LoFisher-Intermediate Accounting, Volume 1, Fifth Edition,5e Kin Lo Test Bank by Ace Test Banks

Test Bank George Fisher Douglas College

Intermediate Accounting Volume 1 5e Kin Lo University of British Columbia

George Fisher Douglas College

Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 1 Fundamentals of Financial Accounting Theory Learning Objective 1 1) Which statement is NOT correct? A) Financial accounting is the process of providing information to external parties. B) Accounting is about the communication of financial information. C) Accounting is the production of information about an enterprise and the transmission of that information to those who need the information. D) Financial accounting is the process of providing information to internal parties. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

2) How does an accountant decide on the appropriate method of accounting for a business transaction? A) Evaluating if the particular method is consistent with the conceptual framework. B) Ensuring that the accounting method agrees with that selected by other companies. C) Evaluating whether the selected method differs from the underlying economics. D) Testing the selected method for numerical accuracy and consistency. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

3) Which statement is correct? A) Financial reporting is the process of preparing information for internal parties. B) Financial reporting involves issuing financial statements to external parties. C) Financial reporting provides the same information as management accounting. D) Financial reporting is only based on rules issued by CPA Canada or the IASB. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

4) Which is NOT a question that financial accounting theory can answer? A) Why do companies provide financial information to external parties? B) Why do all companies use the same accounting policies? C) Why is certain disclosure mandatory in financial reporting? D) What is the role of financial accounting and reporting? Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

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5) Why is financial information required? Answer: • Governmental bodies issue proclamations requiring companies to provide financial information. • Quasi-governmental organizations issue proclamations requiring companies to provide financial information. • Accounting organizations such as CPA Canada or the IASB issue proclamations requiring companies to provide financial information. Diff: 2 Type: ES Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

6) Explain the meaning of financial accounting, managerial accounting and tax accounting. How are these accounting activities related to each other? Answer: Financial reporting is the process by which enterprises provide information to external parties. Managerial accounting, on the other hand, involves reporting within the enterprise. Tax accounting is the reporting of taxable amounts to the government revenue authorities. What ties all the branches of accounting together is the idea that some people have information that others need. Diff: 1 Type: ES Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

7) Discuss three reasons why it is important to understand accounting theory. Answer: • In order to make the best decisions possible, external investors as well as internal managers need to interpret financial and accounting information about the state of the business. • There is a misunderstanding that accounting standards are simply proclamations issued by government or quasi-governmental regulatory agencies such as the International Accounting Standards Board (IASB) that have no economic benefit to society. • Rather, financial reporting is an economic good and is therefore subject to the laws of supply and demand. Accounting standards reflect and respond to, although imperfectly, the demand for financial information and the ability of enterprises to supply that information. Financial accounting theory helps us to understand the complexities in the production and consumption (use) of accounting information. Viewed in this way, financial information can be, and is, a subject of rigorous economic analysis. Diff: 2 Type: ES Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

8) Explain the meaning of generally accepted accounting principles (GAAP). Answer: GAAP refers to broad principles and conventions of general application as well as rules and procedures that determine accepted accounting practices. Diff: 2 Type: ES Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

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9) Explain the process an accountant uses to determine the appropriate accounting method for a business transaction. Answer: As GAAP refers to broad principles, not specific rules, accounting involves exercising professional judgment to determine the appropriate accounting. Judgment is exercised by: • considering the range of possible methods of accounting; • evaluating whether and how the particular method of accounting is consistent with the conceptual framework underlying GAAP; • appreciation for the underlying economic forces at work and ensuring that the accounting appropriately reflects the substance of the transaction. Diff: 3 Type: ES Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

10) Explain what accounting is and why financial reporting exists. Answer: Accounting is the production of information about an enterprise and the transmission of that information from those who have it to those who need it. In other words, accounting is communicating information about business transactions and activities about business entities to interested external parties. Financial reporting is the process by which enterprises provide information to external parties. Financial reporting is an economic good that is subject to the laws of supply and demand. Financial reporting exists because interested parties require information about the business entity to make their investment, credit or other decisions. The demand for information arises from people's need to make decisions under uncertainty about the future. In many contexts, there are asymmetric distributions of information amongst people. Those who have more information are the potential suppliers of information to those who have less. People making decisions under uncertainty demand information to alleviate that uncertainty; an asymmetric distribution of information allows some individuals to supply information to others. Diff: 2 Type: ES Skill: Conceptual Objective: 1.1 Explain the sources of demand and supply of accounting information.

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Learning Objective 2 1) Which statement best explains "information asymmetry"? A) Information asymmetry means that there is uncertainty about the future. B) Information asymmetry means that some people have more information than others. C) Information asymmetry means that external parties need financial information. D) Information asymmetry means information is material to a decision maker. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

2) Which statement best explains "moral hazard"? A) The term refers to a situation where one party has an information advantage over another. B) The term refers to the need external parties have for financial information. C) The term refers to the fact that some people have more information than others. D) The term refers to a situation where one party cannot observe the actions of another party. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

3) Which statement best explains "adverse selection"? A) The term refers to a situation where one party has an information advantage over another. B) The term refers to the need external parties have for financial information. C) The term refers to the fact that some people have more information than others. D) The term refers to a situation where one party cannot observe the actions of another party. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

4) Explain the meaning of information and information asymmetry. Give an example of each Answer: Information: Evidence that can potentially affect an individual's decisions. Example: details about the format of the final exam; details about the career placement opportunities for a university's programs; etc. Information asymmetry: A condition in which some people have more information than others. Example: professor has more information about the final exam than the students; management has more information about the financial results than the shareholders; etc. Diff: 1 Type: ES Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

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5) Explain the meaning of adverse selection and moral hazard. Give an example of each. Answer: Adverse selection: A type of information asymmetry whereby one party to a contract has an information advantage over another party. Examples: buying a resale home; buying a used car; buying shares in a company, etc. Moral hazard: A type of information asymmetry whereby one party to a contract cannot observe some actions relating to the fulfillment of the contractual terms by the other party. Examples: renting an apartment to a tenant; car insurance; hiring an executive - separation of ownership and management or the principal-agent problem; lending money to a company, etc. Diff: 1 Type: ES Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

6) Explain the difference between moral hazard and adverse selection. Answer: • Moral hazard involves information about one party's actions that is not available to the other party. For this reason, moral hazard is succinctly summed up as hidden actions. As actions are involved, moral hazard involves information about what happens in the future. • Adverse selection concerns no actions other than whether the parties choose to reveal information that they possess. Consequently, adverse selection involves hidden information from the past and present (although such information could have ramifications for the future). Diff: 2 Type: ES Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

7) Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a company. Answer: The lender can request certain covenants that must be satisfied as a condition of granting the loan; for example, a requirement to have a certain debt-to-equity ratio so that the company does not get over-leveraged. Also, the bank can request an audit report be prepared. Diff: 2 Type: ES Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

8) Discuss two ways in which a shareholder can mitigate the problem of moral hazard when investing in a company. Answer: To mitigate this moral hazard problem, audit reports can be used to provide information to owners about the firm's performance as an indirect indicator of management performance. Compensation can be linked to performance measures such as net income or earnings per share. Ask management to take partial ownership of the company through stock purchase and stock option programs. The thought being that if managers share in the rewards of their efforts, they will thus be more motivated to create value for the company's owners. Diff: 2 Type: ES Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

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9) Having an audit performed on the company's financial statements BEST illustrates which of the following? A) Cheap talk. B) Signalling. C) Moral hazard. D) Information asymmetry. Answer: B Explanation: The company needs to use a "signal" (costly signal) to overcome the problem of unverifiable disclosures about the company's financial position and economic performance. Diff: 2 Type: MC Skill: Conceptual Objective: 1.2 Apply concepts of information asymmetry, adverse selection, and moral hazard to a variety of accounting, management, and related situations.

Learning Objective 3 1) Which of the following statements is correct about financial information? A) All users require the same kind of information. B) Forward looking information is useful for evaluating management stewardship. C) Trade offs are necessary in accounting. D) Historical cost information is useful for pricing the value of a company's shares. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 1.3 Describe the qualitative characteristics of accounting information that help to alleviate adverse selection and moral hazard.

2) How does accounting information help alleviate adverse selection and moral hazard? Answer: • The presence of adverse selection reduces outsiders' perception of the value of an enterprise, creating a demand for full disclosure of information that is relevant to the value of the enterprise, and that will help assist them to forecast future cash flows. • Moral hazard causes outsiders to be suspicious of information supplied by management regarding its actions, creating a demand for information that is reliable and verifiable. Diff: 1 Type: ES Skill: Conceptual Objective: 1.3 Describe the qualitative characteristics of accounting information that help to alleviate adverse selection and moral hazard.

3) Explain how adverse selection and moral hazard affect the qualitative characteristics of accounting information. Answer: Adverse selection means that users will demand information that is RELEVANT to their decisions. Moral hazard means that users will demand information that is VERIFIABLE (representationally faithful/reliable) and not prone to manipulation by the preparers. Diff: 1 Type: ES Skill: Conceptual Objective: 1.3 Describe the qualitative characteristics of accounting information that help to alleviate adverse selection and moral hazard.

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Learning Objective 4 1) For the situations described below, explain whether managers would be motivated to manage earnings, assets, and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings, assets, and equity downward and liabilities upward. Management motivation Situation (Upward / Downward) To influence investors to pay more for the firm's shares. To reduce the likelihood of additional taxes or regulations. To take a "big bath" in a bad year by recording more expenses than usual so that future years are more likely to show higher and rising profitability, resulting in higher future compensation or stock price. To reduce riskiness of its cash flows and obtain funds from the bank at a lower interest rate. To obtain a stronger bargaining position in merger negotiations. Answer: Management motivation Situation (Upward / Downward) To influence investors to pay more for the firm's shares. Upward To reduce the likelihood of additional taxes or regulations. Downward To take a "big bath" in a bad year by recording more expenses than usual so that future years are more likely to show higher and rising profitability, resulting in higher future compensation or stock price. Downward To reduce riskiness of its cash flows and obtain funds from the bank at a lower interest rate. Upward To obtain a stronger bargaining position in merger negotiations. Upward Diff: 2 Type: ES Skill: Conceptual Objective: 1.4 Evaluate whether and what type of earnings management is more likely in a particular circumstance.

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2) For the situations described below, explain whether managers would be motivated to manage earnings, assets, and equity upward and liabilities downward, or alternatively, managers may be motivated to manage earnings, assets, and equity downward and liabilities upward.

Situation To obtain higher bonuses. To increase the likelihood of receiving government subsidies and trade protection. To improve bargaining position relative to employee unions. To meet covenants based on net income. To meet regulatory requirements.

Management motivation (Upward / Downward)

Answer: Situation To obtain higher bonuses. To increase the likelihood of receiving government subsidies and trade protection. To improve bargaining position relative to employee unions. To meet covenants based on net income. To meet regulatory requirements.

Management motivation (Upward / Downward) Upward Downward Downward Upward Upward

Diff: 2 Type: ES Skill: Conceptual Objective: 1.4 Evaluate whether and what type of earnings management is more likely in a particular circumstance.

3) Explain how earnings management may arise. Answer: Insiders have many incentives to manage earnings: to influence share price, to lower the cost of financing, to meet contractual and regulatory requirements, to increase management compensation, to lower political costs, to gain regulatory protection. Most often, the incentives lead to an upward bias in earnings and net assets, but sometimes the incentives lead to a downward bias. Diff: 1 Type: ES Skill: Conceptual Objective: 1.4 Evaluate whether and what type of earnings management is more likely in a particular circumstance.

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4) Management motivation to increase the likelihood that the company will receive a $50,000 government rebate BEST illustrates which of the following? A) Earnings management. B) Positive accounting theory. C) Information asymmetry. D) Efficient securities market. Answer: A Explanation: Manager's efforts to bias reported accounting information in one way or another is earnings management Diff: 2 Type: MC Skill: Conceptual Objective: 1.4 Evaluate whether and what type of earnings management is more likely in a particular circumstance.

Learning Objective 5 1) Which statement appropriately explains the meaning of "publicly accountable enterprise"? A) Firms without equity, debt or other securities traded in public markets. B) Firms with equity, debt or other securities traded in public markets. C) Firms with assets and liabilities that provide goods and services in public markets. D) New firms entering the public markets to provide goods and services. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 1.5 Explain how accounting information interacts with security markets.

2) Which statement best explains the semi-strong form of the efficient securities market hypothesis? A) A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities. B) A market in which the prices of securities traded in that market reflect all information, whether publicly or privately known. C) A market in which the prices of debt securities traded in that market reflect all information that is privately known about those securities. D) A market in which the prices of equity securities traded in that market reflect all information that is privately known about those securities. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 1.5 Explain how accounting information interacts with security markets.

3) Which statement best explains the relationship between the efficient securities market hypothesis and accounting? A) Security prices adjust slowly when accounting reports are publicly released. B) The timeliness of accounting information is irrelevant to securities markets. C) Accounting information competes with other sources of information. D) Security prices are unaffected when accounting reports are publicly released. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 1.5 Explain how accounting information interacts with security markets.

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4) Why is the efficient securities market hypothesis important for accounting? A) When providing financial information, management need only consider the specifically identifiable users who they know will rely on the information. B) Accounting standards can assume that the majority of market participants have a reasonable level of sophistication. C) Individuals with information that is not publicly available cannot make significant profits. D) Accounting information is the only source of financial information that markets use. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 1.5 Explain how accounting information interacts with security markets.

5) Explain the meaning of publicly accountable enterprises, efficient securities market (semi-strong form), and efficient securities market (strong form). Answer: • Publicly accountable enterprises: Firms with equity, debt, or other securities traded in public markets. • Efficient securities market (semi-strong form): A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities. • A market that is strong form efficient has prices that reflect all information, whether publicly or privately known. Diff: 1 Type: ES Skill: Conceptual Objective: 1.5 Explain how accounting information interacts with security markets.

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6) Explain how accounting information helps security markets. Answer: Accounting is an important source of information for security markets, and information from security markets is also useful for accounting. The theory of efficient security markets has important implications for the practice of accounting, particularly with regard to the timely provision of information, the need to protect outside investors from insider trading, and the level of sophistication expected of financial statement users. Efficient market theory has several implications for accounting: • Security prices react quickly to accounting information: when accounting reports are publicly released, security prices adjust to that information rapidly. • Accounting information competes with other sources of information: because market participants demand all information that is relevant to the pricing of securities, they seek out and use many sources of information in addition to accounting reports. As a result, the demand for accounting reports depends on the ability of these reports to convey information useful for security pricing purposes, incremental to any other information available and in a timely fashion. • It is important to distinguish new information from what has already been reflected in prices: what may appear to be good news could already have been reflected in a higher share price, so that the stock no longer represents a good buying opportunity. • Using only publicly available information, it is difficult to earn abnormal profits (i.e. an amount exceeding the expected rate of return given the risk of the investment). • It is possible to earn abnormal profits using information that is NOT publicly available: individuals who are privy to information that is not publicly available can buy or sell securities at significant profits. • Accounting reports and standards can assume that users have a reasonable level of sophistication: if publicly traded securities are efficiently priced, it is not necessary for accounting information and accounting standards to be understandable to all potential users. Rather, it is sufficient to ensure that a substantial portion of the market participants are able to process the information for prices to properly reflect that information. The less sophisticated users who have difficulty interpreting accounting (and other) information can rely on market prices. • Efficient market theory influences legal doctrine: investors need not show direct reliance on information provided by companies for them to have a claim against companies and their management for misrepresentation; they merely needed to have relied on the prevailing security price. Thus, management's provision of financial or other information needs to consider not only specifically identifiable users who will rely on that information but also the overall impact on the security prices and anyone who relies on those prices. Diff: 2 Type: ES Skill: Conceptual Objective: 1.5 Explain how accounting information interacts with security markets.

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7) Explain the accounting implications of the following concepts about efficient securities markets: a) Accounting information competes with other sources of information. b) Accounting reports and standards can assume that users have a reasonable level of sophistication. Answer: a) The demand for accounting reports depends on the ability of those reports to convey decision-useful information for security pricing purposes, incremental to any other information available and in a timely manner. Timeliness is important as evident in the issuance of quarterly financial statements. b) If publicly traded securities are efficiently priced, it is not necessary for accounting information and accounting standards to be understandable to all potential users. Rather, it is sufficient that they are understandable to a substantial portion of the market participants. Diff: 3 Type: ES Skill: Conceptual Objective: 1.5 Explain how accounting information interacts with security markets.

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 2 Conceptual Frameworks for Financial Reporting Learning Objective 1 1) Which of the following is NOT a purpose of a conceptual framework of accounting concepts and financial reporting objectives? A) To increase the user's ability to understand financial statements. B) To increase financial statement users' confidence in financial reporting. C) To provide a foundation for detailed accounting and reporting rules. D) To enhance comparability among companies' financial statements. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 2.1 Explain the role of a conceptual framework for financial reporting and the reasons for having conceptual frameworks.

2) Which of the following is NOT correct about the conceptual framework in accounting? A) It is the basis for standard-setting for accounting standard setting bodies. B) It is based on fundamental accounting truths derived from the laws of nature. C) It can be used to solve emerging or complex accounting problems. D) It can be used to develop consistent and comparable accounting principles. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 2.1 Explain the role of a conceptual framework for financial reporting and the reasons for having conceptual frameworks.

3) Which is a purpose of the conceptual framework in accounting? A) To support principles-based accounting standards, principles and practices. B) To provide rules from which decision-useful financial information can be developed. C) To promote global consistency, acceptance and adoption of IFRS around the globe. D) To develop different accounting practices between countries around the globe. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 2.1 Explain the role of a conceptual framework for financial reporting and the reasons for having conceptual frameworks.

4) The underlying or fundamental objective of the accounting conceptual framework is A) decision usefulness. B) comparability. C) representational faithfulness. D) understandability. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 2.1 Explain the role of a conceptual framework for financial reporting and the reasons for having conceptual frameworks.

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5) Provide three reasons for the importance of the conceptual framework for financial reporting. Answer: A conceptual framework is like a strategic business plan that identifies demands of users and how to supply a product that meets those demands. The conceptual framework provides overall plans to guide implementation: the evaluation of more specific accounting standards and the application of accounting standards to specific circumstances. As business plans, they differ in response to variations in the environments for which they are developed, and they change from time to time to respond to changes in market conditions. It provides the foundational principles, assumptions and principles upon which accounting standards are built. This foundation ensures accounting standards are consistent with each other (e.g. the definition of an "asset" ensures that the accounting for fixed assets and intangible assets are based on consistent recognition criteria). The foundational concepts help accountants determine the appropriate accounting in circumstances for which specific standards may not exist. Diff: 2 Type: ES Skill: Conceptual Objective: 2.1 Explain the role of a conceptual framework for financial reporting and the reasons for having conceptual frameworks.

6) Which of the following is part of the IFRS Conceptual Framework? A) Statement of financial position. B) Elements of financial statements. C) Information Asymmetry. D) Financial statement notes. Answer: B Explanation: A) This is a type of financial statement required under IFRS/ ASPE B) These are the basic items/categories of items that appear in the financial statements C) One of the reasons financial statements are needed D) These are an essential part of the financial statements Diff: 2 Type: MC Skill: Conceptual Objective: 2.1 Explain the role of a conceptual framework for financial reporting and the reasons for having conceptual frameworks.

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Learning Objective 2 1) Which is NOT a qualitative characteristic of financial information in the IFRS Conceptual Framework? A) Understandability. B) Historical cost. C) Representational faithfulness. D) Comparability. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

2) Which is an assumption of financial information in the IFRS Conceptual Framework? A) Accrual basis of accounting. B) Historical cost. C) Timeliness. D) Financial capital maintenance. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

3) Which is NOT an element of financial information in the IFRS Conceptual Framework? A) Other comprehensive income. B) Assets. C) Income. D) Liabilities. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

4) Which is NOT a criteria for recognition of financial information in the IFRS Conceptual Framework? A) The amount is reasonably measurable. B) The expenses should be matched with revenues. C) The amount must be measured at historical cost. D) Inflow or outflow of cash flows are probable. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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5) Who are NOT users of financial information under the IFRS Conceptual Framework? A) Present investors. B) Potential investors. C) Creditors. D) Management. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

6) What is NOT an information need of users of financial information under the IFRS Conceptual Framework? A) Information on the amount of cash flows. B) Information about the timing of future cash flows. C) Information on the uncertainty of cash flows. D) Information about the amount of past cash flows. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

7) Which financial statement is NOT needed under the IFRS Conceptual Framework? A) Balance sheet. B) Statement of retained earnings. C) Income statement. D) Statement of cash flows. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

8) What information does the balance sheet provide to users of financial information under the IFRS Conceptual Framework? A) Information about changes in liabilities over a period of time. B) Information about changes in resources over a period of time. C) Information about the performance of a company over a period of time. D) Information about the state of a company at a point in time. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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9) What decision would users of financial information NOT need to make under the IFRS Conceptual Framework? A) Decide whether to invest in an entity. B) Information on an entity's economic performance. C) Amount of money to borrow from an entity. D) Assessment of the riskiness of cash flows. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

10) What decision would users of financial information need to make under the IFRS Conceptual Framework? A) Determining whether to lend to the company. B) Determining if a company is an ethical company. C) Determining if the liquidation values are accurate. D) Determine if the company is socially responsible. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

11) Financial statements under the IFRS Conceptual Framework do NOT help users with what kind of objective(s)? A) Alleviating moral hazard. B) Forecasting future product growth. C) Prediction of future earnings. D) Evaluating the riskiness of an investment. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

12) Which statement best explains the qualitative characteristic of "relevance"? A) Financial reports should be understandable to the users of the information. B) Omitting information would influence a user's economic decision. C) Information should influence a user's economic decisions. D) Financial reports should be accurate and complete. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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13) Which statement best explains the concept of "representational faithfulness"? A) Transactions should be recorded in accordance with their substance rather than their legal form. B) Transactions should be recorded in accordance with their legal form rather than their substance. C) Transactions should be recorded accurately and completely to be useful to financial statement users. D) Transactions should be recorded using the rules and guidelines provided in the accounting standards. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

14) When actual financial statements routinely report results that overstate or understate a company's financial position, which qualitative characteristic is violated? A) Relevance. B) Neutrality. C) Prudence. D) Reliability. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

15) What information does the income statement provide to users of financial information under the IFRS Conceptual Framework? A) Information about changes in liabilities over a period of time. B) Information about changes in resources over a period of time. C) Information about the performance over a period of time. D) Information about the state of a company at a point in time. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

16) Which of the following is an attribute of "relevance"? A) Verifiability. B) Predictive value. C) Free from error. D) Comparability. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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17) Which of the following is an attribute of "representational faithfulness"? A) Historical cost. B) Confirmatory value. C) Neutrality. D) Understandability. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

18) Which statement best explains the qualitative characteristic of "completeness"? A) Financial statements should represent the underlying transactions, assets and liabilities. B) Omission of financial information that would influence a user's economic decision. C) Financial information should not contain errors or bias. D) Financial statements should not omit material items or transactions. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

19) Which qualitative characteristic of financial information alleviates "moral hazard"? A) Neutrality. B) Predictive value. C) Timeliness. D) Comparability. Answer: A Explanation: A) Representationally faithful information alleviates moral hazard; neutrality is an attribute of representational faithfulness. Diff: 3 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

20) Which of the following characteristic of financial information alleviates "information asymmetry"? A) Completeness. B) Verifiability. C) Confirmatory value. D) Materiality. Answer: C Explanation: C) Relevant information alleviates information asymmetry; confirmatory value is an attribute of relevance. Diff: 3 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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21) Which statement best explains the meaning of "recognition" in financial reporting? A) Determining where items should be presented in the body of the financial statements. B) Presenting an item in the financial statements, rather than simply disclosing in the notes. C) Quantifying items so that they can be presented in the body of the financial statements. D) Presenting expenses in the same accounting period as the related revenues. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

22) Which statement best explains the meaning of "measurement" in financial reporting? A) Determining where items should be presented in the body of the financial statements. B) Presenting an item in the financial statements but not in the notes. C) Quantifying items so that they can be presented in the body of the financial statements. D) Presenting expenses in the same accounting period as the related revenues. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

23) Which statement best explains the meaning of "comparability" in financial reporting? A) Financial information that is available quickly to financial statement users. B) Financial information that can be objectively confirmed by another person. C) Financial reports that are comprehendible to the users of such reports. D) Financial statement preparers using consistent accounting policies year over year. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

24) Which statement best explains the meaning of "presentation" in financial reporting? A) Determining where items should be presented in the body of the financial statements. B) Presenting an item in the body of the financial statements and in the notes. C) Quantifying items so that they can be presented in the body of the financial statements. D) Presenting expenses in the same accounting period as the related revenues. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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25) When are financial items recognized in the financial statements? A) Items are recognized if the fair value amounts can be determined. B) Items are recognized if the inflows or outflows of resources are probable. C) Items are recognized if the future gains will result from disposal of the item. D) Items are recognized if there are no measurement uncertainties. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

26) What is the most commonly used measurement basis? A) Current cost. B) Realizable value. C) Historical cost. D) Present value. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

27) Which of the following is/are constraints in the financial reporting process? A) Classifying an item as a revenue versus an expense in the income statement. B) Using the historical cost versus the fair value method to measure transactions. C) Recognizing an item as an asset versus a liability in the balance sheet. D) Benefits of information versus the costs of producing that information. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

28) Which of the following accurately describes the objective of financial reporting under the IFRS Conceptual Framework? A) The Conceptual Framework focuses on a narrow set of users such as investors and lenders. B) Special purpose financial statements are required under the Conceptual Framework. C) In the Conceptual Framework, users include a broad range such as employees and customers. D) Under the Conceptual Framework, general purpose financial statements increase moral hazard. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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29) Identify the eight major components of the conceptual framework for accounting. Explain how these components interact with the demand for and supply of financial information. Answer: • The eight components are: users of financial statements, needs/objectives of users, qualitative characteristics, elements, recognition criteria, measurement considerations, constraints and assumptions. • The conceptual framework can be viewed and better understood as a plan for the supply of accounting information to meet the demands of potential users. • Analysis of the demand for accounting information requires specifying the users (target market), their information needs (customer needs), and the desirable characteristics of information (desirable product characteristics). • The supply side of a conceptual framework involves identifying the elements of financial statements (potential components), followed by criteria for recognition in the financial statements (product design), and measurement (customization to specific needs). • Whether the supply of information is able to meet the users' demands also depends on constraints on financial reporting and the suitability of assumptions made in the planning process. Diff: 2 Type: ES Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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30) Indicate the qualitative characteristic being described in each situation below: Qualitative characteristic

Answer: Qualitative characteristic Verifiability

Relevance

Representational faithfulness

Neutrality Understandability

Situation The degree to which different people would agree with the chosen representation in the financial reports. Information that is able to provide feedback about past performance or helps make future predictions of performance. Information that lacks errors and bias, and users can depend on the information to be a faithful representation of what it is purported to represent. Information that is free from bias. The ease with which users are able to comprehend financial reports.

