535

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.20

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.6 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Debit

Credit

1 Rent Expense ..................................... HST Recoverable ($5,500 × 13%) ..... Cash .............................................. To record payment of rent.

5,500 715

4 Purchases........................................... HST Recoverable ($8,000 × 13%) ..... Accounts Payable—Comet.......... To record purchase on account.

8,000 1,040

6 Accounts Payable—Comet............... Purchase Returns and Allowances HST Recoverable ($500 x 13%) .. To record credit for goods returned.

565

6,215

9,040

500 65

7 Accounts Receivable—Solar Star ... Sales............................................... HST Payable ($10,000 × 13%) ...... To record sales on account.

11,300

12 Equipment .......................................... HST Recoverable ($1,200 × 13%) ..... Cash .................................................. To record cash purchase of computer.

1,200 156

Solutions Manual .

B.21

10,000 1,300

1,356

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.6 (Continued) Province of Ontario (continued)

Date

GENERAL JOURNAL Account Titles and Explanation

Nov. 30 HST Payable ....................................... HST Recoverable ......................... Cash .............................................. To record remittance of HST.

Debit

Credit

2,520 985 1,535

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.22

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.7 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 1 Delivery Expense ($200 × 1.07) ....... GST Recoverable ($200 × 5%) ......... Cash .............................................. Cash payment for delivery.

214.00 10.00

5 Repairs Expense ($800 × 1.07) ....... GST Recoverable ($800 × 5%) ......... Cash .............................................. Cash payment for repairs.

856.00 40.00

10 Supplies ($250 × 1.07) ...................... GST Recoverable ($250 × 5%) ......... Accounts Payable........................ Purchase of supplies on account.

267.50 12.50

224.00

896.00

280.00

13 Accounts Receivable ........................ 5,264.00 Service Revenue .......................... GST Payable ($4,700 × 5%)......... PST Payable ($4,700 × 7%) ......... To record revenue for services performed. 15 Cash ................................................... Accounts Receivable .................. Collection on account.

896.00

22 Travel Expense ($720 × 1.07) ........... GST Recoverable ($720 × 5%) ......... Cash .............................................. Cash payment for airline ticket.

770.40 36.00

Solutions Manual .

B.23

Credit

4,700.00 235.00 329.00

896.00

806.40

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.7 (Continued)

Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 30 Telephone Expense ($150 × 1.07) ... GST Recoverable ($150 × 5%) ......... Accounts Payable........................ To record telephone services payable.

160.50 7.50

30 GST Payable ...................................... GST Recoverable ......................... Cash .............................................. Record GST remittance.

1,890.50

Credit

168.00

30 PST Payable ...................................... 2,640.00 Cash .............................................. Record PST remittance.

741.60 1,148.90

2,640.00

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.24

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.8 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 8 Equipment ................................................. HST Recoverable ($1,500 × 15%) ............ Accounts Payable .............................. Purchased equipment on account.

1,500.00 225.00

10 Supplies..................................................... HST Recoverable ($100 × 15%) ............... Cash...................................................... Cash purchase of supplies.

100.00 15.00

12 Accounts Receivable ............................... Service Revenue ................................. HST Payable ($1,250 × 15%) .............. To record revenue for services performed.

1,437.50

18 Repairs Expense ...................................... HST Recoverable ($220 × 15%) ............... Cash...................................................... Cash payment for repairs.

220.00 33.00

22 Cash ........................................................... Accounts Receivable .......................... Collection on account.

1,437.50

30 HST Payable .............................................. HST Recoverable ................................ Cash...................................................... Remit HST Payable.

2,520.60

Credit

1,725.00

115.00

1,250.00 187.50

253.00

1,437.50

820.45 1,700.15

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.25

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

EXERCISE B.9 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 8 Equipment ................................................. GST Recoverable ($1,500 × 5%).............. Accounts Payable .............................. Purchased equipment on account.

1,500.00 75.00

10 Supplies..................................................... GST Recoverable ($100 × 5%)................. Cash...................................................... Cash purchase of supplies.

100.00 5.00

12 Accounts Receivable ............................... Service Revenue ................................. GST Payable ($1,250 × 5%) ................ To record revenue for services performed.

1,312.50

18 Repairs Expense ...................................... GST Recoverable ($220 × 5%)................. Cash...................................................... Cash payment for repairs.

220.00 11.00

22 Cash ........................................................... Accounts Receivable......................... Collection on account.

1,312.50

30 GST Payable.............................................. GST Recoverable ................................ Cash...................................................... Record GST remittance.

970.50

Credit

1,575.00

105.00

1,250.00 62.50

231.00

1,312.50

315.55 654.95

LO 2,3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.26

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth 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 .... Purchase on account.

2,700 351

4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ............... To record sales on account.

2,938

Cost of Goods Sold ($675 × 2) .................. Merchandise Inventory ........................ To record cost of goods sold.

1,350

5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Merchandise Inventory ......................... To record credit for goods returned.

791

Solutions Manual .