Situation The degree to which different people would agree with the information presented in the financial reports. Information that is able to provide feedback about past performance or helps make future predictions of performance. Information that lacks errors and bias, and users can depend on the information to be a faithful representation of what it is purported to represent. Information that is free from bias. The ease with which users are able to comprehend financial reports.

Diff: 2 Type: ES Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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31) Which financial statement element is being described? Element

Answer: Element Liability Asset

Expenses

Equity Income

Situation A present obligation of the entity to transfer an economic resource as a result of past events. A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity participants. The residual interest in the assets of an entity after deducting all its liabilities. Increases in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Diff: 2 Type: ES Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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32) Explain why assets and liabilities are generally not offset against one another. Use an example to illustrate your rationale. Answer: While the definitions of assets and liabilities are mirror images of each other, it is implicit in the definitions of assets and liabilities that they are two distinct concepts and we do not offset one against the other. Rather than defining "net assets" or equity, we specify assets separately from liabilities. Showing that a company has $700 million in assets and $200 million in liabilities conveys more information than simply showing $500 million in net assets. Also, the characteristics of the assets can differ dramatically from those of the liabilities. Only in limited circumstances in which an asset is closely linked to a specific liability would offsetting be appropriate. Diff: 3 Type: ES Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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33) Which concept of financial reporting is being described? Assumption

Answer: Assumption Going concern Cash basis of accounting Physical capital maintenance

Accrual basis of accounting Financial capital maintenance

Situation A reporting entity will continue its operations into the foreseeable future Record transactions when they have been settled in cash as of the balance sheet date. Measured in physical quantities, a company should be capable of producing as much at the end of an accounting period as it was able to produce at the beginning of that period. Record transactions even if they have not been settled in cash as of the balance sheet date. A company should have as much resources in monetary terms at the end of an accounting period as it had at the beginning of that period.

Situation A reporting entity will continue its operations into the foreseeable future. Record transactions when they have been settled in cash as of the balance sheet date. Measured in physical quantities, a company should be capable of producing as much at the end of an accounting period as it was able to produce at the beginning of that period. Record transactions even if they have not been settled in cash as of the balance sheet date. A company should have as much resources in monetary terms at the end of an accounting period as it had at the beginning of that period.

Diff: 3 Type: ES Skill: Conceptual Objective: 2.2 Explain the rationale for each of the eight major components of these frameworks and synthesize these components into an integrated whole.

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Learning Objective 3 1) In which of the following transactions would it NOT be appropriate to recognize an asset in the financial statements? A) SGG receives a firm commitment from another company to purchase goods from SGG. B) SGG pays $10,000 to a lawyer for services to be provided next year. C) SGG provides services to another company, but will not be paid until after year end. D) A customer of SGG makes a deposit of $1,500 for goods to be custom-made. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

2) Computer Inc. sells equipment with a 3-year warranty. Prior experience indicates that costs for warranty repairs average 3% in the first year, 2% in the second year, and 1% in the third year. In 2025, Computer Inc. had sales of $800,000. It paid $20,000 for materials and labour to make warranty-related repairs in 2025. What amount will be recorded as warranty expense in 2025? A) $20,000 B) $24,000 C) $28,000 D) $48,000 Answer: D Explanation: D) $800,000 × 6% = $48,000 Diff: 2 Type: MC Skill: Computational Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

3) Fail-Safe Computer Inc. sells equipment with a 2-year warranty. Prior experience indicates that costs for warranty repairs average 3% in the first year and 2% in the second year. Sales were $300,000 and $400,000 in fiscal 2024 and 2025, respectively. It paid $5,000 for materials and labour to make warranty-related repairs in 2024. What amount will be recorded as warranty expense in 2024? A) $5,000 B) $12,000 C) $15,000 D) $18,000 Answer: C Explanation: A) $300,000 × 5% = $15,000 Diff: 2 Type: MC Skill: Computational Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

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4) Maybel Company has a March 31, 2024, year end. Which of the following should NOT be recorded as a current liability? A) A deposit received from a customer for the February 2025 rent on a 1-year lease entered into on March 1, 2024. B) Unpaid payroll taxes. C) Dividends in arrears on preferred dividends. D) Property taxes estimated and unpaid based on the prior year's municipal tax bill. Answer: C Diff: 3 Type: MC Skill: Computational Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

5) JP Corporation had net income of $1,000,000 for 2025. After issuing its financial statements, the company realized that it had failed to include inventory from one of its small warehouses for several years. Specifically, it forgot to include $20,000 on December 31, 2024, and $30,000 on December 31, 2025. Which of the following is TRUE regarding JP's 2025 net income? A) Net income was understated by $10,000. B) Net income was overstated by $10,000. C) Net income was understated by $30,000. D) Net income was overstated by $30,000. Answer: A Diff: 2 Type: MC Skill: Computational Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

6) During the past year, Easy Supplies Ltd.'s assets decreased $33,000, its liabilities decreased $41,000, its share capital increased $5,000, and Easy recorded net profit of $12,000. What was the amount of dividends declared? A) $1,000 B) $9,000 C) $12,000 D) $19,000 Answer: B Explanation: B) $41,000 - $5,000 - $12,000 - $33,000 = $9,000 Diff: 2 Type: MC Skill: Computational Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

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7) Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the year, purchases of $141,700 were made and debited to the office supplies account. At the end of the year, a physical count of the office supplies indicated $41,800 on hand. What was the office supplies expense for the year? A) $141,700 B) $152,200 C) $183,500 D) $194,000 Answer: B Explanation: B) $52,300 + $141,700 - $41,800 = $152,200 Diff: 3 Type: MC Skill: Computational Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

8) Which of the following is part of the ASPE Conceptual Framework? A) To provide information for investors, lenders and creditors only. B) Completeness is an attribute of representational faithfulness. C) To provide information useful for investment decisions. D) To provide information useful for assessing management stewardship. Answer: D Explanation: A) This is part of the IFRS Conceptual Framework - Exhibit 2-7. B) This is part of the IFRS Conceptual Framework - Exhibit 2-7. C) This is part of the IFRS Conceptual Framework - Exhibit 2-7. Diff: 3 Type: MC Skill: Conceptual Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

9) Which is NOT an example of trade-offs made in the IFRS Conceptual Framework? A) Relevance versus representational faithfulness. B) Comparability versus consistency. C) Physical capital versus financial capital. D) Timeliness versus verifiability. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

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10) Discuss some of the conceptual framework concepts involved in determining whether to capitalize or expense an expenditure. Answer: Consider whether the expenditure satisfies the definition of an asset: • Does the expenditure represent an economic resource controlled by the entity that has the potential to produce economic benefits? Consider whether the expenditure satisfies the definition of an expense: • Does the expenditure decrease equity for reasons other than a distribution to equity participants? Diff: 2 Type: ES Skill: Conceptual Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

11) ABC Manufacturing paid $250,000 to defend itself against a patent infringement lawsuit from CCB Limited. CCB has won, but ABC is planning to appeal the decision and continue pursuing its case. ABC is permitted to use its patent during the appeal process. Provide two arguments to support ABC capitalizing the $250,000 expenses associated with a lawsuit. Provide two arguments against ABC capitalizing the $250,000 expenses associated with a lawsuit. Which option would you recommend and why? Answer: Arguments to support capitalizing: • The $250,000 represents an asset: the expenditure has future economic benefits because the payment allows ABC to remain in operation to generate future cash flows from operations. • The payment arose from past events and the company has control over using the patent. • The $250,000 should be matched with the related revenues that ABC earns by using the patent. • Other valid arguments Arguments against capitalizing: • The future benefits are unclear since ABC may still lose on appeal, so, to be prudent, it should not capitalize. • Future period of benefit is unclear, so there is no reliable basis for amortization and matching. • Defending itself against patent infringement is a normal business activity for ABC and should be expensed as incurred. • Other valid arguments Recommendation – must follow from student's analysis Diff: 3 Type: ES Skill: Conceptual Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

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12) Accelerated Earnings Inc. (Company) has an operating line of credit with the local bank that is secured by accounts receivable and inventory. The Company purchased inventory whenever the price was low during the year and has a substantial amount on hand at year end. The inventory price has increased substantially at year end. The Controller recorded the following journal at year end: Dr. Cr.

Inventory Gain on inventory

120,000 120,000

Required: a) Who are the users of the Company's financial statements, and what is their informational need? b) What part of the IFRS Conceptual Framework is violated by this journal entry? c) What is the impact of this journal entry on the Company's users? d) What correction is required? Answer: a) The local bank is the user of the financial statement. The line of credit is based on the inventory (and accounts receivable) balance. b) This journal entry violates the "recognition" requirements of the IFRS Conceptual Framework. Transactions are recognized in the financial statements if the inflows/outflows of resources are probable. Simply because the market value of inventory has increased does not result in an inflow to the organization—an inflow will result ONLY when the inventory is sold. Additionally, this journal entry violates the "historical cost" principle. Inventory should be recorded at the price paid by the Company. c) As a result of this journal entry, the Company's inventory is overstated. This will cause the bank to lend too much to the Company. The bank could suffer a loss if the Company is unable to repay the loan. d) The solution is to reverse the entry. Diff: 3 Type: ES Skill: Conceptual Objective: 2.3 Apply the conceptual frameworks in IFRS and ASPE to specific circumstances and evaluate the trade-offs among different concepts within the frameworks.

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Learning Objective 4 1) Which organization oversees accounting standards in Canada? A) Financial Accounting Standards Board. B) Chartered Professional Accountants of each province. C) Chartered Professional Accountants of Canada. D) International Accounting Standards Board. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

2) Which statement best describes a publicly accountable enterprise? A) An entity that has not issued debt instruments that are outstanding and traded in a public market. B) An entity that holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. C) An entity that has not issued equity instruments that are outstanding and traded in a public market. D) An entity that holds assets in a legal capacity for a broad group of outsiders as one of its primary businesses. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

3) Which statement best describes a private enterprise? A) Any entity that is not a publicly accountable enterprise. B) Any for-profit organization that is not a publicly accountable enterprise. C) An entity that holds assets in a legal capacity for a broad group of outsiders as one of its primary businesses. D) Any entity, excluding a not-for-profit organization. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

4) What standards are NOT contained in the CPA Canada Handbook? A) Accounting standards for publicly accountable enterprises. B) Accounting standards for not-for-profit organizations. C) Accounting standards for private enterprises. D) MD&A standards for publicly accountable enterprises. Answer: D Explanation: D) These are managed by the Canadian Securities Administrators. Diff: 1 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

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5) Which statement is NOT correct? A) Private enterprises may follow IFRS. B) Private enterprises may follow ASPE. C) Not-for-profit organizations may follow IFRS. D) Government organizations must follow IFRS. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

6) Which statement is correct? A) Private enterprises may follow IFRS. B) Not-for-profit organizations must follow ASPE. C) Publicly accountable enterprises may follow ASPE. D) Private enterprises must follow ASPE. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

7) Which statement is correct? A) Private enterprises must follow IFRS. B) Publicly accountable enterprises must follow IFRS. C) Not-for-profit organizations must follow ASPE. D) Private enterprises must follow ASPE. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

8) Which of the following accurately describes the standard setting process in Canada? A) The Accounting Standards Oversight Council approves the IFRS. B) The Accounting Standards Board has no authority to alter IFRS. C) The IFRS are jointly set by the Accounting Standards Board and the IASB. D) The Public Sector Accounting Board oversees standards for private enterprises. Answer: B Explanation: A) This group oversees the Accounting Standard Board and Public Sector Accounting Board. C) The IFRS standards are set by the IASB only. D) This body issues standards for the public sector only. Diff: 3 Type: MC Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

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9) Explain how accounting standards are set in Canada. Your answer should list the different groups responsible for setting standards and which types of businesses use each standard. Answer: In Canada, the Canada Business Corporations Act refers to accounting and auditing standards in the CPA Canada Handbook as the standards to be met for compliance with its regulations, thus effectively granting the CPA authority to set accounting and auditing standards. The CPA Canada Handbook contains a relatively comprehensive set of standards, comprising - accounting standards for entities not in the public sector (including all for-profit enterprises whether publicly traded or privately held, and not-for-profit organizations); - public sector accounting standards for governments and related entities such as government-owned universities and hospitals; and - standards for auditing and other assurance engagements for both the public and private sectors. Responsibility for non-public sector accounting standards rests with the Accounting Standards Board (AcSB), while the Public Sector Accounting Board (PSAB) issues standards for the public sector. While IFRS is contained within Part I of the CPA Canada Handbook, the AcSB has no authority to alter IFRS since these standards are set by the IASB in London. Given the dual role of the CPA as an association of chartered professional accountants and a standard-setting body, there is a potential for a real or perceived conflict of interest. In response, in 2000 the Canadian Institute of Chartered Accountants (CICA), one of the legacy bodies of the CPA, established an independent governance body to oversee the other boards in order to increase the independence of the standard-setting bodies. The Accounting Standards Oversight Council (AcSOC) oversees the two accounting boards (AcSB and PSAB). Diff: 2 Type: ES Skill: Conceptual Objective: 2.4 Describe the standard-setting environment in Canada.

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 3 Accrual Accounting Learning Objective 1 1) What is a "cash" cycle? A) A cycle of transactions that converts cash inflows to cash outflows, or vice versa. B) A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors. C) A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of. D) A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

2) What is the cash basis of accounting? A) A method of accounting that records accounting transactions based on economic substance. B) A method of accounting that requires accruals for amounts due or outstanding at year-end. C) A method of accounting that records transactions only when cash is received or paid. D) An entry that reflects events in a period different from their corresponding cash flow. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

3) What is a financing cash cycle? A) A cycle of transactions that converts cash inflows to cash outflows, or vice versa. B) A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors. C) A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of. D) A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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4) What is the accrual basis of accounting? A) A basis of accounting that records economic events when they happen rather than only when cash exchanges occur. B) A method of accounting that does not require accruals for amounts due or outstanding at year-end. C) An entry that reflects accounting events and transactions after the related cash flow. D) An entry that reflects events in a period different from their corresponding cash flow. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

5) What is an "operating" cycle? A) A cycle of transactions that converts cash inflows to cash outflows, or vice versa. B) A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors. C) A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of. D) A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

6) What is an "accrual"? A) An entry to record deposits received from a customer for services to be provided next year. B) An entry that reflects accounting events or transactions after the related cash flow. C) An entry that reflects events or transactions in a period different from its corresponding cash flow. D) An entry to record the payment of a supplier invoice for goods received last month. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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7) Which of the following is NOT an example of a "cash" cycle? A) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors. B) Purchase of property with long-term future benefits which results in cash inflows and then the property is disposed of. C) Planning for product growth which results in investment opportunities that will create returns for investors. D) Purchase of inventory, conversion into products that are delivered to customers, and receipts from customers. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

8) What is an investing cash cycle? A) A cycle of transactions that converts cash inflows to cash outflows, or vice versa. B) A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors. C) A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of. D) A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

9) What is a "deferral"? A) An entry to record payments received from customers that had been outstanding for 100 days. B) An entry that reflects accounting events or transactions after the related cash flow. C) An entry that reflects a transaction in a period different from its corresponding cash flow. D) An entry to record the receipt of inventory that will be paid in 60 days. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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10) Which of the following is an example of the "financing" cash cycle? A) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors. B) Purchase of property with long-term future benefits which results in cash inflows and then the property is disposed of. C) Planning for product growth which results in investment opportunities that will create returns for investors. D) Purchase of inventory, conversion into products that are delivered to customers, and receipts from customers. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

11) Which of the following is an example of an "investing" cash cycle? A) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors. B) Purchase of property with long-term future benefits that results in cash inflows and then disposing of the property. C) Planning for product growth that results in investment opportunities that will create returns for investors. D) Purchase of inventory, conversion into products that are delivered to customers, and receipts from customers. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

12) Which of the following is an example of an "operating" cash cycle? A) Receipt of funding from investors that is used to generate returns from investments and operations, and then returned to investors. B) Purchase of property with long-term future benefits that results in cash inflows and then disposing of the property. C) Planning for product growth that results in investment opportunities that will create returns for investors. D) Purchase of inventory, conversion into products that are delivered to customers, and receipts from customers. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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13) Explain the meaning of the cash basis of accounting and the accrual basis of accounting. When is the cash basis appropriate? Why is the accrual basis used in financial reporting? Answer: • Cash basis of accounting: Record transactions when they have been settled in cash as of the balance sheet date. • Accrual basis of accounting: Record transactions even if they have not been settled in cash as of the balance sheet date. • Cash accounting sufficiently meets information demand when enterprises have finite and short lives because all cash cycles close when the entity dissolves. • Accrual accounting better satisfies the demand for information because it provides additional information on cash cycles that are not yet complete at the reporting date. Diff: 2 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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14) Which cycle is being described in the following situations? Cycle

Situation A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers. A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors. A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of. A cycle of transactions that converts cash inflows to cash outflows, or vice versa.

Answer: Cycle Operating cash cycle

Situation A cycle that involves the purchase of items such as inventory; production, sales, delivery of goods or provision of services; and receipts from customers.

Financing cash cycle

A cycle where there is receipt of funding from investors, those funds are used to generate returns from investments and operations, and then the funds are returned to investors.

Investing cash cycle

A cycle where a property is purchased that has long-term future benefits for the enterprise, which ultimately results in cash inflows, and then the property is disposed of.

Cash cycle

A cycle of transactions that converts cash inflows to cash outflows, or vice versa.

Diff: 2 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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15) Explain how "accruals" are used in financial reporting. Provide an example to support your discussion. Answer: • Accruals are accounting entries that record events in a period different from the corresponding cash flows. • Accruals encompass both instances where the accounting record reflects (i) events before cash flows and (ii) events after cash flows. • Sometimes, accountants will refer to the latter more specifically as deferrals. • For example, recognizing sales revenue after the receipt of cash is a deferral of revenue (i.e. a liability/obligation). • For example, recognizing sales revenue before the receipt of cash is an accrual (i.e. Accounts Receivable). Diff: 2 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

16) What is the difference between accrual accounting and cash accounting? Answer: Accrual accounting is a method of accounting that records economic events when they happen rather than only when cash exchanges occur. Cash accounting is a method of accounting that records only cash exchanges. Diff: 1 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

17) Explain why companies prepare financial statements on an annual basis. Answer: Both business and regulations respond to market demands. Financial information is needed for decision making. Investors and creditors of publicly accountable enterprises are numerous and have needs for information at different times for their investing and lending decisions. It would be impractical for enterprises to provide financial statements according to when each of these investors/creditors requires the information. Therefore, companies provide the information on fixed schedules annually and/or quarterly. As well, periodic reports are more useful in reflecting the economic condition of the business when the accrual basis is used. Diff: 2 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

18) Explain how financial information prepared using accrual accounting provides better information to predict future cash flows than financial information prepared using the cash basis of accounting. Answer: Accrual accounting numbers can be a better predictor of future cash flows because they smooth out and reallocate cash flows to periods that better reflect the long-term average cash flow of the enterprise. For example, an equipment purchase results in a large cash outflow but benefits the company over many years, so allocating the purchase cost over those years makes each year more representative of the cash flow expected in a typical year. Diff: 2 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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19) What is meant by the "going concern assumption" in financial accounting? Explain the implications to financial accounting if the going concern assumption is not valid. Answer: The accrual basis of accounting implicitly assumes that the firm will continue to operate well into the future such that the result of incomplete transactions will be completed or concluded. This assumption is called the going-concern assumption. Because of this assumption we can use the historical cost basis of valuing most of the accounts on the balance sheet. The opposite of the going-concern assumption is the notion that the firm is or will soon be bankrupt, and therefore no longer continues to operate. If the going-concern assumption is no longer valid (and the firm is going into bankruptcy), then assets should be valued at their exit value. This usually will be their net realizable value, which will likely result in a major reduction in the carrying value of the asset on the balance sheet and a large loss recorded on the income statement. Diff: 3 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

20) Explain the differences between a cash cycle, a financing cash cycle, an investing cash cycle, and an operating cash cycle. Answer: A cash cycle is a set of transactions that converts a cash inflow to a cash outflow, or vice versa. A financing cash cycle is the receipt of funding from investors, using those funds to generate returns from investments and operations, and returning the funds to investors. An investing cash cycle is the purchase of property that has long-term future benefits for the enterprise, using that property to obtain economic benefits which ultimately results in cash inflows, and disposing of the property. An operating cash cycle involves the purchase of items such as inventory; production, sales, and delivery of goods or provision of services; and receipts from customers. Diff: 2 Type: ES Skill: Conceptual Objective: 3.1 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand.

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Learning Objective 2 1) Which statement is correct about accrual accounting? A) Accounting estimates or professional judgment are not necessary with accrual accounting. B) A true measure of economic or accounting income is possible with accrual accounting. C) An accounting method that records events when they have an economic effect on the company. D) A method of accounting that does not require accruals for amounts due or outstanding at year-end. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

2) What is meant by the phrase "true and fair view" of financial reporting? A) The financial statements provide a true representation of the company's economic conditions and performance. B) The financial statements provide an unbiased representation of the company's economic conditions and performance. C) The financial statements provide a fair representation of the company's economic conditions and performance. D) The financial statements provide an accurate representation of the company's economic conditions and performance. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

3) What is meant by "earnings quality"? A) A measure of how closely expense accruals correspond to actual expenses without management bias. B) A measure to determine management bias by comparing actual reported profits with "true" earnings. C) A measure to determine management bias by comparing reported income to actual cash flows. D) A measure of how closely earnings correspond to earnings reported without management bias. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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4) A company's reported earnings are $1,000 and cash flows are $600. Based on economic conditions during the year, the company booked allowances of $250. As a result of contractual incentives, the company booked a further $150 in accruals. What is the total of the unbiased accruals and excessive accruals? A) $150 B) $400 C) $600 D) $1,000 Answer: B Explanation: B) $1,000 - $600 = $400 (also: $250 + $150 = $400) Diff: 2 Type: MC Skill: Computational Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

5) A company's reported earnings are $1,000 and cash flows are $600. Based on economic conditions during the year, the company booked allowances of $250. As a result of contractual incentives, the company booked a further $150 in accruals. How much are the unbiased accruals? A) $150 B) $250 C) $400 D) $600 Answer: B Diff: 2 Type: MC Skill: Computational Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

6) A company's reported earnings are $2,000 and cash flows are $1,600. Based on economic conditions during the year, the company booked allowances of $150. As a result of contractual incentives, the company booked a further $250 in accruals. What is the total of the excessive accruals? A) $150 B) $250 C) $400 D) $1,600 Answer: B Diff: 2 Type: MC Skill: Computational Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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7) A company's cash flows are $3,600. Based on economic conditions during the year, the company booked allowances of $1,500. As a result of contractual incentives, the company booked a further $700 in accruals. What is the total reported earnings of the company? A) $1,400 B) $2,200 C) $3,600 D) $5,800 Answer: D Explanation: D) $3,600 + $1,500 + $700 = $5,800 Diff: 3 Type: MC Skill: Computational Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

8) A company's reported earnings are $2,000 and cash flows are $1,600. Based on economic conditions during the year, the company booked allowances of $150. As a result of contractual incentives, the company booked a further $250 in accruals. What is the amount of unbiased earnings? A) $150 B) $400 C) $1,750 D) $2,000 Answer: C Explanation: C) $1,600 + $150 = $1,750 Diff: 3 Type: MC Skill: Computational Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

9) What are biased accruals? A) Accruals based on applying GAAP. B) Accruals based on overly optimistic estimates. C) Accruals based on ethical considerations. D) Accruals based on applying professional judgment. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

10) What are excessive accruals? A) Accruals that are based on professional judgment. B) Accruals that are based on ethical considerations. C) Accruals based on contractual incentives or opportunism. D) Accruals required by GAAP. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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11) Why are excessive accruals a concern for accounting and financial reporting? A) They improve the quality of earnings of the company. B) They may represent unethical practices by the company. C) They require too much professional judgment. D) They result in standards overload. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

12) Which statement is correct? A) Lower amounts of excessive accruals results in higher earnings quality. B) Excessive accruals are directly observable in financial reporting. C) It is easy to determine the contractual incentives causing excessive accruals. D) Excessive accruals improve the comparability of financial reporting. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

13) Which statement correctly explains the relationship between cash flows, accruals, and reported earnings? A) Cash flows are the best representation of a company's financial position and performance because of excessive accruals. B) The cash basis of accounting provides the best representation of a company's financial position and performance. C) The accrual basis of accounting provides the best representation of a company's financial position and performance. D) Accruals reduce earnings quality but are needed in financial reporting because GAAP is founded on professional judgment. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

14) Which statement is correct? A) The amount and types of excessive accruals are directly related to earnings quality. B) Excessive accruals are transparent and improve the quality of financial reporting. C) Users can routinely determine the contractual incentives causing excessive accruals. D) Users like earnings that closely correspond to reported results without management bias. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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15) Dexter Corp. received cash for a service that is to be performed in the next accounting period. How should this transaction be accounted for? A) As accrued revenue. B) As an expense. C) As a prepaid expense. D) As a liability. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

16) What is the impact of overstating an accrued expense during the 2025 fiscal year? A) There is no effect on 2025 income. B) Net income for 2025 will be overstated. C) Current liabilities for 2025 will be understated. D) Ending retained earnings for 2025 will be understated. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

17) Which is NOT an example of a biased accrual? A) Accruals based on overly optimistic estimates. B) Accruals based on overly conservative estimates. C) Accruals based on achieving target level of revenues. D) Accruals based on applying professional judgment. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

18) Explain why estimates are necessary in accrual accounting and why a "true" measure of income cannot be provided. Answer: • Since accrual accounting includes information about cash cycles that are not yet complete, management/accountants need to estimate the cycles' outcomes, which are inherently uncertain. • There are better or worse estimates based on available information, but since the future is unknowable, none of the predictions about the future can be considered to be true and therefore "true" income does not exist. Diff: 1 Type: ES Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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19) Explain what is meant by "quality of earnings." Answer: Quality of earnings conceptually refers to how close the reported earnings are to an unbiased amount. Since we cannot observe unbiased earnings, quality of earnings is difficult to measure in practice. Diff: 1 Type: ES Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

20) Identify at least one estimate that would be required in measuring the following financial statement items. Work in process inventories Intangible assets Building Vacation pay Revenue from a 5-year construction contract Answer: Work in process inventories

Directly attributable overhead

Definite or indefinite expected useful life; residual values at end of useful lives; depreciation method that would be Intangible assets most appropriate Useful lives; pattern of benefits obtained; residual values Building at end of useful lives; separable components Expected vacation days that will not be used by people Vacation pay (i.e. expires before they can take) Revenue from a 5-year Profitability of contract; degree of progress fulfilling construction contract contract; expected costs to complete Diff: 1 Type: ES Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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21) What is meant by "quality of earnings"? Discuss if earnings quality should be assessed by comparing earnings to cash flows. Answer: Quality of earnings refers to how closely reported earnings correspond to earnings that would be reported in the absence of management bias. The practice of assessing earnings quality by comparing earnings and cash flows has some merit but is imperfect. The difference between earnings and cash flows generally can be referred to as accruals. These accruals reflect economic circumstances, accounting standards, professional judgment, ethics (the unbiased portion), as well as management bias resulting from contractual incentives and managerial opportunism. To the extent accruals reflect management bias, comparing earnings and cash flows helps to uncover that bias. Diff: 2 Type: ES Skill: Conceptual Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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22) Computer Consulting Limited was started in early 2024 and continued to operate until early 2027, when it was wound up due to disputes between the two principal shareholders. When it started, the company used the following accounting policies: 1. Use straight-line depreciation for the firm's only asset, a computer which cost $1,100,000 and has an estimated useful life of four years. 2. Estimate warranty expense as 9% of sales. 3. Estimate bad debts expense as 5% of sales. Derive net income for 2024 to 2026. For the year-end balance for 2027, assume accounts receivable, allowance for doubtful accounts, and the warranty accrual are $0, as the firm wound itself up during the year and all timing differences have been resolved.

Sales (all on account) Warranties paid Proceeds on disposal of computer Accounts receivable collected in the year Accounts receivable written off in the year All other expenses (paid in cash in the year incurred)

2024 2025 2026 $3,400,000 $3,600,000 $4,100,000 272,000 288,000 420,250 0 0 0

2027 $410,000 147,600 410,000

2,958,000

2,880,000

3,895,000

1,126,000

102,000

108,000

205,000

236,000

2,380,000

2,520,000

2,767,500

287,000

Answer: Sales Operating expenses Warranty expense Bad debt expense Deprec. expense 4 yr SL Net income

2024 $3,400,000 2,380,000 306,000 170,000 275,000

2025 $3,600,000 2,520,000 324,000 180,000 275,000

2026 $4,100,000 2,767,500 369,000 205,000 275,000

$269,000

$301,000

$483,500

Diff: 2 Type: ES Skill: Computational Objective: 3.2 Explain why accrual accounting is fundamentally inexact, why estimates are central to accrual accounting, and why there is no "true" income for typical situations; and evaluate the "quality of earnings."

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23) Xavier Computer Limited was started in early 2024 and continued to operate until early 2027, when it was wound up due to disputes between the two principal shareholders. When it started, the company used the following accounting policies: 1. Use 50% declining-balance depreciation for the firm's only asset, a computer which cost $1,100,000 and has an estimated useful life of four years. 2. Estimate warranty expense as 10% of sales. 3. The year-end allowance for doubtful accounts should be 40% of gross accounts receivable. Derive net income for 2024 to 2026. For the year-end balance for 2027, assume accounts receivable, allowance for doubtful accounts, and the warranty accrual are $0, as the firm wound itself up during the year and all timing differences have been resolved.

2024 2025 2026 $3,400,000 $3,600,000 $4,100,000 272,000 288,000 420,250 0 0 0

2027 $410,000 147,600 410,000

2,958,000

2,880,000

3,895,000

1,126,000

102,000

108,000

205,000

236,000

2,380,000

2,520,000

2,767,500

287,000

Answer: Sales Operating expenses Warranty expense Bad debt expense Deprec expense 50% DB Net income (loss)

2024 $3,400,000 2,380,000 340,000 238,000 550,000

2025 $3,600,000 2,520,000 360,000 352,800 275,000

2026 $4,100,000 2,767,500 410,000 205,000 137,500

$(108,000)

$92,200

$580,000

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24) Computer Consulting Limited was started in early 2024 and continued to operate until early 2027, when it was wound up due to disputes between the two principal shareholders. When it started, the company used these accounting policies: 1. Use straight-line depreciation for the firm's only asset, a computer which cost $1,100,000 and has an estimated useful life of four years. 2. Estimate warranty expense as 9% of sales. 3. Estimate bad debts expense as 5% of sales. Derive the annual net cash flows for 2024 to 2026. For the year-end balance for 2027, assume accounts receivable, allowance for doubtful accounts, and the warranty accrual are $0, as the firm wound itself up during the year and all timing differences have been resolved.

2024 2025 2026 $3,400,000 $3,600,000 $4,100,000 272,000 288,000 420,250 0 0 0

2027 $410,000 147,600 410,000

2,958,000

2,880,000

3,895,000

1,126,000

102,000

108,000

205,000

236,000

2,380,000

2,520,000

2,767,500

287,000

Answer: Collections Cash operating expenses paid Warranty exp paid Purchase of capital asset Net cash flows

2024 $2,958,000 2,380,000 272,000 1,100,000 $(794,000)

2025 $2,880,000 2,520,000 288,000 0 $72,000

2026 $3,895,000 2,767,500 420,250 0 $707,250

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Learning Objective 3 1) Why is determining the "cut-off" point critical in the accrual basis of accounting? A) Based on the periodicity concept, financial statements are prepared on a regular basis. B) It is important to reflect business transactions and events in the subsequent accounting period. C) The point in time at which one reporting period ends and another begins is important. D) Transactions must be reported in the cut-off period before the statements are authorized. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

2) Assume that a company has a calendar year of January 1, 2026–December 31, 2026. March 15, 2027, was the end of the period for gathering information pertaining to the financial statements. The financial statements were authorized for issue on March 24, 2027. What is the cut off point for the "recognition" of transactions and events in a reporting period? A) January 1, 2026. B) March 15, 2027. C) March 24, 2027. D) December 31, 2026. Answer: D Explanation: A) The beginning of the fiscal period B) The end of the subsequent events period C) Date the financial statements are authorized for issue D) The end of the fiscal period Diff: 2 Type: MC Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

3) What is the significance of the subsequent events period for accrual accounting? A) The subsequent events period can affect the recognition of business transactions and events. B) The subsequent events period can affect the measurement of business transactions and events. C) The subsequent events period can affect the recognition and measurement of business transactions and events. D) Transactions must be reported in the cut-off period before the statements are authorized. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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4) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. There is a fire at the company's only warehouse; the company has insufficient fire insurance to replace the warehouse and contents such that a material loss will result and operations will be curtailed for six months. (Justify your recommendation) Answer: No adjustment is required as the fire does not change any estimates or assumptions used in valuing year-end amounts. This event should be disclosed in the notes to the financial statements and the amount of the loss quantified; but not recorded, only described in the notes. Mention should be made of the effect of the fire on the following year's earnings. Disclosure is required as all the relevant information is known and the event is significant to the future operations of the company. Diff: 1 Type: ES Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

5) Assume that a company has a fiscal year of July 1, 2026–June 30, 2027. August 15, 2027, was the end of the period for gathering information pertaining to the financial statements. The financial statements were authorized for issue on August 24, 2027. What is the cut off point for the "measurement" of transactions and events in this reporting period? A) July 1, 2026. B) The end of the subsequent events period. C) August 24, 2027. D) June 30, 2027. Answer: C Explanation: A) The beginning of the fiscal period B) Subsequent events period C) Date the financial statements are authorized for issue D) The end of the fiscal period Diff: 2 Type: MC Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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6) The Rihanna Company owns 1,000 shares in Abhay Corp, a public company listed on the stock exchange. The share price was as follows: - At date of purchase, July 2, 2026 = $100/share - At year end, June 30, 2027 = $100/share - At start of next fiscal year, July 1, 2027 = $95/share - At date financial statements authorized for issue, September 1, 2027 = $90/share Materiality for Rihanna's financial statements is $500,000. What is the appropriate treatment of the subsequent event in the June 30, 2027, financial statements? A) Adjustment in the financial statement for the decline in value of $10,000. B) No adjustment is needed for the subsequent decline in share price to $90/share. C) Note disclosure in the financial statements for the decline in value of $5,000. D) Both an adjustment and note disclosure in the financial statements for the decline to $90/share. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

7) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. There is a significant fall in the market price of a major portion of inventory due to new technology making the existing items obsolete. The market price is lower than the current carrying value. (Justify your recommendation.) Answer: An adjustment is required as the market price is lower than cost, and inventory should be valued at the lower of cost and market. The drop in market price is relevant to the measurement of inventories at year-end because it reflects conditions at that point in time. No additional disclosure is required; this is just an unfortunate (albeit unusual) operating occurrence. Diff: 1 Type: ES Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

8) Why is it important to properly define the reporting period when using the accrual basis of accounting? Answer: The cut-off date is the end of the period for the recognition of events. Subsequent events, while not recognized in the reporting period, may provide relevant information for the measurement of items recognized before the cut-off date. Diff: 2 Type: ES Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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9) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. A new competitor enters the marketplace, which will result in serious price competition and, likely, reduced income next year. (Justify your recommendation.) Answer: New competition requires neither recognition nor disclosure. The event does not relate to conditions at or prior to the year-end for recognition. The event is neither specific nor unusual in nature to warrant disclosure. Diff: 1 Type: ES Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

10) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. New technology makes a major capital asset redundant or causes it to lose significant fair market and salvage value. (Justify your recommendation). Answer: Due to the new technology, the assumptions for useful life, salvage value, and depreciation method should be reviewed and assumptions that are no longer appropriate based on this new information should be changed. The depreciation expense for the current year should reflect these new estimates. This requires a note disclosure as this information clarifies estimates used at the year-end for calculating depreciation expense. Diff: 1 Type: ES Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

11) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. A major client unexpectedly goes bankrupt and it is determined that you will get only 30% of the value of their account receivable as full and final settlement. (Justify your recommendation.) Answer: For the bankruptcy of a client, recognize the reduction in the carrying value of the accounts receivable by 70% and make the necessary adjustment. This is required as this new information relates to the measurement of receivables recognized at the year-end. Diff: 1 Type: ES Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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12) The following event occurred after the company's year-end but before the completion of the audit. For this subsequent event, determine whether the event: • requires an adjustment to the year-end financial statements, • requires note disclosure, or • requires neither adjustment to recognized amounts nor disclosure. The company experiences a major labour strike. Workers are still on strike when the audit is finished. Does your answer change if this strike might force the company into bankruptcy? (Justify your recommendation). Answer: No adjustment and no disclosure; labour strikes are just an unfortunate aspect of normal business operations. However, if the strike threatens the survival of the company it should be disclosed, as this would put into question the validity of the going-concern assumption. Diff: 1 Type: ES Skill: Conceptual Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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13) Sing Songs Ltd. started operations on January 1, 2024. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Using the following information about activities for 2024–2026, derive the net income for each year under BOTH accounting options: 2024 2025 2026 Sales (all on account) $10,500,000 $13,500,000 $14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Warranties actually paid 180,000 500,000 525,000 Estimated warranty payable ending 385,000 525,000 700,000 balance based on ageing analysis of sales Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses (paid 2,500,000 2,800,000 3,000,000 immediately)

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Answer: Accounting Option 1 Sales Cost of goods sold Bad debt expense Warranty expense Depreciation expense Other operating expenses Net income

2024

2025

2026

$10,500,000

$13,500,000

$14,100,000

2,700,000 735,000 525,000 1,100,000 2,500,000 $2,940,000

2,800,000 945,000 675,000 1,100,000 2,800,000 $5,180,000

2,750,000 987,000 705,000 1,100,000 3,000,000 $5,558,000

2024

2025

2026

$10,500,000

$13,500,000

$14,100,000

2,790,000 280,000 565,000 1,100,000 2,500,000 $3,265,000

2,960,000 400,000 640,000 1,100,000 2,800,000 $5,600,000

2,500,000 1,987,000 700,000 1,100,000 3,000,000 $4,813,000

Accounting Option 2 Sales Cost of goods sold Bad debt expense Warranty expense Depreciation expense Other operating expenses Net income

Diff: 3 Type: ES Skill: Computational Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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14) Sing Songs Ltd. started operations on January 1, 2024. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Assume that the company selected Accounting Option 1. Using the following information about activities for 2024–2026, derive the net income for each year: 2024 Sales (all on account) Inventory purchases (paid immediately) Ending inventory value: FIFO Ending inventory value: Average cost Collections Amounts actually written off Warranties actually paid Estimated warranty payable ending balance based on ageing analysis of sales Depreciation expense All other operating expenses (paid immediately)

2025

2026

$10,500,000 $13,500,000

$14,100,000

4,500,000

3,000,000

2,900,000

1,800,000 1,710,000

2,000,000 1,750,000

2,150,000 2,150,000

9,500,000 12,500,000 100,000 250,000 180,000 500,000 385,000 525,000

7,165,000 750,000 525,000 700,000

1,100,000 2,500,000

1,100,000 2,800,000

1,100,000 3,000,000

2024

2025

2026

$10,500,000 $13,500,000

$14,100,000

Answer: Accounting Option 1 Sales Cost of goods sold Bad debt expense Warranty expense Depreciation expense Other operating expenses Net income

2,700,000 2,800,000 2,750,000 735,000 945,000 987,000 525,000 675,000 705,000 1,100,000 1,100,000 1,100,000 2,500,000 2,800,000 3,000,000 $2,940,000 $5,180,000 $5,558,000

Diff: 2 Type: ES Skill: Computational Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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15) Sing Songs Ltd. started operations on January 1, 2024. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Assume that the company selected Accounting Option 2. Using the following information about activities for 2024–2026, derive the net income for each year: 2024

2025

2026

Sales (all on account) $10,500,000 $13,500,000 $14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Warranties actually paid 180,000 500,000 525,000 Estimated warranty payable ending 385,000 525,000 700,000 balance based on ageing analysis of sales Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses (paid 2,500,000 2,800,000 3,000,000 immediately) Answer: Accounting Option 2 2024 Sales Cost of goods sold Bad debt expense Warranty expense Depreciation expense Other operating expenses Net income

2025

2026

$10,500,000 $13,500,000

$14,100,000

2,790,000 2,960,000 2,500,000 280,000 400,000 1,987,000 565,000 640,000 700,000 1,100,000 1,100,000 1,100,000 2,500,000 2,800,000 3,000,000 $3,265,000 $5,600,000 $4,813,000

Diff: 3 Type: ES Skill: Computational Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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16) Sing Songs Ltd. started operations on January 1, 2024. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Using the following information about activities for 2024–2026, derive the 2024 net income (only) under BOTH accounting options and explain why the net income under the two methods is NOT the same. 2024

2025

2026

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Answer: Accounting Option 1 2024 Sales Cost of goods sold Bad debt expense Warranty expense Depreciation expense Other operating expenses Net income

$10,500,000

2,700,000 735,000 525,000 1,100,000 2,500,000 $2,940,000

Accounting Option 2 2024 Sales Cost of goods sold Bad debt expense Warranty expense Depreciation expense Other operating expenses Net income

$10,500,000

2,790,000 280,000 565,000 1,100,000 2,500,000 $3,265,000

Net income is different between the two methods due to the different inventory methods and the timing of when certain amounts were expensed. As the cumulative net income for both scenarios for all three years happen to be the same, it is just a matter of when the warranty and bad debt expenses were accrued. As accruals try to estimate actual expenditures or events that occur later, the aggregate effects over multiple periods eventually net or wash out. Accrual or allocation methods are ways of estimating amounts that will only be clarified later when confirming events occur (warranty actually paid) or fail to occur (account receivable actually written off due to non-payment). Accruals are essential as accounting seeks to implement the matching principle, whereby expenses are matched with revenues recognized to determine net income for a period. Diff: 3 Type: ES Skill: Computational Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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17) Sing Songs Ltd. started operations on January 1, 2024. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Explain why net income would NOT be the same under both accounting options. Answer: Net income would be different between methods due to the different inventory methods and the timing of when certain amounts were expensed. As the cumulative net income for the two scenarios for the three years happen to be the same, it is just a matter of when the warranty and bad debt expenses were accrued. As accruals try to estimate actual expenditures or events that occur later, the aggregate effects over multiple periods eventually net or wash out. Accrual or allocation methods are ways of estimating amounts that will only be clarified later when confirming events occur (warranty actually paid) or fail to occur (account receivable actually written off due to non-payment). Accruals are essential as accounting seeks to implement the matching principle, whereby expenses are matched with revenues recognized to determine net income for a period. Diff: 2 Type: ES Skill: Computational Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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18) Sing Songs Ltd. started operations on January 1, 2024. During its first year of operations, the company had a choice of accounting policies:

Inventory valuation Bad debt expense

Accounting Option 1 FIFO 7% of sales

Warranty expense

5% of sales

Accounting Option 2 Average cost Allowance: 20% of closing (gross) accounts receivable Allowance: an analysis of sales and repairs

Using the information provided below, discuss whether the cumulative cash flows will be the same or different for each accounting option. 2024 Sales (all on account) Inventory purchases (paid immediately) Ending inventory value: FIFO Ending inventory value: Average cost Collections Amounts actually written off Bad debt expense 7% of sales Bad debt expense AFDA based on analysis of AR Warranties actually paid Warranty expense 5% of sales Warranty expense provision based on analysis of sales and repairs Depreciation expense All other operating expenses (paid immediately)

2025

2026

$10,500,000 $13,500,000

$14,100,000

4,500,000 3,000,000 1,800,000 2,000,000 1,710,000 1,750,000 9,500,000 12,500,000 100,000 250,000 735,000 945,000 200,000 200,000

2,900,000 2,150,000 2,150,000 7,165,000 750,000 987,000 1,387,000

180,000 525,000 385,000

500,000 675,000 525,000

525,000 705,000 700,000

1,100,000 2,500,000

1,100,000 2,800,000

1,100,000 3,000,000

Answer: Collections Inventory purchases Warranties paid Operating expenses Cash flow

2024 $9,500,000 4,500,000 180,000 2,500,000 $2,320,000

2025 $12,500,000 3,000,000 500,000 2,800,000 $6,200,000

2026 $7,165,000 2,900,000 525,000 3,000,000 $740,000

Total $29,165,000 10,400,000 1,205,000 8,300,000 $9,260,000

Cumulative operating cash flows for all three years are the same ($9,260,000) for both sets of policies because cash flows are unaffected by the choice of accounting policies used. Diff: 3 Type: ES Skill: Computational Objective: 3.3 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events.

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Learning Objective 4 1) Which statement is NOT correct? A) Accruals involve uncertainty about future transactions and events. B) Companies must use the same accounting estimates year-over-year in preparing statements. C) A company can change its accounting policies if it provides more relevant information. D) Higher earnings quality provides users with more decision useful financial statements. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

2) Which statement is correct? A) Accounting policy changes should reflect changes in economic circumstances. B) Accounting errors are corrected prospectively in the financial statements. C) Changes in accounting estimates are corrected retrospectively in the statements. D) Correction of accounting errors proves that management bias exists in reporting. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

3) A correction of an accounting error does NOT involve A) note disclosure. B) retrospective adjustment. C) retrospective restatement. D) management bias. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

4) A correction of an accounting error involves A) the use of hindsight. B) retrospective restatement. C) professional judgment. D) prospective adjustment. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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5) Which of the following is an example of an error that should be corrected? A) Switching from straight-line to the declining balance method of depreciation. B) Changing from weighted average to the first-in, first out method of inventory valuation. C) Using 5% for bad debts provision, but 1% is required in the company's procedures manual. D) Starting to capitalize fixed assets under $1,000 which were previously considered immaterial. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

6) A change in accounting policy should A) be based on changes in the underlying economics of business transactions. B) not be based on management's best discretion. C) be based on improving the comparability of financial reporting. D) not be based on changes to accounting standards. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

7) A change in accounting policy A) is accounted for on a retrospective basis, without restatement. B) allows management to bias financial reporting. C) is accounted for on a prospective basis, with restatement. D) is accounted for in the same manner as an error correction. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

8) Changes in accounting estimates are based on A) information available from the use of hindsight. B) information available at the time financial statements are prepared. C) providing comparable information in the financial statements. D) low quality of professional judgment being exercised. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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9) Changes in accounting estimates A) are accounted for in the same manner as changes in accounting policies. B) reduce the relevance and reliability of financial reporting. C) are applied to current and past reporting periods. D) are applied to current and future reporting periods. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

10) Which of the following is an example of a change in accounting estimate? A) Switching from straight-line to the declining balance method of depreciation. B) Using 3% for the allowance for bad debts, instead of 1% as stated in the company's procedures manual. C) Using 5% for the allowance for bad debts because of the increased possibility of bankruptcy by customers. D) Changing from weighted average to the first-in, first-out method of inventory valuation. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

11) Which of the following is an example of a change in accounting policy? A) Changing from weighted average to the first-in, first-out method of inventory valuation. B) Capitalizing a delivery truck that had previously been expensed. C) Using 5% for the allowance for bad debts because of the increased possibility of bankruptcy by customers. D) Using 4% for the allowance for bad debts, instead of 2% as stated in the company's procedures manual. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

12) Changes in accounting estimates are A) accounted for in the same manner as accounting policy changes. B) accounted for on a prospective basis. C) applied to current and past reporting periods. D) accounted for in the same manner as error corrections. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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13) Changes in accounting estimates are based on A) new information that has now become available. B) management bias. C) information available from the use of hindsight. D) comparable industry practice. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

14) Correction of an error is based on A) new information that has now become available. B) information available at the time of preparing the financial statements. C) the use of hindsight. D) comparable industry practice. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

15) Which one of the following errors would cause a company's unadjusted trial balance to be out of balance? A) Overstating an asset balance by $100 and a revenue balance by the same amount. B) Failure to post the debit portion of a journal entry to the proper account (recorded, for example, as a credit to revenue rather than as a debit to an expense account). C) Recording a $5,000 revenue transaction by crediting the accounts receivable account and debiting the revenue account. D) Recording $1,000 cash collected from a customer as a debit to the cash account and a debit to the accounts receivable account. Answer: D Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

16) Which of the following would result in an overstatement in reported net income? A) Failure to record $45,000 collection of accounts receivable. B) Expensing rather than capitalizing the $12,500 cost of a capital asset. C) Failure to record an accrued revenue of $24,000. D) Failure to record an accrued expense of $18,000. Answer: D Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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17) If the gross profit percentage used in the gross profit inventory method were understated, which of the following is correct? A) Cost of goods sold would be understated. B) Ending inventory would be understated. C) Ending inventory would be correctly stated, but beginning inventory would be incorrect. D) Ending inventory would be overstated. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

18) The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2027. A machine was purchased on January 1, 2025, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What is the appropriate accounting? A) Retrospective adjustment for fiscal 2027. B) Retrospective adjustment for fiscal 2025 and 2026. C) Prospective adjustment from fiscal 2026 going forward. D) Error correction for fiscal 2027. Answer: B Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

19) The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2027. A machine was purchased on January 1, 2025, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. Assume that net income before tax (NIBT) was $80,000 for fiscal 2025. What is the appropriate accounting for fiscal 2025? A) Retrospective adjustment and revised NIBT of $110,000. B) Retrospective adjustment and revised NIBT of $95,900. C) Retrospective adjustment and revised NIBT of $65,900. D) No accounting is necessary in fiscal 2025. Answer: B Explanation: B) $150,000/10 × 2 = $30,000; ($150,000 - $9,000) / 10 = $14,100; $30,000 - $14,100 = $15,900; $80,000 + $15,900 = $95,900. Diff: 3 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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20) The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2027. A machine was purchased on January 1, 2025, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. Assume that net income before tax (NIBT) was $102,000 for fiscal 2026. What is the appropriate accounting for fiscal 2026? A) Retrospective adjustment and revised NIBT of $87,900. B) Retrospective adjustment and revised NIBT of $126,000. C) Retrospective adjustment and revised NIBT of $111,900. D) No accounting is necessary in fiscal 2026. Answer: C Explanation: C) $150,000/10 × 2 = $30,000; $150,000 - $30,000 = $120,000; $120,000/10 × 2 = $24,000; ($150,000 - $9,000) / 10 = $14,100; $24,000 - $14,100 = $9,900; $102,000 + $9,900 = $111,900. Diff: 3 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

21) The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2027. A machine was purchased on January 1, 2025, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What should have been booked as depreciation expense in fiscal 2026? A) $9,900 B) $14,100 C) $24,000 D) $30,000 Answer: B Explanation: B) ($150,000 - $9,000) / 10 = $14,100 Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

22) The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2027. A machine was purchased on January 1, 2025, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What was booked as depreciation expense in fiscal 2025? A) $14,100 B) $15,900 C) $24,000 D) $30,000 Answer: D Explanation: D) $150,000 × 2/10 = $30,000 Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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23) The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2027. A machine was purchased on January 1, 2025, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What adjustment is needed for fiscal 2025? A) $14,100 B) $15,900 C) $24,000 D) $30,000 Answer: B Explanation: B) Depreciation required under straight line: ($150,000 – $9,000) / 10 = $14,100 2025 depreciation booked: $150,000 × 2/10 = $30,000; Adjustment = $30,000 - $14,100 = $15,900 Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

24) The method of depreciation was changed from the double-declining-balance method to the straight-line method in fiscal 2027. A machine was purchased on January 1, 2025, at a cost of $150,000. The machine has an estimated useful life of 10 years and a residual value of $9,000. What adjustment is needed for fiscal 2026? A) $9,900 B) $10,000 C) $20,000 D) $30,000 Answer: A Explanation: A) Depreciation required under straight line: ($150,000 - $9,000) / 10 = $14,100 2026 depreciation booked: ($150,000 - $30,000) × 2/10 = $24,000; Adjustment = $24,000 - $14,100 = $9,900 Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

25) JP Corporation had net income of $1,000,000 for 2025. After issuing its financial statements, it realized that it had failed to include inventory from one of its small warehouses for several years. Specifically, it forgot to include inventory of $20,000 on December 31, 2024, and $30,000 on December 31, 2025. Which of the following is TRUE regarding JP’s 2025 net income? A) Net income was understated by $10,000. B) Net income was overstated by $10,000. C) Net income was understated by $30,000. D) Net income was overstated by $30,000. Answer: A Explanation: A) Opening inventory understated $20,000; closing inventory understated $30,000; therefore, COGS overstated (and net income understated) by $30,000 - $20,000 = $10,000. Diff: 2 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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26) Lee Limited began operations on January 1, 2024. The following data relate to the company's first 2 years in business:

Inventory December 31, 2024 December 31, 2025 Cost of goods sold For 2024 For 2025

Reported Amount

Correct Amount

$25,000 35,000

$20,000 30,000

$400,000 450,000

$?????? ??????

What is the correct cost of goods sold amount for 2025? A) $400,000 B) $405,000 C) $450,000 D) $460,000 Answer: C Explanation: C) $450,000 - ($25,000 - $20,000) + ($35,000 -$30,000) = $450,000 Diff: 3 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

27) What is the effect of overstating 2026 depreciation expense? A) Accumulated depreciation will be understated for 2026. B) Net income for 2026 will be overstated. C) Ending retained earnings for 2026 will be understated. D) Ending retained earnings for 2026 will be overstated. Answer: C Diff: 3 Type: MC Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

28) Explain how changes in accounting policies, changes in accounting estimates and errors are accounted for under the accrual basis of accounting. Answer: Correction of errors and changes in accounting policies require retrospective adjustment of financial statements. Changes in estimates due to new information require prospective treatment. Diff: 1 Type: ES Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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29) For the following types of accounting changes, identify the relevant criteria for each accounting change by selecting "yes," "no," or "N/A" (not applicable).