B.27

Credit

3,051

2,600 338

1,350

91 700

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.1 (Continued) Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date

Nov. 7 Sales Returns and Allowances1 ............... HST Payable ($1,300 × 13%) ..................... Cash....................................................... To record cash refund for returned merchandise. 1

Debit 1,300 169

1,469

($2,600 ÷ 2)

Merchandise Inventory .............................. Cost of Goods Sold ............................. To record cost of returned goods.

675

8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash....................................................... To record cash purchase of supplies.

200 26

675

226

Accounts Receivable—Regional Band.... Sales ...................................................... HST Payable ($5,100 × 13%) ............... To record sales on account.

5,763

Cost of Goods Sold ................................... Merchandise Inventory........................ To record cost of goods sold.

2,850

Solutions Manual .

Credit

B.28

5,100 663

2,850

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.1 (Continued) Province of Ontario

Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov. Merchandise Inventory ($1,900 × 2) ......... HST Recoverable ($3,800 × 13%) ............. Accounts Payable—Yamaha Canada . Purchase on account.

3,800 494

14 Cash ............................................................ Accounts Receivable........................... Collection on account.

4,150

16 Accounts Payable—Yamaha Canada ...... HST Recoverable ($1,900 × 13%) ........ Merchandise Inventory......................... To record credit for goods returned.

2,147

20 Accounts Payable—Fender Supply ......... Cash ...................................................... Payment on account.

3,051

Credit

4,294

4,150

247 1,900

3,051

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.29

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth 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 .... Purchase on account.

2,700 135

4 Cash ............................................................. Sales ...................................................... GST Payable ($2,600 × 5%) ................. PST Payable ($2,600 × 7%).................. To record sales on account.

2,912

Cost of Goods Sold.................................... Merchandise Inventory ........................ To record cost of goods sold.

1,350

5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Merchandise Inventory ......................... To record credit for goods returned.

735

Solutions Manual .

B.30

Credit

2,835

2,600 130 182

1,350

35 700

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.2 (Continued) Province of British Columbia GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Credit

1,300 Nov. 7 Sales Returns and Allowances ............... GST Payable ($1,300 × 5%) ....................... 65 PST Payable ($1,300 × 7%) ........................ 91 Cash....................................................... To record cash refund for return of goods. 1

($2,600 ÷ 2)

Merchandise Inventory .............................. Cost of Goods Sold.............................. To record cost of goods returned.

675

8 Supplies ($200 × 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash....................................................... Cash purchase of supplies.

214 10

675

224

Accounts Receivable—Regional Band.... Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%) ................. To record sales on account.

5,712

Cost of Goods Sold ................................... Merchandise Inventory........................ To record cost of goods sold.

2,850

Solutions Manual .

1,456

B.31

5,100 255 357

2,850

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.2 (Continued) Province of British Columbia

Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov. Merchandise Inventory ($1,900 × 2) ......... GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada . Purchase on account.

3,800 190

14 Cash ............................................................ Accounts Receivable........................... Collection on account.

4,150

16 Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Merchandise Inventory......................... To record credit for goods returned.

1,995

20 Accounts Payable—Fender Supply ......... Cash ...................................................... Payment on account.

2,835

Credit

3,990

4,150

95 1,900

2,835

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.32

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth 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 .... Purchase on account.

2,700 351

4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ............... To record sales on account.

2,938

5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Purchase Returns and Allowances ..... To record credit for goods returned.

791

7 Sales Returns and Allowances1 ............... HST Payable ($1,300 × 13%) ..................... Cash....................................................... To record credit for sales return. 1 ($2,600 ÷ 2)

1,300 169

Solutions Manual .

B.33

Credit

3,051

2,600 338

91 700

1,469

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.3 (Continued) Province of Ontario GENERAL JOURNAL Date Account Titles and Explanation

Debit

Nov. 8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash....................................................... Cash purchase of supplies.

200 26

10 Accounts Receivable—Regional Band Sales ..................................................... HST Payable ($5,100 × 13%) .............. To record sales on account.

5,763

13 Purchases ($1,900 × 2) ............................. HST Recoverable ($3,800 × 13%)............. Accounts Payable—Yamaha Canada Purchase on account.

3,800 494

14 Cash ............................................................ Accounts Receivable .......................... Collection on account.

4,150

16 Accounts Payable—Yamaha Canada ..... HST Recoverable ($1,900 × 13%)........ Purchase Returns and Allowances .... To record credit for goods returned.

2,147

Solutions Manual .

B.34

Credit

226

5,100 663

4,294

4,150

247 1,900

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.3 (Continued) Province of Ontario

Date

GENERAL JOURNAL Account Titles and Explanation

Nov. Accounts Payable—Fender Supply ......... Cash ...................................................... Payment on account.

Debit

Credit

3,051 3,051

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.35

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth 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 .... Purchase on account.

2,700 135

2,912

5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Purchase Returns and Allowances ..... To record credit for goods returned.

735

7 Sales Returns and Allowances1 .............. GST Payable ($1,300 × 5%) ....................... PST Payable ($1,300 × 7%) ........................ Cash....................................................... To record credit for sales return. 1 ($2,600 ÷ 2)

1,300 65 91

Solutions Manual .