Accounting change due to management choice (Yes, No, N/A)

Information known (or should have been known) in the prior period (Yes, No, N/A)

Accounting change due to management choice (Yes, No, N/A)

Information known (or should have been known) in the prior period (Yes, No, N/A) Yes No N/A

Error correction Change in estimate Change in accounting policy Answer:

Error correction Change in estimate Change in accounting policy

No No Yes

Diff: 1 Type: ES Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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30) Which of the following would be accounted for as correction of an error? A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B) A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C) A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D) A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E) An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F) A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost. Answer: F Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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31) Which of the following would be accounted for as a change in accounting policy? (More than one answer may be correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B) A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C) A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D) A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E) An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F) A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost. Answer: C, F Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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32) Which of the following would be accounted for as a change in accounting estimate? (More than one answer may be correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B) A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C) A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D) A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E) An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F) A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost. Answer: A, B, D, E Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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33) Which of the following would be accounted for on a prospective basis? (More than one answer may be correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B) A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C) A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D) A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E) An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F) A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost. Answer: A, B, D, E Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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34) Which of the following would be accounted for retrospectively? (More than one answer may be correct.) A) A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B) A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C) A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D) A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E) An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F) A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost. Answer: C, F Diff: 2 Type: MC Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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35) Explain if the following situations would be accounted for prospectively or retrospectively. Give a brief explanation to support your response. A. A furniture maker decreases bad debts expense from 3% to 2% of credit sales. B. A manufacturer determines that credit losses are becoming material due to deteriorating economic conditions. As a result, it decides to set up an allowance for doubtful accounts at 5% of amounts over 90 days. C. A parking service estimates bad debts to be 10% of the value of parking violations issued. In the current year, it changes to estimating the allowance for bad debts to be equal to 20% of accounts 30 to 90 days and 50% of accounts over 90 days. D. A shipbuilder changes its revenue recognition policy from the point of receipt by the customer to when the ship leaves the factory shipyard. This change results from a change in shipping policy from f.o.b. destination to f.o.b. shipping point. (Recall from introductory accounting that f.o.b. means "free on board," and it refers to the point at which ownership transfers from seller to buyer.) E. An electronics retailer has never accrued for warranties or product guarantees. A new consumer protection law comes into effect, giving buyers of electronic products a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. F. A clothing company that has been operating for 20 years decides to obtain an external audit for the first time in order to meet the bank's demands. The audit firm recommends that management report inventories at the lower of cost and net realizable value, whereas the company has previously only tracked and reported inventory figures at cost.

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Answer: Situation A. Furniture maker bad debts B. Manufacturer credit losses

Type of change Treatment Change in Prospective estimate Change in estimate

Discussion/rationale Due to new information

D. Shipbuilder revenue recognition

Change in estimate

E. Electronics retailer warranties F. Clothing company inventory

Change in estimate

Due to new information (that credit losses are becoming material). Could also be a change in accounting policy and treat retrospectively to maintain comparability from year to year. Reprospective Not due to new information, but just with a choice by management restatement of prior periods Prospective This is a change in circumstance, which is a change in estimate. It is due to new information. This is a change in accounting that reflects a change in business policy, not a change in accounting policy Prospective Due to new information (enactment of new law)

Change in accounting policy or correction of error

Retrospective but likely unable to restate prior periods

C. Parking service Change in bad debts accounting policy

Prospective

Not due to new information. Retrospective treatment would be ideal, but information on net realizable values for prior years is unlikely to be obtainable.

Diff: 2 Type: ES Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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36) Explain why a change in accounting policy requires the adjustment of both prior and future periods, whereas a change in estimate requires only adjustment of current and future periods. Answer: A change in accounting policy is a change that is due to management choice rather than the arrival of new information. Accounting standards require such changes in policy to be reflected retrospectively so that the financial statements in prior periods (as well as the current period) are prepared using the same accounting policies. This requirement enhances the comparability (consistency) of financial statements from one period to another. In contrast, changes in estimates reflect new information, and the arrival of new information is not a choice made by management. Fundamentally, accrual accounting requires making estimates using available information, and we accept that these estimates will be imperfect due to uncertainty. Consequently, new information leads us to update these estimates going forward but do not result in changes to estimates made in the past. Diff: 2 Type: ES Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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37) Using the conceptual frameworks and other ideas, discuss whether a change in accounting policy should be treated prospectively or retrospectively. Answer: For prospective treatment For retrospective (GAAP) * If accounting policy alternatives are *Ensures comparability (consistency) available because different alternatives among reporting periods. best suit different circumstances, then * Comparable financial statements allow such policy changes should be for better predictions about the future. considered to result from changed * Retrospective treatment provides more circumstances. relevant information because the impact * Changing circumstances cannot be of the accounting change on several predicted with accuracy, so periods is not artificially included in one retrospective treatment would reporting period. inappropriately assume a certain * Retrospective treatment prevents amount of clairvoyance (the ability to management from making accounting see the future). policy changes that temporarily and * Retrospective treatment is not superficially improve the appearance of representationally faithful for the prior current-year results due to one-time periods because the new accounting changes in accounting policy. policy was not the alternative chosen in * Reduction in earnings management those prior periods. opportunities increases earnings quality * Retrospective treatment allows and users' confidence in financial management to change past reported reports. numbers, which erodes readers' confidence in the reliability of financial statements. * Retrospective treatment allows management to spread out the effect of accounting policy change rather than show the full effect in the year of change, potentially increasing chances for earnings management. Diff: 2 Type: ES Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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38) For each of the following scenarios, determine the effects (if any) of the accounting change (correction of error, change in accounting policy, or change in estimate) on the relevant asset or liability, equity, and comprehensive income in the year of change and the prior year. Use the following table for your response. Effects in year prior to change Type of Treatment Assets or Equity Income accounting liabilities change

Effects in year of change Assets or Equity Income liabilities

A. Company A increases the allowance for doubtful accounts (ADA). Using the old estimate, ADA would have been $71,000. The new estimate is $74,000. B. Company B omitted recording an invoice for a $7,000 sale made on credit at the end of the previous year and incorrectly recorded the sale in the current year. The related inventory sold has been accounted for. C. Company C changes its revenue recognition policy to a more conservative one. The result is a decrease in prior year revenue of $4,200 and a decrease in current-year revenue of $6,300 relative to the amounts under the old policy. Answer: Effects in year prior to change Effects in year of change Type of Treatment Assets or Equity Income Assets or Equity Income accounting liabilities liabilities change Estimate Prospective No change No No Decrease Decrease Decrease change change $3,000 $3,000 Error RetroIncrease Increase Increase No change No Decrease spective Asset $7,000 $7,000 change $7,000 Policy RetroDecrease Decrease Decrease Decrease Decrease Decrease change spective Asset $4,200 $4,200 $10,500 $10,500 $4,200 Diff: 2 Type: ES Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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39) Hatcher Limited, a private company, was started on January 1, 2025. For the first year, the chief accountant prepared the financial statements and a local accountant completed the necessary review of these statements. However, for the year ended December 31, 2026, an external auditor was appointed. For each situation below, explain the recommended treatment for each of these matters in terms of whether they are errors, changes in accounting policy, or changes in estimate. Explain your conclusion. 1) Long-term contracts: Hatcher used the completed contract method for revenue recognition in 2025. Management now believes that the percentage of completion method would be better. Income under the completed contract method for 2025 was $3,800,000 and for 2026 it was $3,600,000. If the percentage of completion method had been used, the income would have been $5,800,000 (2025) and $3,400,000 (2026). 2) Accounts receivable: The accounts receivable on December 31, 2025, included a $30,000 account which was not provided for but subsequently was written off during 2026 as the customer went bankrupt after the issuance of the financial statements. Hatcher would like to adjust 2025 for this oversight as it sees this as an error. 3) Machine depreciation: Hatcher has a machine that cost $500,000 and has been depreciated over an estimated useful life of 10 years. Upon reviewing the manufacturer's reports in 2026, management now firmly believes the machine will last a total of 15 years from date of purchase. They would like to change last year's depreciation charge based on this analysis. Depreciation expense of $50,000 has been recorded for 2026. 4) Building depreciation: The company's building (cost $5,000,000, estimated salvage value $0, useful life 20 years) was depreciated last year using the 10% declining-balance method. The company and auditor now agree that the straight-line method would be a more appropriate method to use. A depreciation provision of $450,000 has been made for 2026. 5) Inventories: The accountant last year failed to apply the lower of cost or net realizable value to ending inventory. Upon review, the inventory balance for last year should have been reduced by $250,000. The closing inventory allowance for this year-end should be $370,000. No entry has been made for this. 6) Warranties: Hatcher does not accrue for warranties; rather, it records the warranty expense when claims are paid. Hatcher provides a one-year warranty for defective goods. Payments to satisfy warranty claims in 2025 were $160,000, and $370,000 in 2026. Out of the $370,000 paid in 2026, $170,000 related to 2025 sales. A reasonable estimate of warranties payable at the end of 2026 is $270,000. Recommended treatment

Supporting explanation

1 2 3 4 5 6

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Answer: Recommended treatment 1 Policy change 2 Estimate change 3 Estimate change 4 Policy change 5 Error 6 Policy change

Supporting explanation Retrospective for 2025; adjust 2026 No adjustment for 2025; adjust 2026 Prospective for 2026 Retrospective for 2025; adjust 2026 Retrospective for 2025; adjust 2026 Retrospective for 2025; adjust 2026

Diff: 3 Type: ES Skill: Conceptual Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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40) Hatcher Limited, a private company, was started on January 1, 2025. For the first year, the chief accountant prepared the financial statements and a local accountant completed the necessary review of these statements. However, for the year ended December 31, 2026, an external auditor was appointed. For each situation outlined below, determine the correct accounting treatment and prepare the corrected statements of comprehensive income for 2025 and 2026. 1) Long-term contracts: Hatcher used the completed contract method for revenue recognition in 2025. Management now believes that the percentage of completion method would be better. Income under the completed contract method for 2025 was $3,800,000 and for 2026 it was $3,600,000. If the percentage of completion method had been used, the income would have been $5,800,000 (2025) and $3,400,000 (2026). 2) Accounts receivable: The accounts receivable on December 31, 2025, included a $30,000 account which was not provided for but subsequently was written off during 2026 as the customer went bankrupt after the issuance of the financial statements. Hatcher would like to adjust 2025 for this oversight as it sees this as an error. 3) Machine depreciation: Hatcher has a machine that cost $500,000 and has been depreciated over an estimated useful life of 10 years. Upon reviewing the manufacturer's reports in 2026, management now firmly believes the machine will last a total of 15 years from date of purchase. They would like to change last year's depreciation charge based on this analysis. Depreciation expense of $50,000 has been recorded for 2026. 4) Building depreciation: The company's building (cost $5,000,000, estimated salvage value $0, useful life 20 years) was depreciated last year using the 10% declining-balance method. The company and auditor now agree that the straight-line method would be a more appropriate method to use. A depreciation provision of $450,000 has been made for 2026. 5) Inventories: The accountant last year failed to apply the lower of cost or net realizable value to ending inventory. Upon review, the inventory balance for last year should have been reduced by $250,000. The closing inventory allowance for this year-end should be $370,000. No entry has been made for this. 6) Warranties: Hatcher does not accrue for warranties; rather, it records the warranty expense when amounts are paid. Hatcher provides a one-year warranty for defective goods. Payments to satisfy warranty claims in 2025 were $160,000 and $370,000 in 2026. Out of the $370,000 paid in 2026, $170,000 related to 2025 sales. A reasonable estimate of warranties payable at the end of 2026 is $270,000.

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Long-term contract income Other income (loss) Bad debt expense Depreciation expense - machine Depreciation expense - building

2025 $ 3,800,000 (300,000) (450,000) (50,000) (500,000)

Inventory write-down Warranty expense Income before taxes Income taxes (at 25) Net income

0 (160,000) 2,340,000 (585,000) $ 1,755,000

2025 as amended (answer)

2026 $ 3,600,000 (200,000) (480,000) (50,000) (450,000)

2026 as amended (answer)

0 (370,000) 2,050,000 (512,500) $ 1,537,500

Answer:

2025 Long-term contract income Other income (loss) Bad debt expense Depreciation expense - machine Depreciation expense - building

2025 as amended (answer)

2026

2026 as amended (answer)

$ 3,800,000 (300,000) (450,000) (50,000) (500,000)

$ 5,800,000 (300,000) (450,000) (50,000) (500,000)

$ 3,600,000 (200,000) (480,000) (50,000) (450,000)

$ 3,400,000 (200,000) (480,000) (32,143) (236,842)

Inventory write-down Warranty expense

0 (160,000)

(250,000) (330,000)

0 (370,000)

(120,000) (470,000)

Income before taxes Income taxes (at 25%)

2,340,000 (585,000)

3,920,000 (980,000)

2,050,000 (512,500)

1,861,015 (465,254)

$ 1,755,000

$ 2,940,000

$ 1,537,500

$ 1,395,761

Net income

2) Bad debt expense not adjusted for 2025 as was a change of estimate in 2026. 3) Depreciation expense not adjusted for 2025 as change of estimate in 2026. ($500,000 - $50,000) / 14 = $32,143. 4) ($5,000,000 - $500,000) / 19 = $236,842. 5) $370,000 - $250,000 = $120,000. 6) $370,000 paid 2026 - $170,000 relating to 2025 = $200,000 paid for 2026. $270,000 provision required end of 2026. $200,000 cost paid + $270,000 required provision = $470,000 expense. Diff: 3 Type: ES Skill: Computational Objective: 3.4 Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change.

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Learning Objective 5 1) Which statement is NOT correct? A) Cash accounting is straightforward. B) Cash accounting requires the same financial statements as accrual accounting. C) The cash flow statement reports performance under cash accounting. D) The income statement is the same as the cash flow statement under cash accounting. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

2) Which statement is correct? A) The income statement tracks the flow in assets and liabilities on the balance sheet. B) The balance sheet reports the economic performance of the company. C) The income statement reports performance of the company. D) The cash flow statement tracks the flow of revenues and expenses in the income statement. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

3) In North America, the balance sheet A) should separate current and non-current elements. B) should be prepared on the liquidity basis. C) should show non-current assets before current assets. D) should show other comprehensive income. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

4) Under the IFRS Conceptual Framework, what general information is useful for the decision making needs of lenders and investors? A) Information prepared on the cash basis of accounting. B) Information and changes in information relating to the entity's resources and claims against those resources. C) Financial performance resulting from a company's operating activities. D) Information on the company's equity and share structure. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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5) What information does a cash flow statement provide? A) Resources that the company owns. B) Performance of the company on an accrual basis. C) Performance of the company on a cash basis. D) Changes not due to performance of the company. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

6) Which statement is NOT correct? A) The balance sheet accumulates accruals and deferrals required by accrual accounting. B) Financial statements under cash accounting are less complicated than those under accrual accounting. C) The cash flow statement reports accounting performance under accrual accounting. D) Financial statements under accrual accounting are more time consuming to prepare than those under cash accounting. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

7) Which asset groups do NOT need to be presented separately in the balance sheet? A) Asset groups that differ in their function or nature. B) Liabilities that are due to different banks. C) Asset groups that are material. D) Investment properties. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

8) What is a "current asset"? A) An asset expected to be consumed in the ordinary operating cycle of the business. B) An asset not expected to be consumed in the ordinary operating cycle of the business. C) An asset expected to be used for investment purposes. D) An asset, such as cash, that is restricted from being used for at least 12 months. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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9) What is classified as a "non-current" liability? A) An obligation expected to be settled within the ordinary operating cycle of the business. B) An obligation related to the company's normal operating activities. C) An obligation where the company has breached its covenant violations. D) A debt that need not be settled until more than a year after the balance sheet date. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

10) Expenses in the income statement may A) be classified on the basis of their currency. B) be classified on the basis of their function. C) be classified by materiality. D) be classified by geographic location. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

11) Which statement is correct about expenses in the income statement? A) The nature of expense format classifies expenses based on their source. B) Some nature of expense categories are cost of sales, administration or warehouse. C) Expenses must be classified by their function. D) Expenses should be classified in decreasing order of magnitude. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

12) Which statement is correct about expenses in the income statement? A) Some function of expense categories are depreciation or employee costs. B) Expenses can be classified in any manner under IFRS. C) The function of expense format classifies expenses based on their use. D) Expenses should be classified based on their materiality. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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13) Which statement is correct about the statement of comprehensive income? A) Entities using the nature format for expenses must provide additional disclosure. B) The single-step format provides more information than the multiple-step format. C) The multiple-step format must be used in financial reporting. D) Entities using the function format for expenses must provide additional disclosure. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

14) What is classified as a "current" liability? A) An obligation where the lender has waived the company's covenant violations before the balance sheet date. B) An obligation where the company has breached its covenants. C) An obligation not expected to be settled within the ordinary operating cycle of the business. D) An obligation where the lender has waived the company's covenant violations before the balance sheet date, and an obligation where the company has breached its covenant violations. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

15) What is classified as a "non-current" liability? A) An obligation expected to be settled within the ordinary operating cycle of the business. B) An obligation where the company has breached its covenants. C) Both A and B are non-current liabilities. D) Both A and B are current liabilities. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

16) Which statement is NOT correct about expenses in the income statement? A) The function of expense format classifies expenses based on their use. B) Some function of expense categories are depreciation, employee costs, raw materials consumed. C) The nature of expense format classifies expenses based on their source. D) Some function of expense categories are cost of sales, administration or warehouse. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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17) Which statement is NOT correct about expenses in the income statement? A) The function of expense format classifies expenses based on their use. B) Some nature of expense categories are depreciation, employee costs, raw materials consumed. C) The nature of expense format classifies expenses based on their source. D) Some nature of expense categories are cost of sales, administration or warehouse. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

18) Which statement is incorrect about the cash flow statement? A) The cash flow statement can be prepared using the direct method. B) The cash flow statement can be prepared using the indirect method. C) The cash flow statement provides information on the economic performance of the company. D) The cash flow statement shows the change in cash and cash equivalents over the year. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

19) Information on the cash flow statement is categorized into A) operating, investing and financing activities. B) current and non-current activities. C) operating, non-operating and discontinued activities. D) nature and function activities. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

20) Which statement is correct about the difference between IFRS and ASPE? A) The concept of "comprehensive income" exists under both IFRS and ASPE. B) A statement of compliance with ASPE is required in note disclosures. C) A combined statement of comprehensive income can be provided under IFRS. D) The concept of "comprehensive income" does not exist under ASPE. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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21) Information on the income statement is categorized into A) operating, investing and financing activities. B) current and non-current activities. C) continuing and discontinued activities. D) nature and function activities. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

22) Information on the balance sheet is categorized into A) operating, investing and financing activities. B) current and non-current elements. C) continuing and discontinued activities. D) profit or loss and other comprehensive income. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

23) Which financial statement provides information about the transactions in a company's financing, investing, and operating cycle? A) Statement of Comprehensive Income. B) Statement of Financial Position. C) Statement of Cash Flows. D) Statement of Changes in Equity. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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24) Handy Corp. retired bonds payable with a carrying value of $980,000. What effect does this transaction have on total assets and shareholders' equity? A) Total Assets Shareholders' Equity Decrease by $980,000 No effect B) Total Assets Decrease by $980,000

Shareholders' Equity Increase by $980,000

C) Total Assets Increase by $980,000

Shareholders' Equity Increase by $980,000

D) Total Assets Increase by $980,000

Shareholders' Equity Decrease by $980,000

Answer: A Diff: 2 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

25) Mandel Corp. retired bonds payable with a carrying value of $980,000. What effect does this transaction have on these accounts? A) Total Assets Total Liabilities Shareholders' Equity Decrease by $980,000 Increase by $980,000 No effect B) Total Assets Decrease by $980,000

Total Liabilities Decrease by $980,00

Shareholders' Equity No effect

C) Total Assets Increase by $980,000

Total Liabilities Decrease by $980,000

Shareholders' Equity Increase by $980,000

D) Total Assets No effect

Total Liabilities No effect

Shareholders' Equity Decrease by $980,000

Answer: B Diff: 2 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

61 .

26) Mandel Corp. repaid a bank loan for $980,000. What effect does this transaction have on these accounts? A) Total Assets Total Liabilities Shareholders' Equity Increase by $980,000 Increase by $980,000 Decrease by $980,000 B) Total Assets Decrease by $980,000

Total Liabilities Decrease by $980,000

Shareholders' Equity No effect

C) Total Assets No effect

Total Liabilities Decrease by $980,000

Shareholders' Equity No effect

D) Total Assets No effect

Total Liabilities No effect

Shareholders' Equity No effect

27) Sally Corp. received payment on a long-term receivable for $980,000. What effect does this transaction have on these accounts? A) Total Assets Total Liabilities Shareholders' Equity Increase by $980,000 Decrease by $980,000 No effect B) Total Assets Decrease by $980,000

Total Liabilities Increase by $980,000

Shareholders' Equity No effect

C) Total Assets No effect

Total Liabilities Decrease by $980,000

Shareholders' Equity No effect

D) Total Assets No effect

Total Liabilities No effect

Shareholders' Equity No effect

Answer: D Diff: 3 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

62 .

28) The following entry was recorded by Woodrow Inc.: Cash Accumulated depreciation Loss on disposal of property, plant and equipment (PPE) PPE

57,000 33,000 10,000 100,000

What is the effect on Woodrow's financial statements? A) A cash inflow from financing activities of $57,000. B) Net assets increased by $57,000. C) A deduction of $10,000 in using the indirect method of determining cash flows from operating activities. D) Retained earnings decreased by $10,000. Answer: D Diff: 2 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

29) The following entry was recorded by Hollow Inc.: Cash Accumulated depreciation Gain on disposal of property, plant and equipment (PPE) PPE

70,000 30,000 10,000 90,000

What is the effect on Hollow's financial statements? A) A cash inflow from financing activities of $70,000. B) Net assets increased by $10,000. C) An increase of $10,000 in using the indirect method of determining cash flows from operating activities. D) Retained earnings decreased by $10,000. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

63 .

30) The following entry was recorded by Hollow Inc.: Cash Accumulated depreciation Gain on disposal of property, plant and equipment (PPE) PPE

70,000 30,000 10,000 90,000

What is the effect on Hollow's financial statements? A) A cash inflow from operating activities of $70,000. B) Net assets decreased by $10,000. C) A decrease of $10,000 in using the indirect method of determining cash flows from operating activities. D) Retained earnings increased by $10,000. Answer: D Diff: 3 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

31) The following entry was recorded by Hollow Inc.: Cash Accumulated depreciation Gain on disposal of property, plant and equipment (PPE) PPE

70,000 30,000 10,000 90,000

What is the effect on Hollow's financial statements? A) A cash inflow from investing activities of $70,000. B) Net assets decreased by $10,000. C) A decrease of $10,000 in using the indirect method of determining cash flows from operating activities. D) Retained earnings decreased by $10,000. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

64 .

32) The following information was provided from the records of Nimble Limited, which began operations in the current year: Accrued expenses (payable), end of year Sales revenue (cash and credit) Prepaid expenses, end of year Cash collected on customer accounts during the year Cash paid for expenses (including prepaid expenses and cost of goods sold)

$ 22,000 325,000 5,000 31,000 187,000

What was the company's pre-tax income for the year? A) $116,000 B) $121,000 C) $138,000 D) $169,000 Answer: B Explanation: B) Sales - (COGS + expenses - prepaids) $325,000 – ($187,000 + $22,000 – $5,000) = $121,000 Diff: 2 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

33) The following information was provided from the records of Konstruct Inc, which began operations in the current year: Accrued expenses (payable), end of year Sales revenue (cash and credit) Prepaid expenses, end of year Cash collected on customer accounts during the year Cash paid for expenses (including prepaid expenses and cost of goods sold)

$ 30,000 325,000 15,000 31,000 207,000

What were the company's expenses for the year? A) $192,000 B) $207,000 C) $222,000 D) $237,000 Answer: C Explanation: B) ($207,000 + $30,000 - $15,000) = $222,000 Diff: 2 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

65 .

34) Winder Corporation had total shareholders' equity of $665,000 at the beginning of the year and $773,000 at the end of the year. Shareholders invested an additional $75,000 during the year. Also during the year, cash dividends of $20,000 were declared and paid. Calculate the net income or loss for the year. A) $33,000 B) $53,000 C) $108,000 D) $128,000 Answer: B Explanation: B) Opening shareholders' equity + shares issued + net income – dividends declared = closing shareholders' equity $665,000 + $75,000 – $20,000 = $720,000; $773,000 - $720,000 = $53,000 net income Diff: 3 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

35) Windmere Corporation had total shareholders' equity of $765,000 at the beginning of the year and $873,000 at the end of the year. Shareholders invested an additional $75,000 in common shares and $15,000 in preferred shares during the year. Net income was $43,000. Calculate the dividends paid for the year. A) $25,000 B) $43,000 C) $65,000 D) $108,000 Answer: A Explanation: A) Opening shareholders' equity + shares issued + net income – dividends declared = closing shareholders' equity $765,000 + $75,000 + $15,000 + $43,000 – dividends declared = $873,000; dividends declared = $25,000 Diff: 3 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

66 .

36) General Limited's income statement reported the following for last year: Sales revenue Cost of goods sold Expenses Net income

$ 881,000 573,000 129,000 $179,000

Which of the following statements is correct about the income statement? A) Gross profit percentage is 20.32%. B) Mark-up on cost is $573,000. C) Net income percentage is 20.32%. D) Mark-up on the selling price is $308,000. Answer: C Explanation: C) $179,000 / $881,000 = 20.32% Diff: 3 Type: MC Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

37) General Limited's income statement reported the following for last year: Sales revenue Cost of goods sold Expenses Net income

$ 881,000 573,000 129,000 $179,000

Which of the following statements is correct about the income statement? A) Gross profit percentage is 34.96%. B) Mark-up on cost is $573,000. C) Net income percentage is 14.64%. D) Mark-up on the selling price is $308,000. Answer: A Explanation: A) ($881,000 - $573,000) / $881,000 = 34.96% Diff: 3 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

67 .

38) During the past year, Easy Supplies Ltd.'s assets decreased $33,000, its liabilities decreased $41,000, its share capital increased $5,000, and the company recorded net income of $12,000. What was the amount of dividends declared? A) $1,000 B) $9,000 C) $12,000 D) $19,000 Answer: B Explanation: B) $41,000 - $5,000 - $12,000 - $33,000 = $9,000 Diff: 2 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

39) Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the year, purchases of $141,700 were made and debited to the office supplies account. At the end of the year, a physical count of the office supplies indicated $41,800 on hand. What was the office supplies expense for the year? A) $141,700 B) $152,200 C) $183,500 D) $194,000 Answer: B Explanation: B) $52,300 + $141,700 - $41,800 = $152,200 Diff: 2 Type: MC Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

68 .

40) You are having coffee with a friend of yours who is interested in investing in a Canadian public company. Your friend gives you the audited financial statements but says he does not understand how this information is supposed to be helping him. Explain what is contained in a complete set of financial statements and how this information can help your friend with his decision-making needs. Answer: • To meet the information needs of users, a complete set of financial statements consists of four statements plus note disclosures. • The statement of financial position (balance sheet) shows financial position at a point in time. • The statement of changes in equity and the cash flow statement show changes in financial position for the period. • The statement of comprehensive income reports financial performance for the period. • Notes provide information about the accounting policies and additional information relevant to items displayed on the four financial statements, and other pertinent disclosures to help users understand the reporting entity's financial position, performance, and changes in financial position. • The balance sheet is at the centre of the financial reports. It shows the amount of resources, obligations and equity of the company. • The cash flow statement explains the changes in the cash account, while the statement of changes in equity explains changes in share capital, reserves, and retained earnings. • The statement of comprehensive income further analyzes the components of profit/loss and other comprehensive income that contribute to the change in retained earnings. It shows the economic performance and results of operations for the fiscal period. Diff: 2 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

69 .