B.36

Credit

2,835

2,600 130 182

35 700

1,456

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.4 (Continued) Province of British Columbia GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov. 8 Supplies ($200 x 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash....................................................... Cash purchase of supplies.

214 10

10 Accounts Receivable—Regional Band Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%).................. To record sales on account.

5,712

13 Purchases ($1,900 × 2) .............................. GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada . Purchase on account.

3,800 190

Cash ............................................................. Accounts Receivable ........................... Collection on account.

4,150

Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Purchase Returns and Allowances ..... To record credit for goods returned.

1,995

Solutions Manual .

B.37

Credit

224

5,100 255 357

3,990

4,150

95 1,900

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.4 (Continued) Province of British Columbia

Date

GENERAL JOURNAL Account Titles and Explanation

Nov. Accounts Payable—Fender Supply ......... Cash....................................................... Payment on account.

Debit

Credit

2,835 2,835

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.38

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.5 a.

Province of Alberta

Date May 1

Solutions Manual .

GENERAL JOURNAL Account Titles and Explanation

Debit

Rent Expense ....................................... Prepaid Rent ......................................... GST Recoverable ($3,300 × 5%) ......... Cash ................................................ Cash payment for rent.

1,650 1,650 165

Furniture ............................................... GST Recoverable ($4,100 × 5%) ......... Accounts Payable—George’s ...... Purchased furniture on account.

4,100 205

Accounts Payable—George’s ............ GST Recoverable ($800 × 5%) ....... Furniture .......................................... To record credit for furniture returned.

840

Cash ...................................................... Service Revenue ............................ GST Payable ($2,500 × 5%) ........... To record revenue for services performed.

2,625

Supplies ................................................ GST Recoverable ($300 × 5%) ............ Cash ................................................ Cash purchase of supplies.

300 15

B.39

Credit

3,465

4,305

40 800

2,500 125

315

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.5 (Continued) a. (Continued) GENERAL JOURNAL Account Titles and Explanation

Date May 13

Debit

Accounts Receivable—Manson ........ Service Revenue ........................... GST Payable ($1,100 × 5%) .......... To record revenue for services performed.

1,155

Accounts Payable—George’s ........... Cash ($4,305 − $840) .................... Payment on account.

3,465

Office Expense .................................... Cash ............................................... Cash purchase of coffee.

1,100 55

3,465

Utilities Expense ............................. Accounts Payable.................... To record utilities owing.

150

Cash ................................................. Accounts Receivable—Manson Collection on account.

1,155

Accounts Receivable—Pedneault Service Revenue ....................... GST Payable ($600 × 5%) ......... To record revenue for services performed.

630

Solutions Manual .

B.40

Credit

150

1,155

600 30

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.5 (Continued) b. Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27

GST Recoverable $165 205 (40)

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....................... Collect GST Receivable.

135 210 345

LO 2,3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.41

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.6 a.

Province of Ontario

Date May 1

Solutions Manual .

GENERAL JOURNAL Account Titles and Explanation

Debit

Rent Expense ....................................... Prepaid Rent ......................................... HST Recoverable ($3,300 × 13%) ....... Cash ................................................ Cash payment for rent.

1,650 1,650 429

Furniture .............................................. HST Recoverable ($4,100 × 13%) ....... Accounts Payable—George’s ...... Purchased furniture on account.

4,100 533

Accounts Payable—George’s ............ HST Recoverable ($800 × 13%) ..... Furniture .......................................... To record credit for furniture returned.

904

Cash ...................................................... Service Revenue ............................ HST Payable ($2,500 × 13%) ......... To record revenue for services performed.

2,825

Supplies ................................................ HST Recoverable ($300 × 13%) .......... Cash ................................................ Cash purchase of supplies.

300 39

B.42

Credit

3,729

4,633

104 800

2,500 325

339

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.6 (Continued) a. (Continued) GENERAL JOURNAL Account Titles and Explanation

Date May 13

1,243

Accounts Payable—George’s ............ Cash ($4,633 − $904) ..................... Payment on account.

3,729

Office Expense ..................................... Cash ................................................ Cash purchase of coffee.

Utilities Expense .................................... Accounts Payable......................... To record utilities owing.

150

Cash ........................................................ Accounts Receivable—Manson Collection on account.

1,243

Accounts Receivable—Pedneault ....... Service Revenue .............................. HST Payable ($600 × 13%) .............. To record revenue for services performed.

678

Credit

Accounts Receivable—Manson ......... Service Revenue ............................ HST Payable ($1,100 × 13%) ......... To record revenue for services performed.

Debit

Solutions Manual .

B.43

1,100 143

3,729

150

1,243

600 78

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Eighth Canadian Edition

PROBLEM B.6 (Continued) b. Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27

HST Recoverable $429 533 (104)

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 ....................... Collect HST Recoverable.

351 546 897

LO 2,3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

B.44

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

APPENDIX C Subsidiary Ledgers and Special Journals

Learning Objectives 1. Describe the purposes and advantages of maintaining subsidiary ledgers. 2. Record transactions in special journals and post to subsidiary and general ledgers.

Solutions Manual .

C-1

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO

Item

1. 2.

1 1

AP K

3. 4.

2 2

K K

1. 2.

2 2

AP AP

3. 4.

2 2

AP AP

Solutions Manual .

Item

Brief Exercises 5. 2 K 6. 2 AP Exercises 5. 2 AP 6. 1,2 AP Problems 3. 1,2 AP

C-2

Item

7. 8.

2 2

AP AP

7. 8.

1,2 1,2

AP AP

1,2

Item

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

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

Difficulty:

Time: AACSB

CPA CM

Solutions Manual .

C-3

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE C.1 a.

Date

Accounts Receivable Subsidiary Ledger

General Ledger

Chiu Co.

Accounts Receivable

Ref.

Jan. 7 17

Debit

Credit Balance

1,800 700

Date

1,800 Jan.31 1,100 31

Ref.

Debit

Credit Balance

11,5001 2

6,400

11,500 5,100

Elbaz Inc. Date

Ref.

Jan.15 24

Debit Credit 6,000 2,000

Balance 6,000 4,000

Lewis Co. Date

Ref.

Jan.23 29 1 2

Debit Credit Balance 3,700 3,700

3,700 0

$1,800 + $6,000 + $3,700 = $11,500 $700 + $2,000 + $3,700 = $6,400

LO 1 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

C-4 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

BRIEF EXERCISE C.2 1. 2. 3. 4.

General ledger Subsidiary ledger General ledger General ledger

5. 6. 7. 8.

General ledger Subsidiary ledger General ledger General ledger

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

Solutions Manual .

C-5

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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

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

Solutions Manual .

C-6

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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.) 1

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.), Other Accounts (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.

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

Solutions Manual .

C-7

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

BRIEF EXERCISE C.5 Journal

Column Titles

Cash Receipts

Cash (Dr.), Sales (Cr.)

Sales

Accounts Receivable (Dr.), Sales (Cr.)

General

Cash Receipts

Cash (Dr.), Other Accounts (Cr.) (Purchase Returns and Allowances)

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.)

Accounts Payable (Dr.), Purchase Returns and Allowances (Cr.)

There are no column titles in the general journal, but these are the account titles that would be used in journalizing.

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

Solutions Manual .

C-8

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

BRIEF EXERCISE C.6 General Journal

Date

Account Titles and Explanations

Ref.

Apr.

30 Service Revenue ........................................ Rent Revenue............................................. Income Summary................................ To close income statement accounts with credit balances.

53,800 12,000

30 Income Summary. ...................................... Depreciation Expense ........................ Salaries Expense ................................ Supplies Expense ............................... To close income statement accounts with debit balances.

30,900

30 Income Summary ....................................... B. Willis, Capital ................................. To close Income Summary account.

34,900

30 B. Willis, Capital ......................................... B. Willis, Drawings ............................. To close drawings to the capital account.

18,000

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

Solutions Manual .

C-9

Debit

Credit

65,800

8,000 19,400 3,500

34,900

18,000

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

BRIEF EXERCISE C.7 General Journal Date

Account Titles and Explanations

Ref.

Nov. 30 Depreciation Expense ............................... Accumulated Depreciation—Furniture To record depreciation expense.

Debit

Credit

6,800 6,800

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

BRIEF EXERCISE C.8 General Journal Date

Account Titles and Explanations

Ref.

Feb. 28 Accounts Payable ($960 – $690)............... Cash .................................................. To correct entry recording a cheque. LO 2 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

C-10

Debit

Credit

270 270

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

SOLUTIONS TO EXERCISES EXERCISE C.1 1. 2. 3. 4. 5. 6. 7.

Cash Receipts Journal Cash Payments Journal Cash Receipts Journal General Journal Purchases Journal Purchases Journal Cash Payments Journal

8. 9. 10. 11. 12.

Cash Payments Journal General Journal Cash Receipts Journal General Journal Sales Journal

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

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-11

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE C-2 (Continued) a. and c.

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies 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-12 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

EXERCISE C.3 a. and b.

WONG COMPANY Cash Receipts Journal

Account Credited

Date

Sept. 16 n/a 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.

CR1

Sales Cr. 860

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 175

C-13

75 2,360 1,250

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

EXERCISE C.3 (Continued) a. and d. WONG COMPANY General Journal Date

Account Titles and Explanations

Ref.

Debit

Sept. 11 Accounts Payable—Leonard Co................. Merchandise Inventory ........................ To record purchase return.

200

20 Sales Returns and Allowances ................... Cash...................................................... To record sales return for cash.

860

Merchandise Inventory................................ Cost of Goods Sold ............................. To record cost of goods returned.

490

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

C-14

Credit 200

860

490

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

EXERCISE C.4 a. and b. Account Debited Date Sept. 2 T. Lu 26 M. Gafney

WONG COMPANY Sales Journal Invoice Accounts Receivable Dr. No. Ref. Sales Cr. 321  2,720 890 322 

a. and c.