41) IFRS identifies a number of criteria to determine whether an asset can be classified as current. Satisfying ANY ONE of these criteria is sufficient. For the following list of criteria, identify whether each one is relevant for the classification of an asset as current instead of non-current.

Criteria The asset is expected to be sold in the entity's normal operating a. cycle. b. The asset is traded in an active market. The asset is expected to be realized within 12 months after the c. balance sheet date. d. The asset is held primarily for the purpose of being traded.

Relevant for classification as current? (Yes/No)

Answer:

Relevant for classification as current? (Yes/No) Yes No Yes Yes

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

70 .

42) IFRS identifies a number of criteria to determine whether an asset can be classified as current. Satisfying ANY ONE of these criteria is sufficient. For the following list of criteria, identify whether each one is relevant for the classification of an asset as current instead of non-current.

Criteria The asset is expected to be consumed in the entity's normal a. operating cycle. b. The asset is an item of inventory. c. The asset is cash or cash equivalent. d. The asset is a receivable from another company.

Relevant for classification as current? (Yes/No)

Answer:

Relevant for classification as current? (Yes/No) Yes No Yes No

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

71 .

43) IFRS identifies a number of criteria to determine whether a liability should be classified as current. A liability that satisfies ANY ONE of these criteria must be classified as current. For the following list of criteria, identify whether each one is relevant for the classification of a liability as current instead of non-current.

b. c.

Criteria The entity does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. The liability is a line of credit owing to a financial institution. The liability is unavoidable.

Relevant for classification as current? (Yes/No)

Answer:

b. c.

Relevant for classification as current? (Yes/No)

Yes No No

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

72 .

44) IFRS identifies a number of criteria to determine whether a liability should be classified as current. A liability that satisfies ANY ONE of these criteria must be classified as current. For the following list of criteria, identify whether each one is relevant for the classification of a liability as current instead of non-current.

Criteria a. The liability is expected to be settled in the entity's normal operating cycle. b. The liability requires settlement in cash c. The liability is expected to be realized within 12 months after the balance sheet date. d. The liability is held primarily for the purpose of being traded.

Relevant for classification as current? (Yes/No)

Answer:

Criteria The liability is expected to be settled in the entity's normal operating cycle. b. The liability requires settlement in cash c. The liability is expected to be realized within 12 months after the balance sheet date. d. The liability is held primarily for the purpose of being traded.

Relevant for classification as current? (Yes/No)

Yes No Yes Yes

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

73 .

45) IFRS requires certain line items to be presented in the statement of comprehensive income (rather than just disclosed in the notes). Identify whether the following items are required in the statement of comprehensive income.

a. b. c. d. e.

Relevant for classification as current? (Yes/No)

Line item Comprehensive income Labour costs Income tax expense Other comprehensive income Finance costs (interest expense)

Answer: Relevant for classification as current? (Yes/No) Yes No Yes Yes Yes

Line item a. Comprehensive income b. Labour costs c. Income tax expense d. Other comprehensive income e. Finance costs (interest expense)

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

74 .

46) IFRS requires certain line items to be presented in the statement of comprehensive income (rather than just disclosed in the notes). Identify whether the following items are required in the statement of comprehensive income.

a. b. c. d.

Relevant for classification as current? (Yes/No)

Line item Revenue Profit or loss ( net income) Cost of goods sold General and administrative expenses

Answer:

a. b. c. d.

Relevant for classification as current? (Yes/No) Yes Yes No No

Line item Revenue Profit or loss ( net income) Cost of goods sold General and administrative expenses

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

75 .

47) Identify whether each of the following items of operating expense is described according to its FUNCTION. Type of operating expense a. Cost of goods sold b. Delivery c. Employee wages and benefits d. Administration e. Building depreciation f. Utilities (electricity, heating, etc.) g Marketing and advertising h. Sales commissions i. Raw materials consumed j. Insurance

Y/N

Answer: Type of operating expense a. Cost of goods sold b. Delivery c. Employee wages and benefits d. Administration e. Building depreciation f. Utilities (electricity, heating, etc.) g Marketing and advertising h. Sales commissions i. Raw materials consumed j. Insurance

Y/N Y Y N Y N N Y Y N N

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

76 .

48) Identify whether each of the following items of operating expense is described according to its NATURE. Type of operating expense a. Cost of goods sold b. Delivery c. Employee wages and benefits d. Administration e. Building depreciation f. Utilities (electricity, heating, etc.) g Marketing and advertising h. Sales commissions i. Raw materials consumed j. Insurance

Y/N

Y/N N N Y N Y Y N N Y Y

Diff: 1 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

77 .

49) An adjusted trial balance for Wizard Industries Ltd. at December 31, 2025, follows. Prepare a balance sheet at December 31, 2025, with items classified as current or non-current. Debit Accounts payable Accounts receivable Accumulated depreciation Advertising expense Cash Common stock Cost of goods sold Current portion of long-term loan payable Depreciation expense Dividends Equipment Income tax expense Interest expense Interest payable Inventory Long-term loan receivable Non-current portion of long-term loan payable Prepaid rent Rent expense Retained earnings Sales revenue Stationery Stationery expense Unearned revenue Wages expense Wages payable Total

Credit $141,000

$100,000 45,000 18,000 319,000 100,000 370,000 25,000 13,000 23,000 620,000 28,000 34,000 5,000 55,000 250,000 350,000 15,000 90,000 421,500 910,000 2,500 11,000 21,000 87,000 $2,035,500

78 .

17,000 $2,035,500

Answer:

Wizard Industries Ltd. Balance Sheet As at December 31, 2025

Current assets

Current liabilities $100,000

Accounts receivable Inventory

Interest payable 55,000 Wages payable

Stationery Prepaid rent Total current assets

2,500 Unearned revenue 15,000 Current portion of LT debt $491,500 Total current liabilities

Non-current assets Long-term loan receivable Equipment Less: accumulated dep. Total non-current assets

Non-current liabilities $250,000 Long-term loan payable 620,000 Total liabilities (45,000) $825,000 Shareholders' equity Common stock Retained earnings Total shareholders' equity

Total assets

$1,316,500 Total liabilities and equity

$5,000 17,000 21,000 25,000 $209,000

$350,000 $559,000

$100,000 657,500 $757,500 $1,316,500

Diff: 3 Type: ES Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

79 .

50) An adjusted trial balance for Soorya Industries Limited at December 31, 2025, follows. Prepare a balance sheet at December 31, 2025, with items classified as current or non-current. Debit Accounts payable Accounts receivable Accumulated depreciation Advertising expense Cash Common shares Cost of goods sold Current portion of long-term loan payable Depreciation expense Dividends Equipment Income tax expense Interest expense Interest payable Inventory Long-term loan receivable Non-current portion of long-term loan payable Prepaid rent Rent expense Retained earnings Sales revenue Stationery Stationery expense Unearned revenue Wages expense Wages payable Total

Credit $151,000

$100,000 45,000 18,000 329,000 100,000 370,000 25,000 13,000 23,000 620,000 28,000 34,000 5,000 55,000 250,000 350,000 15,000 90,000 421,500 910,000 2,500 11,000 21,000 87,000 $2,045,500

80 .

17,000 $2,045,500

Answer:

Current assets Cash Accounts receivable Inventory Stationary Prepaid rent Total current assets

Soorya Industries Limited Balance Sheet As at December 31, 2025 Current liabilities $329,000 Accounts payable 100,000 Interest payable 55,000 Wages payable 2,500 Unearned revenue 15,000 Current portion of LT debt $501,500 Total current liabilities

Non-current assets Long-term loan receivable $250,000 Equipment 620,000 Less: accumulated depreciation (45,000) Total non-current assets $825,000

Total assets

$1,326,500

$151,000 5,000 17,000 21,000 25,000 $219,000

Non-current liabilities Long-term loan payable Total liabilities

$350,000 $569,000

Shareholder's equity Common shares Retained earnings Total shareholders' equity

$100,000 657,500 $757,500

Total liabilities and equity

$1,326,500

Diff: 3 Type: ES Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

81 .

51) Using the data provided below, determine what amounts will appear on the income statement that is prepared by "nature of expenses." Distribution expense (1) Cost of goods sold (2) General and administrative expense (3)

$23,000 70,000 25,000

Note 1 — Distribution costs include $13,000 of employee wages and $10,000 of depreciation. Note 2 — Cost of goods sold includes $10,000 for depreciation; the remaining amount relates to the net change in inventory and purchases during the year. Note 3 — General and administrative expenses include $20,000 of employee wages and $5,000 of depreciation. Answer: Instead of Distribution, Cost of Goods Sold and General & Administrative Expense. The following amounts will appear: -Employee wages = $33,000 ($13,000 + $20,000) -Depreciation = $15,000 ($10,000 + $5,000) -Net change in inventory = $60,000 ($70,000 - $10,000) Nature relates to the SOURCE of the expense (depreciation from equipment, labour costs from employees, cost of raw materials, or other means of production). Function refers to the USE to which the expense has been put (cost of sales, distribution, administration, or other activities). Diff: 3 Type: ES Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

82 .

52) Prepare a single-step income statement using the following data for Leila Inc. for the year ended December 31, 2026. Sales revenue Rental revenue Distribution expense Cost of goods sold General and administrative expense Depreciation expense Interest expense Income tax expense (20% rate on all items) Gain on sale of building Loss from fire damage Answer:

$210,000 35,000 23,000 120,000 25,000 20,000 5,000 15,000 40,000

Leila Inc. Income Statement (single-step) For the Year Ended December 31, 2026

Revenues and gains: Sale Rental Gain on sale of building Total revenues and gains Expenses and losses: Cost of goods sold Distribution expense General and administrative expense Depreciation expense Interest expense Loss on fire damage Income tax expense [($260,000 - $233,000) × 20%] Total expenses and losses Net income

$210,000 35,000 15,000 $260,000 120,000 23,000 25,000 20,000 5,000 40,000 5,400 238,400 $21,600

Diff: 3 Type: ES Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

83 .

53) Using the data provided below, determine whether the income statement will be formatted by "function of expense" or by "nature of expense." Briefly explain your response. Distribution expense Cost of goods sold General and administrative expense Warehousing expense Interest expense

$65,000 100,000 45,000 20,000 5,000

Answer: The income statement will be formatted by function. The different functions are sales and cost of sales, distribution, general and administration, and warehousing. Each of those functions would contain expenses of a common nature such as employee salaries, supplies, rent, and so forth. Nature format relates to the SOURCE of the expense (depreciation from equipment, labour costs from employees, cost of raw materials, or other means of production). Diff: 2 Type: ES Skill: Conceptual Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

84 .

54) Prepare a multiple-step income statement using the following data for Bella Inc. for the year ended December 31, 2026. Sales revenue Rental revenue Loss on sale of short-term investments Distribution expense Cost of goods sold General and administrative expense Depreciation expense Interest income Income tax expense (25% rate on all items)

Answer:

$300,000 35,000 19,000 23,000 150,000 25,000 20,000 5,000

Bella Inc. Income Statement (multiple-step) For the Year Ended December 31, 2026

Sales revenue Cost of goods sold Gross margin Operating expenses: Distribution expense General and administrative expense Depreciation expense Total operating expenses Income (loss) from operations Other revenues, gains, expenses, and losses: Rental revenue Interest income Loss on sale of short-term investments Other revenues, gains, expenses, and losses Income (loss) from continuing operations before income tax Income tax expense (recovery) (@ 25%) Net income

$300,00 150,000 150,000 $23,000 25,000 20,000 68,000 82,000 $35,000 5,000 (19,000) 21,000 103,000 25,750 $117,250

Note: Formats of multiple-step income statements are not standard; other alternatives are acceptable. Diff: 3 Type: ES Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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55) Determine the missing amounts in the statement of financial position provided below: Assets Cash Accounts receivable Allowance Inventory Prepaids Total current assets PPE Land Building Accumulated depreciation Machinery Accumulated depreciation Total PPE

$12,220 $A 3,333

174,917 221,587 B $419,928

$25,400 $168,951 D 165,842 62,457

C E $271,973

LT investment Other Total assets

$F 3,258 $706,856

Liabilities and shareholders' equity Account payable Other provisions Income tax LT debt - current Accruals Total current liabilities

$75,896 5,421 2,187 G 5,470 $124,961

LT debt Deferred income taxes Total LT Liabilities

$H 55,870 $I

Shareholders' equity Preferred shares Common shares Retained earnings Accumulated OCI Total shareholders' equity Total liabilities and shareholders' equity

$17,854 132,580 223,941 J $413,345 $K

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Answer: Assets Cash Accounts receivable Allowance Inventory Prepaids Total current assets PPE Land Building Accumulated depreciation Machinery Accumulated depreciation Total PPE

$12,220 $178,250 3,333

174,917 221,587 11,204 $419,928

$25,400 $168,951 25,763 165,842 62,457

143,188 103,385 $271,973

LT investment Other Total assets

11,697 3,258 $706,856

Liabilities and shareholders' equity Account payable Other provisions Income tax LT debt - current Accruals Total current liabilities

$75,896 5,421 2,187 35,987 5,470 $124,961

LT debt Deferred income taxes Total LT Liabilities

$112,680 55,870 $168,550

Shareholders' equity Preferred shares Common shares Retained earnings Accumulated OCI Total shareholders' equity Total liabilities and shareholders' equity

$17,854 132,580 223,941 38,970 $413,345 $706,856

Diff: 3 Type: ES Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

87 .

56) Determine the missing amounts: Assets Cash Accounts receivable Allowance Inventory Prepaids Total current assets PPE Land Building Accumulated depreciation Machinery Accumulated depreciation Total PPE

$88,540 $110,630 A

100,778 B 3,214 $374,933

$22,983 $160,234 22,980 193,193 D

C E $198,885

LT investment Other Total assets

$1,863 F $581,247

Liabilities and shareholders' equity Account payable Other provisions Income tax LT debt - current Accruals Total current liabilities

$G 6,671 2,283 3,399 5,431 $73,657

LT debt Deferred income taxes Total LT liabilities

$190,540 H $224,510

Shareholders' equity Preferred shares Common shares Retained earnings Accumulated OCI Total shareholders' equity Total liabilities and shareholders' equity

$33,987 168,241 I 21,870 J $K

88 .

Answer: Assets Cash Accounts receivable Allowance Inventory Prepaids Total current assets PPE Land Building Accumulated depreciation Machinery Accumulated depreciation Total PPE

$88,540 $110,630 9,852

100,778 182,401 3,214 $374,933

$22,983 $160,234 22,980 193,193 154,545

137,254 38,648 $198,885

LT investment Other Total assets

$1,863 5,566 $581,247

Liabilities and shareholders' equity Account payable Other provisions Income tax LT debt - current Accruals Total current liabilities

$55,873 6,671 2,283 3,399 5,431 $73,657

LT debt Deferred income taxes Total LT liabilities

$190,540 33,970 $224,510

Shareholders' equity Preferred shares Common shares Retained earnings Accumulated OCI Total shareholders' equity Total liabilities and shareholders' equity

$33,987 168,241 58,982 21,870 $283,080 $581,247

Diff: 3 Type: ES Skill: Computational Objective: 3.5 Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

89 .

Comprehensive Learning Objectives 1) Here are selected balances for Beaver Creek Inc. for December 31, 2026: Debit $10,000 41,600 1,900 51,600 3,700 116,200 71,000

Cash and cash equivalents Trade and other receivables Investments at fair value through profit or loss Inventories Intangible assets Property, plant and equipment - net Goodwill Short term borrowings Long term borrowings Liabilities at fair value through profit or loss Trade and other payables Current taxes payable Short term provisions Long term provisions Deferred taxes Share capital Retained earnings Reserves Revenue Cost of sales Income tax Profit from discontinued operations Selling and admin expenses Gain on disposal Other operating expenses Interest costs Interest income Other comprehensive income for 2025

Credit

$2,000 41,500 2,300 50,300 12,300 1,000 1,000 1,000 150,000 23,800 10,800 17,600 12,700 700 100 1,600 200 150 650 130 300

Required: A. Prepare the Statement of Financial Position for Beaver Creek Inc. with items classified as current and non-current. B. Prepare the statement of comprehensive income.

90 .

C. Determine the missing amounts:

Revenues Less: Sales returns Net sales

Year 1 $1,000,000 solve for 900,000

Year 2 $solve for 200,000 2,800,000

Year 3 $3,500,000 300,000 solve for

Cost of goods -Beginning inventory -Purchases -Ending inventory Gross profit

250,000 solve for (200,000) 450,000

200,000 600,000 solve for 550,000

250,000 350,000 solve for 500,000

91 .

Answer: A. Balance Sheet Beaver Creek Inc. Statement of Financial Position As at December 31, 2026 Assets Current assets Cash and cash equivalents Investments at fair value through profit or loss Trade and other receivables Inventories Current assets

$10,000 1,900 41,600 51,600 $105,100

Non-current assets Property, plant and equipment - net Intangible assets Goodwill Non-current assets

$116,200 3,700 71,000 $190,900

Total assets

$296,000

Liabilities and equity Current liabilities Trade and other payables Current taxes payable Liabilities at fair value through profit or loss Short term provisions Short term borrowings Current liabilities Non-current liabilities Long term provision Long term borrowings Deferred taxes Non-current liabilities Total liabilities Shareholders' equity Share capital Reserves Retained earnings Total equity

$150,000 10,800 23,800 $184,600

Total liabilities and shareholders' equity

$296,000

$50,300 12,300 2,300 1,000 2,000 $67,900 $1,000 41,500 1,000 43,500 $111,400

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B. Statement of Comprehensive Income. Beaver Creek Inc. Statement of Comprehensive Income For the Year Ended December 31, 2026 Revenue Cost of sales Selling and admin expenses Operating income before capital gains and other items Gain on disposal Other operating expenses Operating income Interest costs Interest income Income from continuing operations before income tax Income tax Profit from discontinued operations Profit for the year Other comprehensive income Total comprehensive income

$17,600 (12,700) (1,600) 3,300 200 (150) 3,350 (650) 130 2,830 (700) 100 2,230 300 $2,530

C. Missing amounts Revenues Less: Sales returns Net sales

Cost of goods -Beginning inventory -Purchases -Ending inventory Gross profit

Year 1 $1,000,000 100,000 (1000 - 900) 900,000

250,000 400,000 (450 - 250 + 200) (200,000) 450,000

Year 2 $3,000,000 (2800 + 200) 200,000

Year 3 $3,500,000

2,800,000

3,200,000 (2500 - 300)

200,000 600,000

250,000 350,000

(250,000) (BI of year 3!) 550,000

(100,000) (500 - 250 - 350) 500,000

300,000

Diff: 3 Type: ES Skill: Computational Objective: 3.1/ 3.5 Explain the source of demand for periodic reporting and how accrual accounting satisfies that demand/Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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2) McMillan Industries Ltd. reports the following transactions and events for fiscal 2025 and 2026. a. On January 11, 2026, there was a fire and the company had insufficient fire insurance. As such, a material loss will result and operations will be curtailed for the next six months. b. The allowance for doubtful accounts (ADA) was increased in 2025 due to deteriorating economic conditions. Using the old estimate, ADA would have been $171,000. The new estimate is $184,000. c. On December 30, 2025, there was a significant decrease of $15,000 in the market price of some inventory due to new technology. The market price is $15,000 lower than the carrying values used in fiscal 2025 statements. This occurred after the company's year-end but before the completion of the audit and issuance of the financial statements. d. A new competitor entered the marketplace in March 2026; this will likely reduce 2026 revenues and net income. e. In January 2026, the accountant recorded $17,000 for sales made on credit on December 28, 2025. f. The revenue recognition policy was changed in 2025. The result is a decrease in 2024 revenue by $40,200 and a decrease in 2025 revenue by $60,300 relative to the amounts under the old policy. g. New technology made some equipment obsolete on January 26, 2026; the fair market and salvage value have decreased by 50%. This occurred after the company's year-end but before the completion of the audit and issuance of the financial statements. h. A major client unexpectedly went bankrupt on January 20, 2026. The company received 10% of the value of the accounts receivable as full and final settlement on February 20, 2026. This occurred after the company's year-end but before the completion of the audit and issuance of the financial statements. i. The company has not previously needed to accrue for warranties. A new consumer protection law comes into effect in June 2026, giving buyers a guarantee against defects for 180 days after purchase and the ability to return defective products to the retailer. Required: For each event, determine whether it requires note disclosure or an adjustment to the 2025 financial statements. Ignore income taxes. Use the following table for your response. Justify your recommendations.

Accounting requirement/explanation

Effects in 2025, if any (increase/decrease/none) Assets or liabilities Equity Income

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Answer:

Accounting requirement/explanation a. No adjustment is required in fiscal 2025 statements as the fire does not change any estimates or assumptions used in valuing year-end amounts or operations of the company. This event should be disclosed in the notes to the financial statements and the amount of the loss quantified. Disclosure is required as all the relevant information is known and the event is significant to future operations. b. Change in Estimate: Prospective adjustment Adjustment needed in 2025 statements c. The drop in market price is relevant to the measurement of inventories at year-end because it reflects conditions at that point in time. An adjustment is required in the 2025 statements as the market price is lower than cost, and inventory should be valued at the lower of the cost and market. No additional disclosure; this is just an unfortunate but unusual operating occurrence. d. The event does not relate to conditions at or prior to the year-end for recognition. The event is neither specific nor unusual in nature to warrant disclosure. New competition requires neither recognition nor disclosure. e. Error Correction: Retrospective treatment Adjustment needed in 2025 statements f. Policy change: Retrospective treatment Adjustment needed in 2025 statements g. Due to the new technology, the assumptions for useful life, salvage value, and depreciation methods should be reviewed, and assumptions that are no longer appropriate based on this new information should be changed. Adjustments should be made in 2025 statements. The depreciation expense for the current year should reflect these

Effects in 2025, if any (increase/decrease/none) Assets or liabilities Equity Income None None None

Decrease $13,000

Decrease $15,000

None

Increase $17,000

None

Decrease $100,500 Decrease

Decrease $60,300 Decrease

Decrease

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new estimates. This is required as this information clarifies estimates used at the year-end for calculating depreciation expense. h. This new information relates to the measurement of receivables recognized at the year-end. Adjustments should be made in 2025 statements. For the bankruptcy of a client, recognize the reduction in the carrying value of the accounts receivable by 90% and make the necessary adjustment. i. Change in estimate due to new information (enactment of new law): prospective treatment. No change or note disclosure for 2025.

Decrease

None

Diff: 3 Type: ES Skill: Conceptual Objective: 3.3/ 3.4/ 3.5 Apply accrual accounting in relation to issues of timing: periodicity, cut-off, and subsequent events./Evaluate whether an accounting change is an error, a change in accounting policy, or a change in estimate, and apply the retrospective or prospective treatments appropriate to that type of accounting change./Integrate the structure and connections among the four financial statements and explain how this structure relates to accrual accounting.

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 4 Revenue Recognition Learning Objective 1 1) Which of the following best explains what recognition means in financial reporting? A) Recognition is the process of reporting an item that is due within 12 months in the current section of the balance sheet. B) Recognition is the process of reporting an item in the notes to the financial statements. C) Recognition is the process of presenting an item in the financial statements. D) Recognition refers to the choice between using fair value and historical cost in the financial statements. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

2) Which of the following is correct about the value creation process? A) The value creation process is the same for all entities. B) The value creation process is the same for all industries. C) Any point on the value creation process is acceptable for revenue recognition. D) The value creation process is specific to each entity. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

3) Which of the following statements about the value creation process is NOT correct? A) The value creation process reflects the wide range of possible points at which revenue could be recognized. B) Recognizing revenue early in the value creation process is more conservative than waiting until cash is received. C) Recognizing revenue early in the value creation process involves more uncertainties and lower reliability about cash flows. D) Permitting too much choice in accounting policies impairs comparability of financial statements. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

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4) Explain why accounting standards generally prescribe a smaller set of alternatives for revenue recognition. Answer: Accounting standards prescribe revenue recognition at later stages of the value creation process when the risks and uncertainties surrounding procurement, demand, price, credit, and indemnity risk are sufficiently low. This enables revenue to be measurable. Diff: 1 Type: ES Skill: Conceptual Objective: 4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

5) Discuss advantages and disadvantages of using the cash basis to recognize revenues. Provide three valid reasons in your discussion. Answer: Advantages/Pros: • The cash basis of revenue recognition would be more reliable since the cash receipt is readily verifiable. Disadvantages/Cons: • This method usually delays the recognition of revenue, reducing its timeliness and relevance to users. • Information from the cash method is generally less useful for making predictions about the future, as they can fluctuate due to random events affecting the timing of payment. • While more reliable, the cash basis does not eliminate judgment and overstatements. • Restricting revenue recognition to the cash basis can have real consequences on business activities. For instance, a company would be less willing to sell products on credit; and the supply of credit is essential to the health of the economy. Diff: 2 Type: ES Skill: Conceptual Objective: 4.1 Explain why there is a range of alternatives for revenue recognition that are conceptually valid and the rationale for accounting standards to prescribe a smaller set of alternatives.