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-15 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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

175

C-16

2,360 1,250

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

EXERCISE C.5 (Continued) a. and d. WONG COMPANY General Journal Date

Account Titles and Explanations

Ref.

Debit

Sept. 11 Accounts Payable—Leonard Co................. Purchase Returns and Allowances .... To record purchase return.

200

20 Sales Returns and Allowances ................... Cash...................................................... To record sales return for cash.

860

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

C-17

Credit 200

860

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

EXERCISE C.6 a. Date

Accounting Principles, Eighth Canadian

General Journal....................... Account Titles and Explanations

Ref.

J1 Debit

Credit

Oct. 5 Accounts Payable—Lyden Company ........ Merchandise Inventory ....................... To record purchase return.

720

7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........ To record credit for goods returned.

600

Merchandise Inventory ............................... Cost of Goods Sold ............................ To record cost of goods returned.

375

720

600

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-18

375

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

EXERCISE C.6 (Continued) b. Oct.

5 Accounts Payable—Lyden Company ........ Purchase Returns and Allowances.... To record purchase return.

720

7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........ To record credit for goods returned.

600

Solutions Manual .

C-19

720

600

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

EXERCISE C.6 (Continued) 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 dual-posted. That is, it is posted to both the control account and the subsidiary account. I hope this memo answers your questions about posting. LO 1,2 BT: AP Difficulty: M Time: 20 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

Solutions Manual .

C-20

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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.

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.

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.

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.

LO 1,2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

C-21

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

EXERCISE C.8 a. and b. General Ledger Accounts Receivable Date Sept.

1 30 30

Explanation

Ref.

Balance

 S1 CR1

Debit

Credit

Balance

7,030

10,960 15,150 8,120

4,190

Accounts Receivable Subsidiary Ledger Zhang Date Sept.

1 30 30

Explanation

Ref.

Balance

 S1 CR1

Debit

Credit

800 2,300

Balance 3,820 4,620 2,320

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 Sept. 30 30

Solutions Manual .

Explanation

Ref. S1 CR1

Debit

Credit

1,030 380

C-22

Balance 1,030 650

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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

1,260 1,240

Balance 2,440 3,700 2,460

London Date

Explanation

Ref.

Sept. 1 30

Balance

 CR1

Solutions Manual .

Debit

Credit 1,800

C-23

Balance 2,640 840

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

EXERCISE C.8 (Continued) c. MAC COMPANY Schedule of Customers September 30 Zhang................................................................................. Cavanaugh ........................................................................ Iman ................................................................................... Jana ................................................................................... London .............................................................................. Total ...........................................................................

$2,320 1,850 650 2,460 840 $8,120

Accounts Receivable (per general ledger account) .......

$8,120

LO 1,2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

C-24

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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. 6,500 2,600 7,500 7,380 23,980 (112)/(401)

S1 Cost of Goods Sold Dr. Merchandise Inventory Cr. 3,900 1,560 4,500 4,428 14,388 (505)/(120)

General Journal Date Jan.

Account Titles and Explanations

Ref.

Debit

5 Accounts Payable—Sun Distributors........ 201 Merchandise Inventory........................ 120 To record purchase return.

1,450

Solutions Manual .

C-25

Credit

1,450

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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)

CR1

Accounts Receivable Sales Cr. Cr.

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

CP1 Account Debited

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-26

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.1 (Continued) a., b. and c. (Continued)

Date

Purchases Journal Accounts Merchandise Supplies Payable Inventory Account Credited Terms Ref. Cr. Dr Dr.

P1 Other Accounts Account Debited

Jan. 3 4 8 11 19 23 24

Sun Distributors Moon Inc. Irvine Co. Lewis Co. Mark Corp Sun Distributors Levine Corp.

      

7,800 480 5,400 4,300 6,600 4,800 4,690 34,070 (201)

Ref.

Amount

Equipment 157

6,600

7,800 480 5,400 4,300 4,800 4,690 26,990 (120)

480 (126)

6,600 X

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

Solutions Manual

C-27 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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

Ref.

Debit

201 120

260

Oct. 13 Accounts Payable—Chen Corp.................. Merchandise Inventory........................ To record purchase return.

Solutions Manual .

C-28

Credit

260

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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

Solutions Manual .

Ref.

Cash Dr.

A/R Cr.

9,610  8,600 8,600 8,810 140 45,000 8,640  5,530 5,530 9,320 95,510 14,130 (101) (112)

CR1

Sales Cr.

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)

C-29

45,000 (X)

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

PROBLEM C.2 (Continued) a., b., and c. (Continued)

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.

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-30

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

5,800 315 4,900 260 9,000 16,200 36,475 (201)

5,800 315 4,900 260 9,000 16,200 35,900 (120)

575 (126)

LO 2 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

C-31 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Edition

Accounting Principles, Eighth Canadian

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)

4,840

7,700 4,840 (401) (505)/(120)

C-32

35,000 35,000 (X)

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.3 (Continued) b. (Continued)

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies 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-33 .

Ref. Amount

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM 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)

Solutions Manual .

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)

C-34

 725 3,900  310

Appendix C

1,300 5,200 (X)

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.3 (Continued) b. (Continued) General Journal Date

Account Titles and Explanations

J1 Ref.

Debit

Jan. 14 Sales Returns and Allowances.................... 410 Accounts Receivable—R. Goge...........  /112 To record sales allowance.

6,000

20 Accounts Payable—Watson & Co. ..............  /201 Notes Payable ....................................... 200 Signed a note in partial payment on account.

14,000

30 Accounts Payable—Voyer Co. ....................  /201 Merchandise Inventory......................... 120 To record purchase return.

400

Solutions Manual .

C-35

Credit

6,000

14,000

400

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

Balance

6,000 10,800 7,000

Notes Receivable Date Jan.

1 31

Solutions Manual .

Explanation

Ref.

Balance



CR1

C-36

38,000 32,000 42,800 35,800 No. 115

Debit

Credit

Balance

35,000

45,000 10,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.3 (Continued) a. and c. (Continued)

Merchandise Inventory Date Jan.

1 30 31 31 31 31

Explanation

Ref.

Balance



J1 S1 P1 CR1 CP1

No. 120 Debit

Credit 400 4,550

7,800 4,840 350

Land Date Jan.

Jan.

Explanation

Ref.

Balance



Debit

Credit

Jan.

Solutions Manual .

No. 145

Explanation

Ref.

Balance



Explanation

Ref.

Balance



C-37

Balance 25,000

Debit

Credit

Balance 75,000

Accumulated Depreciation—Building Date

22,600 22,200 17,650 25,450 20,610 20,960 No. 140

Building Date

Balance

Debit

No. 146 Credit

Balance 38,800

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.3 (Continued) a. and c. (Continued)

Equipment Date Jan.

No. 157

Explanation

Ref.

Balance



Debit

Credit

Balance 6,450

Accumulated Depreciation—Equipment Date Jan.

Explanation

Ref.

Balance



Debit

No. 158 Credit

Balance 1,950

Notes Payable Date

Explanation

No. 200 Ref.

Jan. 20

Debit

Credit

Balance

14,000

Accounts Payable Date Jan.

1 20 30 31 31

Solutions Manual .

Explanation

Ref.

Balance



J1 J1 P1 CP1

C-38

No. 201 Debit

Credit

Balance

14,000 400 7,800 17,150

34,200 20,200 19,800 27,600 10,450

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.3 (Continued) a. and c. (Continued) Mortgage Payable Date Jan.

Explanation

Ref.

Balance



No. 275 Debit

Credit

67,400

M. Perrault, Capital Date Jan.

Date

No. 301

Explanation

Ref.

Balance



87,600

M. Perrault, Drawings

No. 310

Explanation

Jan. 31

Debit

Ref.

Debit

CP1

1,300

Credit

Explanation

Debit

S1 CR1

Credit

Balance

10,800 7,700

10,800 18,500

Sales Returns and Allowances Date

Explanation

Jan. 14

Solutions Manual .

C-39

Balance

No. 401 Ref.

Jan. 31 31

Balance

1,300

Sales Date

Balance

Ref.

Debit

6,000

No. 410 Credit

Balance 6,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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-40

Balance

No. 725

Ref.

Debit

CP1

3,900

Credit

Balance 3,900

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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-41

Credit

Balance

3,000

3,000 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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-42

14,000

14,200 200

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.3 (Continued) d. PERRAULT MUSIC CO. Trial Balance January 31, 2021 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-43

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, Eighth Canadian Edition

PROBLEM C.3 (Continued) e.

Accounts Receivable Subsidiary Ledger S. Armstrong .................................................................... R. Goge ............................................................................. B. Lu .................................................................................. Accounts Receivable control account balance .....................

Accounts Payable Subsidiary Ledger Denomme Corp ................................................................ Voyer Co. ......................................................................... Warren Parts..................................................................... Watson & Co.....................................................................

Accounts Payable control account balance ..........................

$ 2,500 24,000 9,300 $35,800 $35,800

$ 4,000 4,500 1,750 200 $10,450 $10,450

LO 1,2 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual .

C-44

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

J1 Ref.

Debit

May 14 Sales Returns and Allowances ................... 410 Accounts Receivable—W. Karasch ....  /112 To record credit for goods returned.

750

Merchandise Inventory ................................ Cost of Goods Sold ............................. To record cost of goods returned.

120 505

325

20 Accounts Payable—Cobalt Sports ............. Notes Payable ...................................... Signed a note in full payment on account.

 /201

15,500

20 Accounts Payable—Lancio Co. .................. Merchandise Inventory ........................ To record purchase return.

 /201

Solutions Manual .

C-45

Credit

750

325

200

15,500

510 510

120

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) b. (Continued)

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies 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-46 .

Ref. Amount

Equipment 157

4,000 4,000 X

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) b. (Continued) Cash Receipts Journal Account Credited

Date

May 7 G. Parrish 13 B. Simone 23 29 Notes Rec.

Ref.

Cash Dr.

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)

40,000 40,000 (X)

Cash Payments Journal

Payee

Date

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.