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Learning Objective 2 1) On March 1, Pendant Textbook Publications delivered 100 copies of one of its accounting textbooks to the First University bookstore. The bookstore can return all unsold copies to Pendant. The retail price of each copy is $110, while the price charged to the bookstore is $80. Each book costs Pendant $40 to produce. On April 15, the distributor returns 30 unsold copies to Pendant. Based on these facts, how much revenue would Pendant recognize on April 15? A) $2,800 B) $5,600 C) $7,700 D) $2,400 Answer: B Explanation: B) ($80 × 70 copies sold = $5,600) Diff: 1 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

2) Which statement is correct about multiple performance obligation arrangements? A) The revenue recognition criteria no longer apply to these transactions. B) The revenue must be allocated to the components of the sale evenly over the life of the contract. C) The revenue must be recognized evenly over the life of the contract. D) Identifying the different sources of revenue increases the representational faithfulness. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

3) Which statement is correct about multiple performance obligation arrangements? A) The residual method must normally be used. B) The relative stand-alone selling price method must normally be used. C) There is no specific method that must be used. D) The adjusted market assessment approach is an acceptable residual approach that may be used. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

4) Discuss when it is acceptable to use the residual approach to allocate the transaction price to performance obligations. Answer: The residual approach may only be used if either (i) the good or service in question have a highly variable selling price, or (ii) the entity has not yet established a price for that good or service. Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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5) List the five key steps in the revenue recognition process. Answer: 1) Identify the contract 2) Identify the performance obligation 3) Determine the transaction price 4) Allocate the transaction price to performance obligations 5) Recognize income in accordance with performance Diff: 1 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

6) You are an accountant working at Phantastic Pharmaceutical Inc. and have been asked to explain to your controller the possible points at which revenue could be recognized by your organization. Identify two alternatives that are in accordance with IFRS 15 for recognizing revenue at Phantastic. Answer: Value creation occurs during many different business processes: research and development of the drugs, production of the drugs, signing of contract with the customer, delivery of drugs to the customer, or collection from the customer. IFRS requires that revenue be recognized at: either a point in time or over time as the performance obligations are satisfied. An example of the first alternative is recognizing revenue when the drug is delivered to the customer;. An example of the second alternative is recognizing revenue as performance is achieved in accordance with the benchmarks established in the contract e.g. regulatory approval. Diff: 1 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

7) Explain how the transaction price should be allocated to the performance obligations in a multiple performance obligation sales arrangement. Answer: IFRS 15 requires that enterprises allocate the transaction price to the various performance obligations in a multiple performance obligation sales arrangement based on the observable stand-alone selling prices of the components. If this is not possible paragraph 79 of IFRS 15 identifies three alternatives noting that other approaches may also be suitable. The three alternatives identifies in paragraph 79 are: 1) The adjusted market assessment approach which involves estimating what a customer would be willing to pay for the good or service or what competitors charge for a similar good or service. 2) The expected cost plus margin approach which involves estimating expected costs to provide the good or service and adding a profit margin typical for that good or service. 3) The residual approach which computes the stand-alone selling price as the transaction price less the total of the observable stand-alone selling prices of other goods services in the transaction. This approach is only acceptable if either (i) the good or service in question has a highly variable selling price, or (ii) the entity has not yet established a selling price for that good or service. Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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8) Explain how the timing of revenue recognition is affected by multiple performance obligations in the arrangement. Explain how revenue is ultimately recognized in a multiple performance obligations sales arrangements. Answer: Clearly, it is inappropriate to record all the revenue upon delivery of simply one product or service if some products or services are delivered at different points in time. All products or services in such a sales transaction are taken into account. To record revenue in a manner that reflects the timing of delivery for each product or service in the sales arrangement, the sales price of the total arrangement is allocated to the individual components. Then the normal revenue recognition criteria are applied to each component to determine when the revenue from that element can be recorded by the company. Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

9) Explain why a company should allocate revenue to multiple performance obligations in a sales transaction even if the company delivers all of the products or services in the same accounting period. Answer: Proper allocation of revenue to the various revenue streams can make a difference to financial statement readers. Identifying different sources of revenue increases the representational faithfulness of the information and allows users to better understand the operations of the enterprise. For example, knowing that a car company earns more from providing services than from the sale of a car could be quite informative to users in the prediction of future revenues and cash flows. Users could perceive some revenue sources as more sustainable than other sources. This information will also reduce moral hazard and information asymmetry. Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

10) Simply Manufacturers has signed an order to supply 10,000 chairs at a price to be determined sixty days after delivery. Payment is due at that time. The price per chair may range from $0 to $100 depending on a series of events, the outcome of which cannot be accurately predicted. Which of the following factors is most likely to preclude Simply from recognizing revenue at time of delivery. A) The purchaser bears the significant risks and rewards of ownership. B) The revenue is variable in nature. C) The purchaser is not obligated to pay for the goods at time of delivery. D) Simply had not paid its suppliers for the materials used to manufacture the chairs. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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11) Fancy Cars sold a used car for $35,000 cash. The company will also provide 4 oil changes per year for 5 years and an extended service-type warranty for 5 years. This is the first time that Fancy has offered an extended warranty. It intends to offer it to customers on a stand-alone basis but has not yet established a sales price. The observable selling prices of the car and oil changes follow: Car Oil change

$30,000 $50 each oil change

a. Determine how revenue should be allocated to the various components in this transaction. b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction. Answer: a. The residual method is appropriate since the fair value of the warranty is not determinable as a stand-alone price has not yet been established for the service-type warranty. Value Car Oil change ($50 × 4/yr × 5 yrs)

Warranty

$30,000 $1,000

$4,000 $35,000

Total transaction price less the observable stand-alone selling price of the car and oil changes. $35,000 - $30,000 - $1,000

b. Revenue for the car should be recognized upon delivery. Revenue for the oil changes will be recorded as each of the 20 oil changes is performed ($1,000/ (4/yr × 5 yrs) ). The revenue for the warranty would be recognized over the 5 years. Diff: 2 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

12) A city transit authority issues 200,000 monthly passes at $80 each for sale at various retailers. Retailers act as consignees for these passes. Identify why the transit authority cannot recognize revenue at time of distribution. A) The retailers have not taken physical possession of the asset. B) A contract has not been entered into. C) The transaction price is not known. D) The retailers do not bear the significant risks and rewards of ownership. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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13) Hedley Corporation sold hardware and software for $70,000 cash. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The observable stand-alone selling prices are as follows: Hardware Software Hardware Maintenance

$60,000 $15,000 $5,000

Hardware Software Hardware Maintenance

Stand-alone % of total Transaction Amount selling price selling price price allocated to PO $60,000 75% $70,000 $52,500 $15,000 18.75% $70,000 $13,125 $5,000 $80,000

6.25% 100%

$70,000

$4,375 $70,000

b. Revenue for the hardware should be recognized upon delivery/installation. Revenue for the software should be recorded over the one-year support period being provided. Revenue for the maintenance contract should be recognized over the 3 years. Diff: 2 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

14) An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. Identify why the insurance company cannot recognize revenue when the premium is received. A) The insurance company has not transferred to the buyer the significant risks and rewards of ownership of the service. B) The customer has not taken possession of the asset. C) The insurance company earns the revenue over time, rather than at a point of time (time of sale). D) The customer does not control the asset. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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15) Superior Cars sold a car for $35,000 cash. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal observable stand-alone selling prices are as follows: Car Oil change Service-type warranty

$35,000 $50 per oil change $4,000

a. Determine how revenue should be allocated to the various performance obligations in this transaction. b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction. Answer: a. The relative stand-alone sales price method is appropriate since the stand-alone sales price for all components is determinable.

Car Oil change ($50 × 4/yr × 5 yrs) Warranty

Stand-alone selling price Allocated Value $35,000 $30,625 [$35,000/$40,000 × $30,000] $1,000 $875 $4,000 $3,500 $40,000

[$1,000/$40,000 × $30,000] [$4,000/$40,000 × $30,000] $35,000

b. Revenue for the car should be recognized upon delivery. Revenue for the oil changes will be recorded as each of the 20 oil changes is performed ($875/ (4/yr × 5 yrs) ). The revenue for the warranty would be recognized over the 5 years. Diff: 2 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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16) The publisher of TV Weekly received the following 52-week subscriptions during the first quarter of fiscal 2026. Each subscription is $110, which is a 47% discount off the newsstand price of $4 per issue. Each subscription becomes effective in the calendar month after the company receives the subscription. The company has a December 31 fiscal year. What amount of revenue will the company record in 2026 for the subscriptions received in January? (Round your response to the nearest dollar.) Month January February March

Subscription Received 4,300 4,200 4,100

A) $247,142 B) $250,690 C) $433,583 D) $1,279,500 Answer: C Explanation: C) 4,300 × 11/12 months × $110 subscription price = $433,583.33 Diff: 2 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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17) Harris Corporation sold hardware and software for $70,000 cash. In addition, the company will provide support on the software for 1 year and maintenance on the hardware for 3 years. The observable stand-alone selling prices are as follows: Hardware Software Hardware Maintenance

$60,000 $8,900 $4,000

a. Determine how revenue should be allocated to the various components in this transaction. b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized for the various components of this transaction. Answer: a. The relative stand-alone selling price method is appropriate since the stand-alone sales prices of all components are observable. Stand-alone sales price Allocated Value Hardware $60,000 $57,613 [$60,000/$72,900 × $70,000] Software $8,900 $8,546 [$8,900/$72,900 × $70,000] Hardware Maintenance $4,000 $3,841 [$4,000/$72,900 × $70,000] $72,900 $70,000

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18) The publisher of Accounting Digest received the following 12-month subscriptions during 2026. Each subscription is $100. The company has a December 31 year end. Each subscription becomes effective in the calendar month after the company receives the subscription. What amount of revenue will the company record in 2026 for the subscriptions received between January and March? (Round your response to the nearest dollar.) Month January February March April May

Subscription Received 4,300 4,200 4,100 4,400 6,100

A) $315,000 B) $779,167 C) $1,051,667 D) $1,260,000 Answer: C Explanation: C) [(4,300 × 11/12 months) + (4,200 × 10/12 months) + (4,100 × 9/12 months)] × $100 subscription price = $1,051,667 Diff: 3 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

19) On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. Electronic Distribution pays its wholesaler $500 for each TV. It then sells each TV for $800 to its retail customers including TV World. At the end of June, TV World sold 50 units. How much revenue should be recorded by Electronics Distribution for the month of June? A) $80,000 B) $50,000 C) $40,000 D) $25,000 Answer: C Explanation: C) 50 units × $800/unit = $40,000 Diff: 1 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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20) On June 1, Electronics Distribution ships 100 TVs to TV World on consignment. The cost of each unit is $600 and the unit selling price is $750. At the end of June, TV World sold 50 units. How much cost of sales should be recorded by Electronics Distribution for the month of June? A) $37,500 B) $30,000 C) $60,000 D) $75,000 Answer: B Explanation: B) 50 units × $600/unit = $30,000 Diff: 1 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

21) Which of the following is TRUE when goods are sold on consignment? A) The customer has taken physical possession of the asset. B) The selling entity has the present right to payment for the asset. C) The significant risks and rewards of ownership have been transferred. D) The customer has accepted the asset. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

22) Which of the following is TRUE when goods are sold on on an installment basis? A) Revenue is recognized at time of the initial sale. B) Cost of goods sold is debited for the cost of the merchandise sold. C) Revenue is not recognized until all monies due under the contract have been collected. D) The deferred gross profit liability is debited as cash is collected. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

23) In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The system costs Telly-Rental $400. Telly-Rental generally earns a gross profit of 15%. How much revenue is recorded by Telly-Rental in July? A) $0 B) $150 C) $400 D) $1,000 Answer: A Explanation: A) Revenue is deferred until cash is received. Diff: 1 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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24) In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. Telly-Rental generally earns a gross margin of 25%. The customer pays $500 in December. How much revenue is recorded by Telly-Rental in December? A) $125 B) $250 C) $500 D) $1,000 Answer: C Diff: 1 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

25) In July, Telly-Rental sells a home theatre for $1,000 on an installment basis. The cost of goods sold is $400. How much deferred gross profit is recorded by Telly-Rental in July? A) $0 B) $400 C) $600 D) $1,000 Answer: C Explanation: C) $1000 - $400 = $600 Diff: 1 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

26) Which statement best describes a franchise arrangement? A) An arrangement in which one party licenses its business practices to another party. B) An arrangement in which one party exchanges goods or services with another party with little or no consideration. C) An arrangement in which one party provides goods to another party to sell on its behalf and will accept all goods that are not sold. D) An arrangement in which one party allows the purchaser to make payments over an extended period of time. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

27) In September, Fast-Foods Inc. (FF) sells a franchise for an initial fee of $150,000 and ongoing fees based on 3% of gross profit. FF estimates that 20% of the initial fee relates to initial training, store design, and opening activities; the remaining 80% relate to activities to be performed over 3 years. How much revenue should be recorded in September? A) $4,500 B) $30,000 C) $120,000 D) $150,000 Answer: B Explanation: B) 20% × $150,000 = $30,000 Diff: 1 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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28) On December 1, 2026, SuperTech sold 100 locks for laptop computers at $50 each with a 90-day unconditional right of return. Since this is a new product for SuperTech, it has no past history regarding estimated returns. Which of the following is TRUE regarding the recognition of sales for the locks on December 1, 2026? A) Sales of $5,000 should only be recognized in 2027 when the return privilege expires. B) Sales of $5,000 should be recognized in 2026 as long as there is a reserve for returns. C) Sales of $5,000 should be recognized in 2026, with future costs accrued as an estimated liability. D) Sales should only be recognized as the related cash is collected. Answer: A Explanation: A) The right of return means that the revenue to be recognized is variable in nature. Given the uncertainty, revenue cannot be recognized until the amount of variable consideration is known which is when the right of return expires. Diff: 2 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

29) On September 1, 2026, Electric Depot sold 100 laptop computers at $750 each with a 120-day unconditional right of return. Customers have 90 days to pay. Based on past experience, Electric Depot estimates that approximately 1% will be returned. Which of the following is TRUE regarding Electric Depot's December 31, 2026, financial statements? A) Sales of $75,000 should only be recognized after 120 days when the return privilege expires. B) Sales of $74,250 should be recognized and a provision for refund liability of $750 established in September. C) Sales of $75,000 should be recognized in September 2026. D) Sales should only be recognized as the related cash is collected. Answer: B Diff: 2 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

30) Which of the following is an acceptable revenue-recognition method? A) At time of shipment, if warranty uncertainty is not reliably measurable. B) At time of shipment to the consignee, for consignment sales. C) Installment method, if credit risk is high. D) At the point of sale, if credit risk is very high. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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31) RU FIT Centre opened for business on April 5, 2026. For revenue recognition purposes, all memberships are assumed to be issued at the beginning of the month, with 1-year memberships costing $600 and 2-year memberships costing $960. During April, 32 1-year memberships and 25 2-year memberships were sold. RU FIT Centre prepares monthly financial statements. Which of the following statements is correct? A) Revenue to be recognized as earned for the month of April is $2,600. B) Revenue to be recognized as earned for the month of April is $3,600. C) Revenue to be recognized as earned for the month of April is $43,200. D) Deferred revenue at April 30 would be $43,200. Answer: A Explanation: A) (32 × $600 × 1/12) + (25 × $960 × 1/24) = $2,600 Diff: 2 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

32) Shear Company sells computer equipment with a 2-year warranty. Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year. In 2026, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2026. What amount should the warranty expense for 2026 be? A) $18,000 B) $36,000 C) $54,000 D) $250,000 Answer: C Explanation: C) $1,800,000 × 3% = $54,000 Diff: 2 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

33) YMN had sales of $1,500,000, including: • $25,000 of goods shipped on consignment to an unrelated company on December 28, 2026, and received by that company on December 31, 2026. • $20,000 of goods shipped F.O.B. shipping point to a different unrelated party on December 31, 2026, and received on January 2, 2027. On its income statement, what amount of net sales should YMN record for 2026? A) $1,455,000 B) $1,475,000 C) $1,525,000 D) $1,545,000 Answer: B Explanation: B) $1,500,000 - $25,000 = $1,475,000 Diff: 3 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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34) Simple Inc. had sales of $1,500,000, including: • $30,000 of goods sold that were on consignment from an unrelated company on December 28, 2026. • $10,000 of goods shipped F.O.B. shipping point on December 28, 2026. • $20,000 of goods shipped F.O.B. destination point on December 31, 2026. On its income statement, what amount of net sales should Simple Inc. record for 2026? A) $1,440,000 B) $1,470,000 C) $1,480,000 D) $1,490,000 Answer: C Explanation: C) $1,500,000 - $20,000 = $1,480,000 Diff: 3 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

35) Philips Corp. is unsure how to record the following transactions: • $60,000 of goods shipped F.O.B. shipping point on December 28, 2026. • $50,000 of goods shipped F.O.B. destination point on December 31, 2026. What amount of sales related to these two transactions should Philips Corp. record in fiscal 2026? A) $0 B) $50,000 C) $60,000 D) $110,000 Answer: C Diff: 2 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

36) Here are some financial records for Accounting Plus Magazine which started operations in October 2026. Sales for its first month were as follows: Subscriptions sold 16,400 11,800

Price per subscription $25 $40

Subscription start date Oct. 1 Oct. 1

Subscription term (months) 6 months 12 months

What would be the subscription revenue to be recognized for the month of October 2026? (Round to the nearest dollar.) A) $68,333 B) $107,667 C) $774,333 D) $882,000 Answer: B Explanation: B) (16,400 × $25 × 1/6) + (11,800 × $40 × 1/12) = $107,667 Diff: 3 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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37) Here are some financial records for Accounting Plus Magazine which started operations in October 2026. Sales for its first month were as follows:

Subscriptions sold 16,400 11,800

Price per subscription $25 $40

Subscription start date Oct. 1 Oct. 1

Subscription term (months) 6 months 12 months

What would be the deferred revenue at October 31, 2026? (Round to the nearest dollar.) A) $107,667 B) $341,667 C) $774,333 D) $882,000 Answer: C Explanation: C) (16,400 × $25 × 5/6) + (11,800 × $40 × 11/12) = $774,333 Diff: 3 Type: MC Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

38) Which of the following methods of revenue recognition would be selected when a vendor has another firm acting as its selling agent? A) Cost recovery method. B) Returned goods method. C) Installment sales method. D) Consignment sales method. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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39) Based on the note disclosure provided below for XYZ Group, when would the following types of revenue be recognized? a) Consignment sales of vehicles (Sales with repurchase commitments). b) Financial services. c) Lease rentals. d) Post-sale services (Multiple-component contracts). e) Sale of products. Revenues from the sale of products are recognized when the risks and rewards of ownership of the goods are transferred to the customer, the sales price is agreed or determinable and receipt of payment can be assumed. Revenues are stated net of discounts, allowances, settlement discount and rebates. In the case of long-term contracts, revenues are generally recognized in accordance with IFRS 15 (Revenue) on the basis of the stage of completion of work performed using the percentage of completion method. Revenues also include lease rentals and interest income from financial services. Revenues for the Financial Operations sub-group also include the interest income earned by Group financing companies. If the sale of products includes a determinable amount for subsequent services ("multiple performance obligation contracts") the related revenues are deferred and recognized as income over the period of the contract. Amounts are normally recognized as income by reference to the expected pattern of related expenditure. Profits arising on the sale of vehicles for which a Group company retains a repurchase commitment (buy-back contracts) are not recognized until such profits have been realized. The vehicles are included in inventories and stated at cost. Answer: a. Deferred until product is sold to consumer. b. Interest income as time elapses. c. As rental period expires. d. Deferred and recognized as revenue over period of contract according to the pattern of expected costs. e. Upon transfer of risks and rewards, price is agreed or determinable, and payment is likely. Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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40) In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why.

Transaction A. An appliance store sells and delivers a fridge with a two-year warranty. B. An airplane manufacturer signs a contract to supply two planes over four years for Air Canada. C. An insurance company issues a one-year insurance policy.

Revenue recognition method

Why?

Answer: Revenue recognition Transaction method A At point of sale B

According to degree of completion

Over time

Why? Sale of goods: risk and rewards transferred. Sale of goods: significant risk and rewards transferred; remaining indemnity risk is small and estimable. Provision of services. Revenue earned as time elapses.

Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

41) On January 1, 2026, Sukhi's Cycles Inc. sells a motorcycle for $24,000. Terms offered are $1,000 per month first due February 1, 2026. The market interest rate for transactions of this type is 0.25% per month. What is the amount of revenue that Sukhi should record at time of sale? Answer: There is a significant financing component in the contract. As the contract exceeds one year, the transaction price must be adjusted to reflect the time value of money. The amount of revenue to be recorded is $23,266 (PMT = 1,000; N = 24; I = 0.25; PV = ? = -$23,266). Diff: 1 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

42) On January 1, 2026, Sukhi's Cycles Inc. sells a motorcycle for $24,000. Terms offered are $10,000 cash; $7,000 due on January 1, 2027, and $7,000 due on January 1, 2028. The market interest rate for transactions of this type is 4.0% per annum. What is the amount of revenue that Sukhi should record at time of sale? Answer: There is a significant financing component in the contract. As the contract exceeds one year, the transaction price must be adjusted to reflect the time value of money. The amount of revenue to be recorded is $23,203 (PMT = 7,000; N = 2; I = 4 PV = ? = -$13,203; $13,203 + $10,000 = $23,203). Diff: 1 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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43) On January 1, 2026, Sukhi's Cycles Inc. sells a motorcycle for $24,000. Terms offered are $10,000 cash with the balance of $14,000 due on January 1, 2028. The market interest rate for transactions of this type is 5% per annum. What is the amount of revenue that Sukhi should record at time of sale? Answer: There is a significant financing component in the contract. As the contract exceeds one year, the transaction price must be adjusted to reflect the time value of money. The amount of revenue to be recorded is $22,698 (FV = 14,000; N = 2; I = 5 PV = ? = -$12,698; $12,698 + $10,000 = $22,698). Diff: 1 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

44) In the chart below, identify the revenue recognition method that you feel is most appropriate and also explain why. Transaction

Revenue recognition method

Why?

A. An electronics store sells a computer with a 7-day lowest-price guarantee. (That is, if the customer finds a lower price on the same product offered by the company or a competitor, the company will refund the difference to the customer.) B. A university receives students' course fees, in full, at the start of the semester. C. A company deposits funds into a three-year term deposit that earns 3% per year. Answer: Revenue recognition Transaction method Why? A At point of sale. Note that Sale of goods: significant risk and this contract price is rewards transferred; remaining variable, rather than fixed. If indemnity risk is small and estimable. material, period end revenue must be adjusted to reflect this. B According to degree of Provision of services. Revenue earned as completion courses progress. C Over time Provision of services: a deposit provides funds to the bank to use for lending. Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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45) In the chart below, identify the expense recognition method that you feel is most appropriate and also explain why.

Transaction A. A company purchases computers for its marketing department. B. A company purchases manufacturing equipment that is expected to produce 25,000 units. C. A company incurs delivery costs on January 2 for a shipment of products sold seven days earlier (before the year-end).

Expense recognition method

Why?

Answer: Transaction A B

Expense recognition method Over time Based on units of production At point of sale (as an adjusting entry to the previous year's financial statements

Why? Matching with the benefits received over time. Matching with the benefits of production and subsequent sales.

Matching delivery costs with the related sales.

Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

46) Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services. Answer: The five-step revenue recognition process detailed in IFRS 15 is largely the same for the sale of goods and services. Diff: 1 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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47) Through non-subscription sales, TV Weekly provides retailers with a 50% margin (or 100% markup) on its magazines. The newsstand price is $8 per issue. During 2026, the company distributed 1,654,000 copies to retailers, not all of which were sold. Retailers sent a total of 390,000 unsold copies back to the publisher, of which 30,000 copies were for the last two issues published in 2025. In January 2027, the company received 27,000 unsold copies for magazines published in the last weeks of December 2026. Required: Determine the amount of revenue from non-subscriptions TV Weekly should recognize in 2026. Answer: Copies distributed and sold in 2026 × Newsstand price per copy less 50% = 2026 non-subscription revenue = [1,654,000 - (390,000 - 30,000 + 27,000)] × $4 = 1,267,000 × $4 = $5,068,000 Diff: 1 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

48) Larimar Computers provides customers the option to purchase products with three installment payments made over 12 months (equal payments at the end of the 4th, 8th, and 12th months). In January 2026, Larimar sold $39,000 of computers to one customer on this installment plan. The cost of these computers is $30,420. Required: Using the installment sales method, record the journal entries for Larimar's installment sales made in January 2026 and the subsequent payments received on each installment date. Assume all installment payments are received, and ignore the time value of money. Answer: Gross profit % = 22% ($39,000 - $30,420)/$39,000 Jan. 2026 Installment accounts receivable Inventory Deferred gross profit JE for installment sales in Jan. 2026

39,000 30,420 8,580

Cash Cost of goods sold Deferred gross profit (22% × $13,000) or $8,580/3 Installment accounts receivable Revenue $39,000/3 JE for May 2026, Sept. 2026, and Jan. 2027

13,000 10,140 2,860 13,000 13,000

Diff: 2 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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49) Jennifer Furnishings frequently has sales involving "no down payment and no payments for three months." Three months after the purchase date, customers make four equal monthly payments (i.e., they make equal payments 3, 4, 5, and 6 months after purchase). Each payment is one-quarter of the purchase price. The company has a December 31 year-end. During 2026, the company made the following sales on installment plans. Jennifer makes 15% gross profit on these sales.

January February March April May June July August September October November December Total

Sales $63,000 104,000 100,000 69,000 100,000 69,000 135,000 65,000 69,000 100,000 84,000 122,000 $1,080,000

Required: Using the installment sales method and ignoring the time value of money a) Determine the balance of installment accounts receivable at December 31, 2026. b) Determine the amount of deferred gross profit as at December 31, 2026. (Round to the nearest whole dollar.) c) Determine the sales revenue to recognize in 2026 for installment sales made in the year.

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Answer: a) The installment accounts receivable are $424,000. All of the installments sales from January to June would be fully collected by December 31. Installment Sales

January February March April May June July August September October November December Total

(1) $63,000 104,000 100,000 69,000 100,000 69,000 135,000 65,000 69,000 100,000 84,000 122,000 $1,080,000

Numbers of Installment Sales O/S at Payment(s) O/S at year end year end (2) [(1) × (2)] /4 payments 0 0 0 0 0 0 1 $33,750 2 32,500 3 51,750 4 100,000 4 84,000 4 122,000 $424,000

b) The deferred gross profit at December 31, 2026, is $63,600 ($424,000 × 15%). c) Sales revenue for installment sales made in 2026 is $656,000 ($1,080,000 - $424,000). Diff: 2 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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50) Aurora Gold Company produced 650,000 ounces of gold in 2026. Average sales price was $870/oz. The price was $870/oz at the start of the year and $870/oz at the end of the year. Production cost averaged $588/oz, which has been stable for several years. The company had 50,000 ounces in inventory at the beginning of the year, and 20,000 ounces at the end of the year. Required: a) Calculate Aurora Gold's revenue, cost of goods sold, and gross profit, assuming the company recognizes revenue at the point of sale/delivery.

Revenue Cost of goods sold Gross profit

2025 $546,000,000 382,200,000 $163,800,000

2026

b) Determine the amount that should be shown as ending inventory on Aurora's 2026 balance sheet. Answer: a) 2025 2026 Revenue $546,000,000 $591,600,000 ($870 × (650 + 50 - 20)) Cost of goods sold 382,200,000 399,840,000 ($588 × (650 + 50 - 20)) Gross profit $163,800,000 $191,760,000 b) $11,760,000 (20,000 × $588) Diff: 2 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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51) McNicols started selling franchise locations in April 2026. The franchisee pays continuing fees based on annual sales. The initial fee relates to finding a store location and training the franchisee at McNicols' training facility over a 2-year period.

Initial franchise fee Continuing franchise fees Franchise sold Franchisees' reported sales

Fiscal 2026 $85,000 4% 5 $1,500,000

Fiscal 2027 $95,000 3% 3 $2,000,000

Required: a) Explain how McNicols should account for the initial fee. Ignore the time value of money. b) Assume that management estimates that 40% of the value of services related to the initial fee is fulfilled in the first year of signing the franchise agreement. Provide the journal entries to record this revenue in fiscal 2026 and in 2027. c) Explain how McNicols should account for the ongoing fees. d) Provide the journal entries to record the ongoing fees in fiscal 2026 and 2027.