Account Debited

Other Accts. Dr. Ref.

318 Rent Expense 730 17,400 Buttercup  Salaries Exp. 725 1,000 WN Shaw  C. Lee, 310 Drawings 18,400 (201)

318 (120)

C-47 .

CP1

1,500 4,700

1,000 7,200 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

Solutions Manual

Explanation

Ref.

Balance

 J1 CR1 S1

Explanation

Ref.

Balance

 CR1

C-48 .

36,700 91,400 65,482

No. 112 Debit

Credit 750 5,200

2,400

Notes Receivable—Cole Company Date

Balance

Debit

Balance 15,400 14,650 9,450 11,850 No. 115

Credit 40,000

Balance 48,000 8,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) a. and c. (Continued) Merchandise Inventory Date May

1 14 20 31 31 31 31

Explanation

Ref.

Balance

 J1 J1 P1 S1 CR1 CP1

No. 120 Debit

Credit

325 510 4,700 1,050 4,450 318

Equipment Date May

1 30

May

Explanation

Ref.

Balance

 P1

Debit

Credit

Explanation

Ref.

4,000

Balance



Debit

Explanation

No. 158 Credit

Solutions Manual

J1 C-49

Balance 1,800 No. 200

Ref.

May 20

Balance 8,200 12,200

Notes Payable Date

22,000 22,325 21,815 26,515 25,465 21,015 21,333 No. 157

Accumulated Depreciation—Equipment Date

Balance

Debit

Credit 15,500

Balance 15,500 Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) a. and c. (Continued) Accounts Payable Date May

1 20 20 31 31

No. 201

Explanation

Ref.

Balance

 J1 J1 P1 CP1

Debit

Credit

15,500 510 8,700 18,400

C. Lee, Capital Date May

Explanation

Ref.

Balance



Explanation

Ref.

May 31

CP1

Debit

Credit

No. 310 Debit

Credit

1,000

Ref.

May 31 31

CR1 S1

C-50 .

Balance 1,000 No. 401

Explanation

Solutions Manual

Balance 85,100

Sales Date

43,400 27,900 27,390 36,090 17,690

No. 301

C. Lee, Drawings Date

Balance

Debit

Credit 9,500 2,400

Balance 9,500 11,900

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) a. and c. (Continued) Sales Returns and Allowances Date

Explanation

Ref.

May 14

No. 410 Debit

Credit

750

Cost of Goods Sold Date

Explanation

No. 505 Ref.

May 14 31 31

J1 S1 CR1

Debit

Credit 325

1,050 4,450

Salaries Expense Date

Explanation

Ref.

May 31

CP1

Explanation

Solutions Manual

CP1

C-51 .

(325) 725 5,175

Debit

Credit

4,700

Balance 4,700 No. 730

Ref.

May 31

Balance

No. 725

Rent Expense Date

Balance

Debit 1,500

Credit

Balance 1,500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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-52

Debit

Credit

2,400 2,400

Balance 2,400 0 Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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

Solutions Manual

P1 CP1

C-53 .

Debit

Credit 2,600

1,000

Balance 2,600 1,600

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) a. and c. (Continued) Accounts Payable Subsidiary Ledger Summers Corp. Date May

1 30

Solutions Manual

Explanation

Ref.

Balance

 J1

C-54 .

Debit

Credit 4,000

Balance 10,500 14,500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) d. LEE CO. Trial Balance May 31, 2021 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 ......................................................

Solutions Manual

C-55 .

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

$131,990

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.4 (Continued) e.

Accounts Receivable control account balance ..............

$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. .........................................................

$17,690 $ 1,590 1,600 14,500 $17,690

LO 1,2 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

C-56 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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.

Accounts Receivable Dr. Sales Cr.

Ref.

371 372 373 374

   

5,220 2,050 1,800 9,810 18,880 (112)/(401)

GENERAL JOURNAL Date Feb.

Account Titles and Explanations

Ref.

Debit

5 Accounts Payable—Zears Co ..................... 201/ Purchase Returns and Allowances..... 512 To record purchase return.

450

Solutions Manual

C-57 .

Credit 450

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.5 (Continued) a., b. and c. (Continued)

Cash Receipts Journal

Date

Account Credited

Feb. 6 13 15 Earlton Corp. 17 Gilles Co. 20 27 28 Lumber Co.

Solutions Manual

Accounts Other Cash Receivable Sales Accounts Ref. Dr. Cr. Cr. Cr. 1,950 3,850  2,050  5,220 4,900 4,560  1,800 24,330 (101)

C-58 .

CR1

1,950 3,850 2,050 5,220 4,900 4,560 1,800 9,070 15,260 (112) (401)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.5 (Continued) a., b. and c. (Continued)

Cash Payments Journal Ch. No.

Date Feb. 13 15 20 28

Payee

Cash Cr.

Zears Co. 3,750 Employees 14,100 Fell Elect. 7,200 Employees 14,900 39,950 (101)

Solutions Manual

Accounts Payable Dr.

3,750 Zears Co. Salaries 7,200 Fell Elect. Salaries 10,950 (201)

C-59 .