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Answer: a) The $85,000 fee should be recorded based on the performance completed by McNicols. McNicols should record the revenue associated with finding the store location in fiscal 2026. The revenue associated with training the franchise should be recorded over 2 years as service is provided by McNicols. b) Journal entries Cash

425,000 Franchise revenue (40% × $85,000) × 5 franchises sold

170,000

Deferred revenue (60% × $85,000) × 5 franchises sold Fiscal 2026

255,000

Deferred revenue (60% × $85,000) × 5 franchises sold

255,000

Franchise revenue (60% × $85,000) × 5 franchises sold Fiscal 2027 Cash

255,000 285,000

Franchise revenue (40% × $95,000) × 3 franchises sold

114,000

Deferred revenue (60% × $95,000) × 3 franchises sold

171,000

c) The ongoing fees should be recorded annually based on the percentage in the agreement. Revenue earned as time elapses. d) Journal entries Cash or Accounts receivable (4% × $1,500,000) Franchise revenue Fiscal 2026

60,000

Cash or Accounts receivable (3% × $2,000,000) Franchise revenue Fiscal 2027

60,000

Diff: 2 Type: ES Skill: Computational Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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52) Soorya Manufacturing makes educational toys that are sold to retailers on the following contractual terms: Each type of toy has a fixed wholesale price, is shipped F.O.B. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating. Required: a) Identify at least four different revenue recognition points that Soorya could use for its sales. b) What revenue recognition criteria should Soorya use to determine when revenue should be recorded? Answer: a) 1. Record revenues when manufactured 2. Record at signing of contract with retailer 3. Record revenues at shipping point 4. Record revenues 45 days after shipment when payment is due 5. Record revenues after 6 months (when the right of customer return expires) b) Paragraph 31 of IFRS 15 provides the following revenue recognition criteria for the sale of goods or services: ¶18. An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Paragraph 34 then establishes that: ¶34 When evaluating whether a customer obtains control of an asset, an entity shall consider any agreement to repurchase the asset. In this instance control is most likely transferred at time of shipping so option 3 is correct. Note, however that the right of return means that the amount of consideration is variable. In accordance with paragraphs 55 and B21 of IFRS 15 an entity shall recognize revenue only for the amount that it expects to be entitled and establish a refund liability for the difference between this amount and the amount of consideration received (or receivable). Diff: 3 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

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53) Soorya Manufacturing makes educational toys that are sold to retailers on the following terms: Each type of toy has a fixed wholesale price, is shipped F.O.B. shipping point, and payment is due 45 days after the shipment. The retailer may return a maximum of 45% of an order at the retailer's expense up to 6 months after delivery. Sales are made only to retailers that have a good credit rating. In Soorya's 11 years of existence, the company has experienced a return rate of approximately 15%, a bad debt expense of 5% of sales and an average collection period of 90 days. Soorya provides a bonus to its senior managers based on annual revenues, net of returns. Required: a. Identify at least three different revenue recognition points that Soorya could use to record revenue. b. What revenue recognition criteria should Soorya use to determine when revenue should be recorded? c. Discuss the pros and cons for 2 alternative recognition points mentioned in point (a). Remember to support your reasoning with case facts. d. Recommend the recognition point that Soorya should use in its financial statements. Answer: a) 1. Record revenues when manufactured 2. Record at signing of contract with retailer 3. Record revenues at shipping point 4. Record revenues 45 days after shipment when payment is due 5. Record revenues after 6 months (when the right of customer return expires) b) Paragraph 31 of IFRS 15 provides the following revenue recognition criteria for the sale of goods or services: ¶18. An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Paragraph 34 then establishes that: ¶34 When evaluating whether a customer obtains control of an asset, an entity shall consider any agreement to repurchase the asset.

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c) Pros Revenue would be recorded earlier than at the other stages of the process. This would improve the Record revenues company's reported retained when earnings. manufactured

Cons The company has NOT transferred control of the asset to the purchaser. The company does NOT have any receivable/asset due from the customer at this point. The company has NOT transferred control of the asset to the purchaser.

While the contract is mutually Record revenues unexecuted, the purchaser has a legal The company does NOT have any at signing of obligation to fulfill the terms of the receivable/asset due from the contract. contract. customer at this point. Because the shipping terms are FOB shipping point, the company has transferred control of the asset (i.e., The customer can return up to 45% of customer is liable for the goods if the items. lost, damaged or destroyed). The return period is significant (6 months). While the returns can be significant, Therefore, the consideration is the company has a substantial variable. It is not known with Record revenues operating history and could establish certainty how much revenue will be at shipping point a refund liability for the expected earned until after the return period returns. expires. This could be seen as a "significant act" in the earnings process: customer The payment date is not critical for is legally liable for payment only on accounting — as long as an this date. allowance can be established for any Record revenues potential non-payment. 45 days after The company has a substantial shipment when operating history and could establish payment is due a reasonable provision for bad debts when the revenue entry is booked. Unduly conservative

Record revenues after 6 months (when the right of customer return expires) The measurability of the revenue is the MOST RELIABLE at this date.

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The information in the financial statements using this method will be reliable, but not relevant (i.e., users would tradeoff some reliability to get more relevance through earlier revenue recognition). Bonus would be distributed later.

d) In this instance control is most likely transferred at time of shipping so option 3 is correct. Note, however that the right of return means that the amount of consideration is variable. In accordance with paragraphs 55 and B21 of IFRS 15 an entity shall recognize revenue only for the amount that it expects to be entitled and establish a refund liability for the difference between this amount and the amount of consideration received (or receivable) Diff: 3 Type: ES Skill: Conceptual Objective: 4.2 Apply the general revenue and expense recognition criteria to a variety of contexts.

Learning Objective 3 1) Lagory Co. started a contract in June 2025 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2027. Total cumulative costs incurred by the end of December 2025 and 2026 were $2 million and $6 million, respectively. Lagory Co. is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totalled $11 million. How much revenue will Lagory Co. report in 2026? A) $2,000,000 B) $3,000,000 C) $4,000,000 D) $14,000,000 Answer: C Explanation: C) (since Lagory cannot estimate total costs, use cost recovery method)

Revenue Cost of sales Gross profit

2025 $2,000,000 2,000,000 $0

2026 $4,000,000 4,000,000 $0

2027 $8,000,000 5,000,000 $3,000,000

Diff: 2 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

2) Which of the following statements is correct about the revenue recognition criteria for a performance obligation satisfied over time? A) The outcome of the performance obligation must be reasonably estimable before the percentage of completion method can be used to record revenue. B) The selling entity creates an asset that the selling asset controls.. C) The selling entity creates an asset with an alternative use to the selling entity D) The selling entity does not have an enforceable right to payment for the performance completed to date. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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3) Sunshine Contractors started a contract in January 2025 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2027. Total cumulative costs incurred by the end of December 2025 and 2026 were $2 million and $6 million, respectively. Sunshine is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totaled $11 million. How much cost of sales will Sunshine report in 2027? A) $3,000,000 B) $5,000,000 C) $8,000,000 D) $11,000,000 Answer: B Explanation: B) (since Sunshine cannot estimate total costs, use cost recovery method)

Revenue Cost of sales Gross profit

2025 $2,000,000 2,000,000 $0

2026 $4,000,000 4,000,000 $0

2027 $8,000,000 5,000,000 $3,000,000

4) Algae builds large ships and uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2026, year-end.

Cost incurred to date Costs to complete contracts Total price of contracts outstanding at December 31, 2026

2025 $200 million 600 million

2026 $400 million 600 million

1,300 million

How much revenue will Algae recognize in 2025? A) $260 million B) $325 million C) $433 million D) $1,300 million Answer: B Explanation: B) (Percent complete × Contract revenue) – Revenue previously recognized = ($200 / $800) × $1,300 - $0 = $325 million Diff: 1 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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5) Which statement best explains the percentage of completion method? A) An accounting method that recognizes revenue and expenses on a contract only after it is completed. B) An accounting method that recognizes revenue and expenses on a contract in proportion to the degree of progress. C) An accounting method that recognizes an amount of revenue equal to the costs that are expected to be recovered on the contract. D) An accounting method that recognizes revenue and expenses based on the fair value of the contract. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

6) How is revenue recognized on a cost plus 7% contract? A) Revenue is recognized only after the contract is completed. B) Revenue and expenses are recognized in proportion to the degree of progress. C) Record an amount of revenue equal to the costs that are expected to be recovered on the contract. D) Revenue equal to the cost plus 7% profit will be recorded each year. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

7) Which statement about the percentage of completion method is correct? A) This method recognizes revenue on a straight-line basis. B) This method can only be used if there are no uncertainties about how much the contract will cost or how long it will take to complete. C) This method allocates revenue, not construction costs. D) This method allocates construction costs, not revenue. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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8) Ying Construction Company entered into a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2025, with a planned completion date of December 31, 2027. A summary of the costs, billings, and collections is provided below:

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2025 $500,000 1,500,000 440,000 400,000

2026 $700,000 1,200,000 1,000,000 900,000

2027 $1,100,000 0 1,060,000 1,200,000

Ying uses the percentage of completion method. What amount would appear as accounts receivable on Ying's December 31, 2026, balance sheet? A) $100,000 B) $1,000,000 C) $140,000 D) $1,400,000 Answer: C Explanation: C) $440,000 + $1,000,000 - $400,000 - $900,000 = $140,000 Diff: 2 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

9) Yang Construction Company entered into a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2025, with a planned completion date of December 31, 2027. A summary of the costs, billings, and collections is provided below:

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2025 $500,000 1,500,000 440,000 400,000

2026 $700,000 1,200,000 1,000,000 900,000

2027 $1,100,000 0 1,060,000 1,200,000

Yang uses the percentage of completion method. How much gross profit would Yang recognize in 2026? A) $100,000 loss B) $75,000 loss C) $50,000 profit D) $100,000 profit Answer: B Explanation: B) ($500,000 + $700,000) / ($500,000 + $700,000 + $1,200,000) × ($2,500,000 – $2,400,000) = $50,000; $50,000 – [$500,000 / ($500,000 + $1,500,000) × ($2,500,000 – $2,000,000)] = $(75,000) Diff: 3 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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10) Early in 2026, Forest Ltd. signed a contract to construct a warehouse. Forest's management estimated the gross profit on the contract to be $740,000, as indicated by the following: Contract price Estimated costs Estimated gross profit

$3,500,000 2,760,000 $ 740,000

At the end of 2026, the status of the work on the contract was as follows: Costs incurred to date Estimated costs to complete

$1,350,000 1,650,000

How much revenue can be recognized on this contract for 2026, assuming that Forest uses the percentage of completion basis for long-term construction contracts (round to nearest dollar)? A) $333,000 B) $863,333 C) $1,575,000 D) $1,711,957 Answer: C Explanation: C) $1,350,000 / ($1,350,000 + $1,650,000) × $3,500,000 = $1,575,000 Diff: 3 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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11) Pool Contractors (PC) entered into a contract to build a solar heated swimming complex for $1,800,000. Construction commenced on July 1, 2025, with a planned completion date of December 31, 2027. A summary of the related accounting information is provided below: 2025 $400,000 1,200,000 560,000 500,000

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2026 $500,000 600,000 640,000 310,000

2027 $650,000 0 600,000 990,000

How much gross profit would be recognized in fiscal 2026 if PC uses the percentage of completion method? A) $50,000 B) $100,000 C) $130,000 D) $180,000 Answer: C Explanation: C) Gross profit 2025: $400,000 / ($400,000 + $1,200,000) × ($1,800,000 – $1,600,000) = $50,000 % complete 2026: ($400,000 + $500,000) / ($400,000 + $500,000 + $600,000) = 60% complete Gross profit 2026: [($1,800,000 – $1,500,000) × 60%] - 2025 GP = $180,000 – $50,000 = $130,000 Diff: 3 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

12) Nichols Construction Company (NCC) entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2025, with a planned completion date of December 31, 2027. A summary of the related accounting information is provided below: 2025 $400,000 1,200,000 560,000 500,000

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2026 $500,000 600,000 640,000 310,000

2027 $650,000 0 600,000 990,000

How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2026 if NCC uses the percentage of completion method? A) $130,000 B) $390,000 C) $790,000 D) $1,100,000 Answer: B Explanation: B) ($560,000 + $640,000) - ($500,000 + $310,000) = $390,000 Diff: 3 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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13) Nova Construction Company (NCC) entered into a contract to build a school for $1,800,000. Construction commenced on May 1, 2025, with a planned completion date of December 31, 2027. A summary of the related accounting information is provided below: 2025 $400,000 1,200,000 560,000 500,000

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2026 $500,000 600,000 640,000 310,000

2027 $650,000 0 600,000 990,000

How much gross profit would be recognized in fiscal 2025 if NCC uses the percentage of completion method? A) $50,000 B) $100,000 C) $130,000 D) $180,000 Answer: A Explanation: A) $400,000 / ($400,000 + $1,200,000) × ($1,800,000 - $1,600,000) = $50,000 Diff: 2 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

14) Tyco Ltd. entered into a contract to build a sports arena for $1,800,000. Construction commenced on August 1, 2025, with a planned completion date of December 31, 2027. A summary of the related accounting information is provided below: 2025 $400,000 1,200,000 560,000 500,000

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2026 $500,000 600,000 640,000 310,000

2027 $650,000 0 700,000 990,000

How much would the balance in accounts receivable be on the balance sheet of Tyco at the end of 2025 if Tyco uses the percentage of completion method? A) $110,000 B) $60,000 C) $500,000 D) $660,000 Answer: B Explanation: B) $560,000 - $500,000 = $60,000 Diff: 2 Type: MC Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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15) Nichols Construction Company (NCC) entered into a contract to build a shopping complex for $1,900,000. Construction commenced on July 1, 2025, with a planned completion date of December 31, 2027. A summary of the related accounting information is provided below: 2025 $400,000 1,200,000 660,000 500,000

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2026 $500,000 600,000 440,000 310,000

2027 $650,000 0 800,000 800,000

How much would the balance in accounts receivable be on the balance sheet of NCC at the end of 2027 if NCC uses the percentage of completion method? A) $0 B) $250,000 C) $290,000 D) $800,000 Answer: C Explanation: C) ($440,000 + $660,000 + 800,000) - ($310,000 + $500,000 + 800,000) = $290,000 Diff: 2 Type: MC Skill: Conceptual Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

16) Explain how a company records revenue and expenses for a long-term contract under IFRS. Include an explanation of how changes in estimates are accounted for under this method. Answer: • IFRS prescribes the percentage of completion method to account for construction contracts. • The percentage of completion method recognizes revenue in proportion to the degree of progress on the contracted project. • Enterprises may obtain estimates of the percentage complete from engineering estimates, the cost-to-cost approach, or other sources. • Enterprises apply prospective treatment for changes in estimates for costs and percentage complete. • The cost-to-cost approach expresses the fraction complete as the ratio of cost incurred divided by the estimated total cost. Diff: 1 Type: ES Skill: Conceptual Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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17) Queensbridge Corp. started a contract in June 2025 to build a bridge at a fixed price of $45 million. The bridge was to be completed by October 2027 at a total estimated cost of $35 million. Total cumulative costs incurred by the end of December 2025 and 2026 were $7 million and $24 million, respectively. Because of cost overruns in 2026, it is now expected that the project will cost $5 million more than originally estimated. Final costs at the end of the project totaled $36 million. Queensbridge Corp. follows the guidance in IFRS. Required: Determine the amount of gross profit to be recognized for the years ended December 31, 2025, and December 31, 2026. Answer: Gross profit = (cost incurred to date / estimated total cost) × (estimated gross profit) - (gross profit previously recognized) 2025: $2,000,000 (Percent complete × Estimated gross profit) - Gross profit previously recognized = ($7 million / $35 million) × $10 million - $0 = $2,000,000 2026: $1,000,000 (Percent complete × Estimated gross profit) - Gross profit previously recognized = [($31 million / $40 million) × $5 million] - $2 million = $1,875,000 Diff: 2 Type: ES Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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18) WestCoast Co. started a contract in June 2025 to build a bridge at a fixed price of $14 million. The bridge was to be completed by October 2027. Total cumulative costs incurred by the end of December 2025 and 2026 were $2 million and $6 million, respectively. WestCoast Co. is unable to estimate the total costs of the project prior to completion. Final costs at the end of the project totaled $11 million. Required: Determine the amount of revenue, cost of sales, and gross profit WestCoast Co. would report in 2025, 2026, and 2027. 2025

2026

2027

Revenue Cost of sales Gross profit Answer: Remember that the company is unable to estimate the total costs and must use the cost recovery method.

Revenue (= cost of sales) Cost of sales Gross profit

2025 $2,000,000 2,000,000 $0

2026 $4,000,000 4,000,000 $0

2027 $8,000,000 5,000,000 $3,000,000

Diff: 1 Type: ES Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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19) Jones Contractors Inc. agreed to construct a building for $500,000. Construction commenced in 2025 and was completed in 2027.

Costs incurred during the year Estimated costs to complete Billings during the year Collections during the year

2025 $159,300 290,700 90,000 82,500

2026 $217,405 81,295 200,000 199,000

2027 $103,295 0 210,000 207,000

Required: For each of the three years, determine the following amounts relating to the above contract: revenue, expenses, gross profit, accounts receivable balance, and construction-in-process inventory balance. 2025

2026

2027

Revenue Expenses Gross profit (loss) Accounts receivable at end of year Construction in process inventory at end of year

Answer: 2025 Revenue — current year (Percent complete × Contract revenue) - Revenue previously recognized Expenses Gross profit (loss)

2026 $234,250

$177,000

2027 $88,750

[($159.3 / $450 × $500) - $0] $159,300 $17,700

[($376.705 / $458 × $500) $177] $217,405 $16,845

[$500 - $177 $234.250] $103,295 $(14,545)

2025

2026

2027

$8,500 ($7.5 + $200 -$199)

$11,500

$411,250

$500,000

Accounts receivable at end of year (Uncollected A/R from last year + $7,500 Billings during the year — ($0 + $90 - $82.5) Collections during the year) Construction in process inventory at $177,000 end of year (Open balance from last ($0 + $159.3 + year + Expenses + Gross profit) $17.7)

Diff: 2 Type: ES Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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20) On July 1, 2025, Cusak Construction Company Inc. contracted to build an office building for Candy Lane Corp. for a total contract price of $2,150,000. On July 1, Cusak estimated that it would take between two and three years to complete the building. In October 2027, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Candy Lane in 2025, 2026, and 2027.

Costs incurred to date Estimated costs to complete Billings to Candy Lane

2025 $340,000 1,360,000 590,000

2026 $1,150,000 1,150,000 1,000,000

2027 $2,400,000 0 2,100,000

Required: Using the percentage of completion method, calculate the revenue and profit or loss to be recognized as a result of this contract for the years ended December 31, 2025, 2026, and 2027. The company used the cost-to-cost method to estimate the percentage complete. Answer: 2025 2026 2027 Revenues — current year $430,000 $645,000 $1,075,000 Expenses 340,000 810,000 1,250,000 Gross profit (loss) before prudence adjustment 90,000 (165,000) (175,000) Prudence adjustment for expected loss/reversal 0 (75,000) 75,000 Gross profit (loss) $90,000 $(240,000) $(100,000) Diff: 2 Type: ES Skill: Computational Objective: 4.3 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates.

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Learning Objective 4 1) Which statement best explains the completed contract method? A) An accounting method that defers revenue and expense recognition until the date when the contractor completes the project. B) An accounting method that recognizes revenue and expenses on a contract in proportion to the degree of progress. C) An accounting method that recognizes an amount of revenue equal to the costs that are expected to be recovered on the contract. D) An accounting method that recognizes revenue and expenses based on the fair value of the contract. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

2) Which statement best explains the cost recovery method? A) An accounting method that recognizes revenue and expenses on a contract only after it is completed. B) An accounting method that recognizes revenue and expenses on a contract in proportion to the degree of progress. C) An accounting method that recognizes contract costs as incurred and an amount of revenue equal to the costs that are expected to be recovered on the contract. D) An accounting method that recognizes revenue and expenses based on the fair value of the contract. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

3) Which accounting method is permitted under ASPE for construction contracts in limited circumstances? A) An accounting method that recognizes revenue and expenses on a cash basis. B) An accounting method that recognizes revenue and expenses only after it is completed. C) An accounting method that recognizes costs as incurred and an amount of revenue equal to the costs that are expected to be recovered on the contract. D) An accounting method that recognizes revenue and expenses based on the fair value of the contract. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

4) Which statement about the cost recovery method is correct? A) The method recognizes contract revenues on a cash basis. B) The method recognizes revenue and expenses in proportion to the degree of progress. C) This method recognizes defers any profit until the contract is completed. D) This method is the preferred method for recognizing revenue. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

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5) How is the prudence principle applied to the accounting for construction contracts? A) If a loss is expected on the contract, all of this loss is immediately recognized. B) Only a proportional amount of revenue and expenses are recorded each year. C) If a loss is expected on the contract, a loss is recognized in the current year based on the degree of completion. D) Under this principle, good news is reflected earlier than bad news. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

6) Which formula explains how gross profit is recognized when an overall loss is expected on the contract under the percentage completion method? A) Cost incurred / Estimated total cost. B) (Cost incurred / Estimated total cost) × Contract revenue - Revenue previously recognized. C) (Cost incurred / Estimated total cost) × Estimated total cost - Cost of sales previously recognized. D) 100% × (Estimated gross loss) - (Gross profit/loss previously recognized). Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

7) Smile Operators entered into a contract to build a swimming complex for $1,800,000. Construction commenced on July 1, 2025, with a planned completion date of December 31, 2027. A summary of the related accounting information is provided below:

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2025 $400,000 1,200,000 360,000 300,000

2026 $500,000 600,000 440,000 410,000

2027 $650,000 0 1,000,000 1,090,000

How much gross profit would be recognized in 2026 if the company uses the completed contract method under ASPE? A) $0 B) $120,000 C) $220,000 D) $250,000 Answer: A Diff: 2 Type: MC Skill: Computational Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

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8) Tradel Construction Company entered into a contract to build a condominium building for $1,800,000. Construction commenced on July 1, 2025, with a planned completion date of December 31, 2027. A summary of the related accounting information is provided below:

Costs incurred during the year Estimated costs to complete at year end Billings during the year Cash collections during the year

2025 $400,000 1,200,000 360,000 300,000

2026 $500,000 600,000 440,000 410,000

2027 $650,000 0 1,000,000 1,090,000

How much gross profit would be recognized in 2027 if Tradel uses the completed contract method? A) $0 B) $120,000 C) $220,000 D) $250,000 Answer: D Explanation: D) $1,800,000 - ($400,000 + $500,000 + $650,000) = $250,000 Diff: 3 Type: MC Skill: Computational Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

9) Assume the following facts for a construction contract that was completed over four years. The contract price is $5.1 million.

Costs incurred to date Estimated costs to complete

2025 2026 2027 2028 $750,000 $2,033,000 $2,610,000 $4,350,000 2,250,000 3,317,000 1,740,000 0

Using the percentage of completion method, calculate the gross profit or loss to be recognized as a result of this contract for each of the four years. The company used the cost-to-cost method to estimate the percentage complete. Answer: The question only asks for the gross profit or loss, so we can simply apply the normal formulas. Note: Normal circumstances (2025, 2027, 2028) and expected loss on the contract (2026).

2025 2026 2027 2028

GP = (Estimated % Complete or 100% if expected loss) × (Estimated GP) - (GP previously recognized) [($750,000 / $3,000,000 × 100%] × ($2,100,000) - ($0) = $525,000 100% × ($250,000 loss) - $525,000 = ($775,000) [($2,610,000 / $4,350,000) × 100%] × $750,000 - ($250,000 loss) = $700,000 100% × $750,000 - $450,000 = $300,000

Diff: 2 Type: ES Skill: Computational Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

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10) What are three exceptions to the use of the percentage of completion method for construction contracts? Answer: • When the enterprise expects a loss on a contract, prudence requires that 100% of the loss be recognized immediately. • The cost recovery method should be used when the enterprise cannot reasonably estimate the outcome of the construction contract. • Enterprises eligible to use guidance in ASPE may use the completed contract method. Diff: 1 Type: ES Skill: Conceptual Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

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11) Southtel is a builder of large digital networks. In the midst of the high-tech euphoria, the company bid and won a $48,000,000 contract to build a network for the country of Elbonia. Details on the project over the last three years are as follows:

Cumulative costs incurred Additional costs to complete as estimated at year end Amounts invoiced to customer in the year Cash collected in the year from the customer

Year 1 Year 2 Year 3 $16,500 $36,000 $54,000 49,500 13,500 10,500

12,000 26,000 25,000

0 21,000 12,500

Required: Calculate the amount of revenue, cost of goods sold (COGS), and gross profit (or loss) to be recognized in each of the three years. The company uses the percentage of completion method to account for long-term contracts. Record your answer in the following table. Year 1 Revenue Less: Cost of goods sold Less: Expected loss (recovery) Gross profit (loss)

Year 2

Year 3

Total $48,000 54,000 0 $(6,000)

$16,500 $(13,500)

Answer: Revenue (Percent complete × Contract revenue) — Revenue previously recognized Less: Cost of goods sold (Cumulative costs of current year — cumulative costs of prior year) Less: Expected loss (recovery) Cost overrun in year 1, then cost containment in year 2 Gross profit (loss)

Year 1 $12,000

Year 2 $24,000

Year 3 $12,000

Total $48,000

16,500

19,500

18,000

54,000

13,500

(13,500)

$(18,000)

$18,000

$(6,000)

Diff: 2 Type: ES Skill: Computational Objective: 4.4 Apply the accounting standards for long-term contracts when profitability is in doubt.

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Learning Objective 5 1) Why is there risk of earnings overstatement in accounting for construction contracts? A) The long term nature of such contracts makes them a low risk area. B) Allocation of revenue and expenses between two or more periods simplifies the accounting. C) Significant professional judgment is required to make estimates used in the calculations. D) Percentage of completion method reduces the potential for earnings management, manipulation and errors. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

2) What are some ways in which earnings management on construction contracts can be minimized? A) Determining the degree of completion in a manner that best represents the underlying performance of the project. B) Judiciously making estimates for the cost-to-cost approach that maximize earnings in the current year. C) Underestimating future costs. D) Not using engineering estimates or the cost-to-cost approach. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

3) Which statement is correct about the impact of estimation errors on construction contracts? A) Underestimating future costs decreases the percentage complete ratio. B) Overestimating future costs increases the percentage complete ratio. C) Underestimating future costs increases the profit recognized in future periods. D) Underestimating future costs increases the profit recognized in the current period. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

4) Which statement is correct about unintentional errors on construction contracts? A) Unintentional underestimates or overestimates may not be errors. B) Errors are misstatements that should not have been made based on the information available at the time. C) Both statements are correct. D) Neither statement is correct. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

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5) Which statement is correct about the "winner's curse"? A) Misstatements from the winner's curse are unintentional under-estimates or over-estimates. B) Misstatements from the winner's curse result from the unavailability of correct information. C) The winner's curse means a contract is usually awarded to the highest bidder. D) The winner's curse means that a contract will tend to be awarded to the contractor who underestimates costs the most. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

6) What disclosures are required under IFRS for construction contracts? A) Method used to determine the percentage complete in the period. B) Contract revenue recognized in the period. C) Method of revenue recognition. D) All of the above are required. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

7) Briefly explain the following terms: a) Non-monetary exchange transaction b) Consignment transaction c) Franchise d) Installment sale Answer: a) Non-monetary exchange transactions: The exchange of goods or services with little or no monetary consideration. b) Consignment: An arrangement where one party (the consignor) provides goods to a second party to sell; however, the second party (the consignee) has the right to return all or a portion of the goods to the first party if the goods are not sold. c) Franchise: A commercial arrangement in which one party (the franchisor) licenses its trademarks, business practices, and so on to another (the franchisee). d) Installment sale: An arrangement whereby the seller allows the buyer to make payments over an extended period of time while the buyer receives the product at the beginning of the installment period. Diff: 1 Type: ES Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

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8) Explain whether each of the following transactions would be accounted for as a change in accounting policy, change in accounting estimate, or as an error correction. Assume that the entity reports its financial results in accordance with ASPE and all transactions are material. Transaction Appropriate accounting During the audit of the 2026 fiscal year, the auditors learned that Soorya Mining Inc. should have had used an average price of $850/oz for its fiscal 2026 reporting, not $840/oz. During the audit of the 2026 fiscal year, the auditors learned that Everlast Construction used the cost recovery method to account for its long-term contracts as it could not reasonably estimate the outcome of its performance obligations. Everlast has since improved its estimating capabilities and has adopted the percentage of completion method. During the audit of the 2026 fiscal year, the auditors learned that Everlast Construction previously used the completed contract method. During the year Everlast adopted the percentage of completion method.