Account Debited

CP1

Ref.  729  729

Other Accounts Dr. 14,100 14,900 29,000 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

PROBLEM C.5 (Continued) a., b. and c. (Continued)

Account Credited

Date

Purchases Journal Accounts Payable Purchases 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.

      

4,200 290 7,200 9,100 16,400 4,800 5,130 47,120 (201)

Ref. Amount

4,200 290 7,200 9,100 Equipment 157 4,800 _5,130 30,430 (510)

290 (126)

16,400

16,400 X

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

Solutions Manual

C-60 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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. Ref. 510  511  512  513  514  515  516  517 

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)

C-61 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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)

Solutions Manual

C-62 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) a. (Continued)

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 Employees 6,900 58,480 (101)

Solutions Manual

180

180 (120)

C-63 .

Account Debited

CP1 Other Accts. Ref. Dr.

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, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) a. (Continued)

Date

Account Credited

Terms Ref.

Purchases 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-64 .

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, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) a. (Continued)

Date Jan.9

Solutions Manual .

General Journal Account Titles and Explanations

Ref.

Debit

Sales Returns and Allowances ...... Accounts Receivable—J. Ebel To record credit for goods returned.

410 112/

400

Merchandise Inventory ................... Cost of Goods Sold ................. To record cost of goods returned.

120 505

160

Accounts Payable—Liazuk Co. ...... Merchandise Inventory ........... To record purchase return.

201/ 120

500

Accounts Payable—Mikush Bros. . Notes Payable.......................... Signed a note in full payment on account.

201/ 200

15,000

C-65

J1 Credit

400

160

500

15,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) d. Adjusting Journal Entries Date Jan. 31

Solutions Manual .

General Journal Account Titles and Explanations

Ref.

Debit

Supplies Expense1.......................... Supplies ................................... 1 ($1,000 + $400 + $800 − $700) To adjust for supplies used.

728 125

1,500

Insurance Expense (1/9 × $2,000) Prepaid Insurance ................... To record insurance expired.

722 130

222

Depreciation Expense .................... Accumulated Depreciation— Building (1/12 × $6,000) ... Accumulated Depreciation— Equipment (1/12 × $1,500) To record depreciation expense.

711

625

Interest Expense ............................. Interest Payable....................... To accrue interest expense.

718 230

Cost of Goods Sold ........................ Merchandise Inventory ........... ($44,850 − $44,952) To adjust ending inventory to actual.

505 120

102

C-66

J1 Credit

1,500

222

146

500

158

125

102

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) f. Closing Journal Entries General Journal Account Titles and Explanations

Date Jan. 31

Solutions Manual .

Ref.

Debit

401 300

73,720

Income Summary............................ 300 Sales Returns and Allowances 410 Cost of Goods Sold .................. 505 Depreciation Expense .............. 711 Interest Expense ....................... 718 Insurance Expense ................... 722 Salaries Expense ...................... 725 Supplies Expense ..................... 728 To close income statement accounts with debit balances.

39,122

Income Summary............................ A. Winters, Capital .................. To close Income Summary account.

300 301

34,598

A. Winters, Capital ........................... A. Winters, Drawings .............. To close drawings account.

301 310

2,000

Sales ................................................ Income Summary .................... To close income statement accounts with credit balances.

C-67

J2 Credit

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, Eighth 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 J1

C-68

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, Eighth 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-69

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, Eighth 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. J1

C-70

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, Eighth 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-71

Debit

400

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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 J1 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 J1 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-72

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, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) b. (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-73

Credit

4,800

Balance 3,100 4,800 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) b. (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-74

Debit

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) c. and d.

WINTERS COMPANY Trial Balance January 31, 2021 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-75

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, Eighth 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 ...............................................

$26,900 $ 5,100 14,500 7,300 $26,900

Solutions Manual .

C-76

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) e. WINTERS COMPANY Income Statement Month Ended January 31, 2021 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, 2021 A. Winters, capital, January 1 ................................................ Add: Profit ............................................................................. Less: Drawings ...................................................................... A. Winters, capital, January 31 ..............................................

Solutions Manual .

C-77

$ 80,000 34,598 114,598 2,000 $112,598

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) (e) (Continued) WINTERS COMPANY Balance Sheet January 31, 2021 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-78

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth Canadian Edition

CUMULATIVE COVERAGE (Continued) g. WINTERS COMPANY Post-Closing Trial Balance January 31, 2021 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-79

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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth Canadian Edition

BEPV–7

Using tables: Discount rate from Table PV-2 is 9.71225. The present value of 15 payments of $25,000 each discounted at 6% is therefore $242,806.25 ($25,000 × 9.71225). Tarzwell Ltd. should pay $242,806.25 for this annuity contract. Using a financial calculator: Enter: 6 15 25000 0 Press:

I/Y

PMT

CPT

Result: PV = $(242,806.22) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE

.06

NPER

PMT

$ 25,000.00

Type

Result: PV = $ (242,806.22)

Solutions Manual .

PV-7

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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, Eighth 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