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Answer: Transaction Appropriate accounting During the audit of the 2026 fiscal year, the auditors learned that Soorya Mining Inc. should have had used an average price of $850/oz for its fiscal 2026 reporting, not $840/oz. Error correction This is the adoption of a new policy, rather than a change in accounting policy. Paragraph 16 of IAS 8 provides that it is not During the audit of the 2026 fiscal year, a change of accounting policy when a the auditors learned that Everlast policy is applied for transactions, other Construction used the cost recovery events or conditions that differ in substance method to account for its long-term from those previously occurring. In this contracts as it could not reasonable instance the entity previously had a estimate the outcome of its performance condition where it could not reliably obligations. Everlast has since improved estimate the outcome of the performance its estimating capabilities and has obligation. This has now changed and the adopted the percentage of completion entity can reliably estimate the outcome of method. the performance obligation. Error correction. Changing from an During the audit of the 2026 fiscal year, incorrect policy (completed contract the auditors learned that Everlast method) to an allowable policy (percentage Construction previously used the of completion) is an error correction, rather completed contract method. During the than a change in policy, as the company year Everlast adopted the percentage of should not have used the incorrect policy in completion method. the first place. Diff: 3 Type: ES Skill: Conceptual Objective: 4.5 Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

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Comprehensive Learning Objectives 1) Creation Construction Company (CCC) has contracted to build an office building for Property Corp. The construction started on January 1, 2026, and the project was completed on July 1, 2029. The contract price was $70 million. Due to uncertainties in the construction process, the two parties to the project agreed to a risk-sharing arrangement whereby Property Corp. covers 50% of all cost overruns in excess of the originally estimated cost of $65 million (e.g., if estimated total costs are $69 million, then CCC would receive an additional $2 million for the contract). The following data relate to the construction period.

Costs incurred to date Estimated costs to complete Billings during the year Collections during the year

2026 $16,500 49,500 24,000 19,000

2027 $42,900 35,100 38,600 35,100

2028 $56,100 9,900 61,600 58,100

2029 $69,000 0 ???? 68,500

Required: Calculate the estimated gross profit (loss) for 2026, 2027, 2028, and 2029, assuming that the percentage of completion method is used. Answer: GP = (Estimated % Complete or 100% if expected loss) × (Estimated GP) - (GP previously recognized). (000s) [($16,500 / $66,000) × 100%] × ($4,500) - ($0) = $ 1,125 [[$4,500 = 2026 ($70,000 - $66,000) + [50% × ($66,000 -$ 65,000)]]] 100% × ($1,500) - $1,125 = ($2,625) (Estimated costs = $42,900 + $35,100 = $78,000. Estimated costs - originally estimated costs = $78,000 - $65,000 = $13,000. customers responsibility 50%. $13,000 × 50% = $6,500. Revised contract amount is $70,000 + $6,500 = 2027 $76,500. $76,500 - $78,000 = $1,500 loss.) 2028 [($56,100 / $66,000) × 100%] × $4,500 - ($1,500 loss) = $ 5,325 100% × $3,000 - $3,825 = ($ 825); ($69,000 - $65,000 = $4,000; $4,000 × 50% = $2,000; $70,000 + $2,000 = $72,000; $75,000 - $72,000 = $3,000 overall profit for the contract). ($1,125 - $2,625 + $5,325 2029 $825 = $3,000). Diff: 3 Type: ES Skill: Computational Objective: 4.3/ 4.4 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates./Apply the accounting standards for long-term contracts when profitability is in doubt.

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2) Apartment King (AK) is building a luxury condominium for a contract price of $68,000,000. This is estimated to be a three-year project with an estimated cost of $54,000,000. AK uses the percentage of completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following is the best available information at the end of each year:

Costs incurred each year Estimated costs to complete Billings Collections

Year 1 $9,000 51,000 13,000 9,000

Year 2 $31,500 27,000 29,500 26,500

Year 3 $20,000 0 25,500 32,500

Required: a. Calculate the amount of gross profit to be recognized in Year 1, Year 2, and Year 3. Show computations in tabular form provided below. Year 1

Year 2

Year 3

Cost incurred to date Estimated cost to complete Estimated total cost Contract price Estimated gross profit % complete Gross profit to date Gross profit previously recognized Current gross profit b. Prepare all the journal entries required in Year 2. c. Prepare the journal entry required in Year 3 to close the accounts related to the project. d. At the end of Year 2, if the estimated cost to complete is $28 million (instead of $27 million), how much gross profit would be recognized in Year 2?

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Answer: a. (in $ thousands) Notes Cost incurred to date A Estimated cost to complete B Estimated total cost C=A+B Contract price D Estimated gross profit D-C % complete E = A/C Gross profit to date F = DE Gross profit previously recognized G Current gross profit F-G

1 $9,000 51,000 60,000 68,000 8,000 15% 1,200 0 $1,200

b. (Year 2 - in $ thousands) Costs incurred Dr. CIP Cr. Cash, A/P

2 $40,500 27,000 67,500 68,000 500 60% 300 1,200 $(900)

3 $60,500 0 60,500 68,000 7,500 100% 7,500 300 $7,200

31,500 31,500

Billings Dr. A/R

29,500 Cr. Billings on construction in progress

Collections Dr. Cash Cr. A/R

29,500

26,500 26,500

Revenue (income) recognition Dr. COGS Cr. Revenue Cr. CIP

31,500 30,600 900

c. Dr. Billings on construction in progress Cr. CIP

68,000 68,000

d. GP = (Estimated % Complete or 100% if expected loss) × (Estimated GP) - (GP previously recognized); ($500 loss) × 100% - $1,200 = $1,700 loss Diff: 3 Type: ES Skill: Computational Objective: 4.3/ 4.4 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates./Apply the accounting standards for long-term contracts when profitability is in doubt.

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3) Buildings Ltd. is constructing a residential building in downtown Vancouver for a contract price of $15,000,000. Costs for this contract were initially estimated to be $12,000,000. The company uses the percentage of completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following information is available: Year 1 $4,500 7,500 6,000 5,000

Costs incurred each year Additional costs to complete estimated at year end Billings Collections

Year 2 $8,500 5,000 6,000 6,500

Year 3 $2,000 0 3,000 3,500

Required: a. Calculate the amount of gross profit to be recognized in each year. Show computations in good form. b. Calculate the amount of revenue to be recognized in Year 2. c. Prepare all the journal entries required in Year 2. d. Prepare the journal entry required in Year 3 to acknowledge completion and acceptance of the project.

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Answer: a. Gross profit (loss) GP = (Estimated % Complete or 100% if expected loss) × (Estimated GP) - (GP previously recognized) Year 1 [($4,500,000 / $12,000,000 × 100%] × ($3,000,000) - ($0) = $1,125,000 Year 2 100% × ($3,000,000 loss) - $1,125,000 = ($4,125,000) Year 3 100% × 0 - ($3,000,000 loss) = $3,000,000 b. Revenue = % complete × estimated total revenue – revenue previously recognized = (13,000 / 18,000) × 15,000 - 5,625 = $5,208k c. (in $ thousands) Costs incurred Dr. Construction in progress (CIP) Cr. Cash, A/P

8,500 8,500

Billings Dr. A/R

6,000 Cr. Billings on construction in progress

Collections Dr. Cash Cr. A/R

6,000

6,500 6,500

Revenue and expense recognition Dr. COGS Cr. Revenue Dr. Expected loss on LT contract Cr. CIP

8,500 5,208 833 4,125

d. Project completion Dr. Billings on construction Cr. CIP

15,000 15,000

Diff: 3 Type: ES Skill: Computational Objective: 4.3/ 4.4 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates./Apply the accounting standards for long-term contracts when profitability is in doubt.

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4) In early 2023, Ecotravel Corp. won a contract to build a rapid transit line connecting downtown Vancouver to the airport and the suburb of Richmond (the RAV line). The contract was for $2.2 billion to be received over the construction period of six years, ending in November 2029. Ecotravel has a December 31 year-end and uses the percentage of completion method to account for long-term contracts. Required: a. Ecotravel's management expects the gross profit on the total project to be 20%, and that $352 million would be incurred on the project by December 31, 2023. 1. How much gross profit (or loss) will Ecotravel record in the 2023 fiscal year if management's estimates are accurate? 2. Provide the journal entry to record revenue, cost of goods sold, and expected loss (if applicable) for fiscal 2023. b. Assume that it is now early 2027 and you are preparing the adjusting entries for 2026. The accounting records indicate that, by the end of 2025, a total of $758 million in revenue and $680 million in cost of goods sold had been recorded. You also know that $372 million in costs were incurred on the project in 2026, and management's best estimates indicate another $1,208 million in costs will be required to complete the project. 1. How much gross profit (or loss) should Ecotravel record in the 2026 fiscal year if management's estimates are accurate? 2. Provide the journal entry to record revenue, cost of goods sold, and expected loss (if applicable) for fiscal year 2026. Answer: a. 1. GP = (Estimated % Complete or 100% if expected loss) × (Estimated GP) - (GP previously recognized) = ($440) × 20% - $0 = $88 million 2. Journal Entry (in $ millions) Dr. COGS Dr. CIP

352 88 Cr. Revenue

440

b. 1. GP = (Estimated % Complete or 100% if expected loss) × (Estimated GP) - (GP previously recognized) = ($60 loss) × 100% - 78* = ($138) million loss. *$758 - $680 = $78. Since a loss is projected, record 100% of loss. 2. Journal entry (in $ millions) Dr. COGS Dr. Expected loss Cr. CIP Cr. Revenue

372 32 138 266

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5) ACME is investing in a new heavy oil rig operation in northern Alberta. ACME has hired Max Contractors to construct the facilities. The contract price is $4,450 million to be completed over four years. The following information pertains to this construction contract. (all amounts in $ millions) Year 1 Year 2 Year 3 Year 4 Cumulative costs incurred to date $1,170 $1,600 $2,760 $4,500 Estimated additional costs to complete 2,730 2,400 1,840 0 Billings on construction in progress 1,175 1,575 1,675 25 Cash collected in the year 1,145 1,555 1,685 65

Required: (Show all dollar amounts in millions.): a. Calculate the amount of revenue, expense, and gross profit to be recognized in the accounts of Max Contractors in each of the four years. b. If Max were to underestimate the cost to complete to be $1,690 million instead of $1,840 in Year 3, how much gross profit or loss would be recognized in each year? How much more or less gross profit or loss would be reported in that year? How much more or less gross profit or less would be reported in Year 4, and in total for all four years? c. Explain how Max would account for this project if there were significant uncertainty over the outcome of the contract, such that Max could not clearly identify or measure the construction costs. d. Explain what the completed contract method is, and which entities can use this approach.

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Answer: a. (all amounts in $ millions) Revenue - current year (*) Expenses Gross profit(loss) before prudence Price adjustment for expected loss accrual/reversal Gross profit/loss

Year 1 Year 2 Year 3 Year 4 $1,335 $445 $890 $1,780 1,170 430 1,160 1,740 165 15 (270) 40 0 $165

0 $15

(60) $(330)

60 $100

Revenue Yr 1: (1,170/ (1170 +2730) × 4,450 - (previous revenue recognized) = 1,335 b. (all amounts in $millions) Year 1 Year 2 Year 3 Year 4 Revenue - current year $1,335 $445 $979 $1,691 Expenses 1,170 430 1,160 1,740 Gross profit(loss) before prudence 165 15 (181) (49) Price adjustment for expected loss accrual/reversal 0 0 0 0 Gross profit/loss $165 $15 $(181) $(49) Underestimating the cost to complete the project in Year 3 results in ∙ no change to Year 1 profits ∙ an increase of 149 million to Year 3 profits ∙ a decrease of 149 million to Year 4 profits ∙ no change to cumulative profits over the 4 years. c) If Max cannot reliably estimate the contract costs, it must use the cost recovery method. The cost recovery method recognizes (1) contract costs incurred in the period as expenses and (2) an amount of revenue equal to the costs that are expected to be recoverable as part of the contract. Thus, this method defers any profit on the contract to the completion date. In addition, the prudence principle continues to apply, so that any expected losses will be recognized immediately. d) The completed contract is permitted under ASPE for private enterprises. This method defers revenue and expense recognition until the date when the contractor completes the project, instead of periodically over the life of the contract under the percentage of completion method. The prudence principle still applies, such that any losses are still recognized in the period first anticipated. In short, profits are deferred but losses are not. Diff: 2 Type: ES Skill: Computational Objective: 4.3/ 4.4/ 4.5 Apply the revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates./Apply the accounting standards for long-term contracts when profitability is in doubt./Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

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6) Coral Corporation builds large cruise ships on a contract basis. The company uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2026, year-end. (all amounts in $ millions) Cost incurred to date Costs to complete contracts Total price of contracts outstanding at December 31, 2026 Revenue

2025 $200 800

2026 $400 600

2,000 ????

2,500 ????

Required: a. Calculate the revenue to be recognized in 2025 and in 2026. b. While examining the Coral financial statements, the auditors noted that there was an error in the estimate of costs to complete the contracts in 2025. The cost to complete should have been $600 million instead of $800 million. Explain how this would be accounted for in the financial statements. c. In light of the evidence noted in (b), how much revenue should be recognized in 2026? Answer: a. 2025: $400 million (Percent complete × Contract revenue) - Revenue previously recognized = ($200 / $1,000) × $ 2,000 = $400 million 2026: $600 million (Percent complete × Contract revenue) - Revenue previously recognized = ($400 / $1000) × $2,500 - $400 = $600 million b. This will be retrospectively accounted for as an error correction. This is not a change in estimate that is accounted for prospectively. c. Must first correct 2025 error and then calculate 2026. 2025 error correction: (Percent complete × Contract revenue) - Revenue previously recognized = ($200 / $800) × $2,000 = $500 million 2026 calculation: (Percent complete × Contract revenue) - Revenue previously recognized = ($400 / $1000) × $2,500 - $500 = $500 million Diff: 1 Type: ES Skill: Computational Objective: 4.3/ 4.5 Apply the specific revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates./Evaluate the risks of revenue misstatements and the appropriateness of revenue recognition policies in specific circumstances by applying professional judgment.

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7) Community Apartments Inc. (CA Inc.) is building a luxury condominium for a contract price of $68,000,000. This is estimated to be a three-year project with an estimated cost of $54,000,000. CA Inc. uses the percentage-of-completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following is the best available information at the end of each year:

Costs incurred each year Estimated costs to complete Billings Collections

Year 1 Year 2 Year 3 $9,000 $31,500 $20,000 51,000 27,000 0 8,000 34,500 25,500 7,000 28,500 32,500

Required: a. Compute the amount of gross profit to be recognized in Year 1, Year 2, and Year 3. Show computations in tabular form provided below: Year 1 Year 2 Year 3 Cost incurred to date Estimated cost to complete Estimated total cost Contract price Estimated gross profit % complete Gross profit to date Gross profit previously recognized Current gross profit b. Determine the performance that would be reported under the cash basis and accrual basis of accounting for Year 1 of this company. Explain how revenues are matched with expenses when the percentage of completion basis is used. c. Complete the PARTIAL Balance Sheet for Year 1. Current assets Accounts Receivable Inventories

Current Liabilities Unearned revenue

61 .

Answer: a. ( in $ thousands) Cost incurred to date Estimated cost to complete Estimated total cost Contract price Estimated gross profit % complete Gross profit to date Gross profit previously recognized Current gross profit

Notes A B C=A+B D D-C E = A/C F = DE G F-G

1 $9,000 51,000 60,000 68,000 8,000 15% 1,200 0 1,200

2 $40,500 27,000 67,500 68,000 500 60% 300 1,200 (900)

3 $60,500 0 60,500 68,000 7,500 100% 7,500 300 $7,200

b. Under the cash basis of accounting, cash flow from operations would consist of the cash inflows less the cash outflows: $7,000 - $9,000 = net outflow of $2,000 (i.e. Performance loss) Under the accrual basis of accounting, net income (loss) would be $1,200 as determined above under the percentage of completion basis. Under the percentage of completion method, gross profit is recorded for the percent that the project is complete. By definition, gross profit is revenue - costs; as such, to record revenues under this method, the corresponding costs associated with the revenue must also be recorded/accrued. c. Partial Balance Sheet — Year 1 (in $ thousands) Current assets Accounts Receivable [($8,000 - $7,000)] Inventories CIP Costs incurred Year 1 + GP recognized Year 1 ($9,000) + ($1,200)

$1,000 0

$10,200 Less: Billings 8,000

Current Liabilities Unearned revenue

2,200 $3,200

Diff: 3 Type: ES Skill: Computational Objective: 1.2/ 1.3/ 2.2./ 2.3/ 3.3/ 3.5/ 4.3/ 4.4 Apply the concepts of information asymmetry, moral hazard, conceptual framework, accrual accounting, and the articulation of financial statements to the accounting principles for construction contracts.

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8) Destiny Apartments Inc. (DA Inc.) is building a luxury condominium for a contract price of $68,000,000. This is estimated to be a three-year project with an estimated cost of $54,000,000. DA Inc. uses the percentage of completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following is the best available information at the end of each year: Year 1 Costs incurred each year Estimated costs to complete Billings Collections

Year 2 $9,000 51,000 13,000 9,000

Year 3 $31,500 27,000 29,500 26,500

$20,000 0 25,500 32,500

Required: a. Explain how the percentage completion method reduced information asymmetry and guards against moral hazard. b. Compute the amount of gross profit to be recognized in Year 1, Year 2, and Year 3. Show computations in tabular form provided below: Year 1 Year 2 Year3 Cost incurred to date Estimated cost to complete Estimated total cost Contract price Estimated gross profit % complete Gross profit to date Gross profit previously recognized Current gross profit c. Complete the PARTIAL Balance Sheet for Year 2. Current assets Accounts Receivable Inventories

Current Liabilities Unearned revenue

63 .

Answer: a. Using the percentage of completion method reduces information asymmetry for the investor. The financial statements provide information on the revenue and costs of the project annually over the life of the project. Having this information increases the predictive and feedback value of financial statements and, hence, is more relevant information. This method guards against moral hazard since the most recent cost estimates are used in the calculation; if management attempts to manipulate income in one year, the percentage for the following year will be adjusted and the previous year's overstatement will be revealed to the investors. The ratios and margins would be askew and alert investors of the manipulation attempts. Additionally, this method cannot be used if management is not able to reasonably estimate the costs to be incurred or the stage of completion on a rational or systematic basis. The cost recovery method (IFRS) or completed contract method (ASPE) would then be used. b. (in $ thousands) Cost incurred to date Estimated cost to complete Estimated total cost Contract price Estimated gross profit % complete Gross profit to date Gross profit previously recognized Current gross profit

Notes A B C=A+B D D-C E = A/C F = DE G F-G

1 $9,000 51,000 60,000 68,000 8,000 15% 1,200 0 $1,200

c. Partial Balance Sheet — Year 2 (in $ thousands) Current assets Accounts Receivable Year 1 AR + Year 2 AR [($13,000 - $9,000) + ($29,500 - $26,500)] Inventories

2 $40,500 27,000 67,500 68,000 500 60% 300 1,200 $(900)

$7,000 0 $7,000

Current Liabilities Unearned revenue CIP Costs incurred Year 1 and Year 2 + GP recognized Year 1 & Year 2 ($9,000 + $31,500) + ($1,200 - $900) $40,800 Less: Billings Year 1 + Year 2 $13,000 + $29,500 42,500

64 .

$1,700

3 $60,500 0 60,500 68,000 7,500 100% 7,500 300 $7,200

JE for Year 2 (in $ thousands) — helps with partial BS calculations Costs incurred Dr. CIP 31,500 Cr. Cash, A/P Billings Dr. A/R

31,500

29,500 Cr. Billings on construction in progress

Collections Dr. Cash

29,500

26,500 Cr. A/R

26,500

Revenue (income) recognition Dr. COGS Cr. Revenue Cr. CIP

31,500 30,600 900

65 .

Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 5 Cash and Receivables Learning Objective 1 1) What is NOT included in "cash and cash equivalents"? A) Canadian cash on hand. B) Demand deposits. C) Six-month term deposits. D) Three-month Treasury bills. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

2) Define "cash" and explain how funds that are subject to restrictions should be accounted for in the accounting records. Answer: Cash refers to cash on hand and demand deposits; "cash" refers to legal tender: bills and coins issued by the Bank of Canada (or a foreign government/central bank in the case of foreign currency). Cash represents funds that are readily accessible to settle debts. Any funds that are subject to restrictions should be separately reported outside of current assets. Diff: 1 Type: ES Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

3) Explain why the definition of cash and cash equivalents is important for the financial statements. How would a transfer from one bank account to another be reported in the cash flow statement? Answer: The definition impacts the cash flow statement. Only changes in cash and cash equivalents result in cash flows; changes in the composition of cash and cash equivalents does not constitute a cash flow. Diff: 2 Type: ES Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

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4) Which statement about "cash and cash equivalents" is correct? A) The definition for "cash and cash equivalents" used on the balance sheet differs from the definition for "cash and cash equivalents" used on the cash flow statement. B) A change in the composition of "cash and cash equivalents" is considered an operating activity on the cash flow statement. C) A change in the composition of "cash and cash equivalents" is not considered a cash flow for purposes of the cash flow statement. D) "Cash and cash equivalents" are short term liquid investments that can be converted to cash within a short time frame. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

5) Which of the following is NOT a reason for preparing a bank reconciliation? A) It explains differences between cash in the general ledger and cash on the bank statement. B) It is necessary in order to prevent fraud committed by employees. C) It is helpful in identifying any errors made by the bank. D) It is helpful in identifying any bookkeeping errors made in the general ledger. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

6) Which statement is correct about the bank reconciliation? A) It compares cash in the company's records with those of the bank. B) It does not identify accounting errors made by the bank. C) It interferes with other internal controls over cash. D) It compares cash in the general ledger with the monthly budgets. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

7) What is included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. A) Petty cash. B) Six-month term deposits in Canadian dollars. C) Guaranteed Investment Certificate maturing in 100 days. D) Four-month term deposit in U.S. dollars. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

2 .

8) What is included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. A) Guaranteed Investment Certificate maturing in 181 days. B) Four-month term deposits. C) U.S. cash on hand. D) Guaranteed Investment Certificate maturing in 125 days. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

9) What is included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. A) Short-term, liquid investments convertible into known amounts of cash. B) Short-term, highly liquid investment convertible into known amounts of cash. C) Cash restricted for plant expansion. D) Sinking funds. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

10) What dollar amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 30 days Investment in a money market fund Cash on hand Postage stamps

$12,000 8,000 1,000 1,000

A) $9,000 B) $12,000 C) $21,000 D) $22,000 Answer: C Explanation: C) $12,000 + $8,000 + $1,000 = $21,000 Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

3 .

11) What dollar amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 30 days Investment in a money market fund Cash restricted for plant expansion Three-month term deposits

$11,000 8,000 1,000 2,000

A) $9,000 B) $11,000 C) $21,000 D) $22,000 Answer: C Explanation: C) $11,000 + $8,000 + $2,000 = $21,000 Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

12) What dollar amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Investment in shares of a public company Investment in a money market fund Cash restricted for plant expansion Three-month term deposits

$11,000 8,000 1,000 2,000

A) $8,000 B) $10,000 C) $19,000 D) $21,000 Answer: B Explanation: B) $8,000 + $2,000 = $10,000 Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

4 .

13) What criterion is NOT required for a "cash equivalent"? A) Convertibility into cash. B) Long term investment. C) Insignificant risk of change in value. D) Highly liquid investment. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

14) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Investment in shares of a public company Investment in a money market fund Bonds of a publicly traded company Two-month U.S. dollar term deposits

$12,000 18,000 10,000 24,000

A) $18,000 B) $22,000 C) $30,000 D) $42,000 Answer: D Explanation: D) $24,000 + $18,000 = $42,000 Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

5 .

15) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 140 days Investment in a money market fund U.S. dollar bonds of a publicly traded company Treasury bills maturing in 30 days

$12,000 18,000 10,000 24,000

A) $36,000 B) $42,000 C) $54,000 D) $64,000 Answer: B Explanation: B) $24,000 + $18,000 = $42,000 Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

16) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 125 days Treasury bills maturing in 30 days U.S. dollar chequing account Shares of a U.S. publicly traded company

$12,000 24,000 18,000 10,000

6 .

17) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 140 days Euro-denominated savings account U.S. dollar chequing account Treasury bills maturing in 30 days

$12,000 18,000 10,000 24,000

A) $36,000 B) $42,000 C) $52,000 D) $64,000 Answer: C Explanation: C) $24,000 + $18,000 + $10,000 = $52,000 Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

18) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 30 days Six-month U.S. term deposit U.S. dollars on hand Bonds of a publicly traded U.S. company

$24,000 12,000 18,000 10,000

A) $30,000 B) $36,000 C) $40,000 D) $42,000 Answer: D Explanation: D) $24,000 + $18,000 = $42,000 Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

7 .

19) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 10 days Four-month U.S. term deposit Bonds of a publicly traded U.S. company U.S. treasury bill maturing in 120 days

$12,000 18,000 10,000 24,000

A) $0 B) $12,000 C) $36,000 D) $64,000 Answer: B Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

20) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Euro treasury bills maturing in 140 days U.S. treasury bill maturing in 120 days Bonds of a publicly traded U.S. company U.S. dollars on hand

$12,000 18,000 10,000 24,000

A) $12,000 B) $18,000 C) $24,000 D) $54,000 Answer: C Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

8 .

21) What amount will be included in "cash and cash equivalents"? Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Treasury bills maturing in 101 days Six-month U.S. term deposit Bonds of a publicly traded U.S. company U.S. treasury bill maturing in 120 days

$12,000 18,000 10,000 24,000

A) $0 B) $12,000 C) $36,000 D) $64,000 Answer: A Diff: 2 Type: MC Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

22) Which statement about "cash and cash equivalents" is correct? A) The definition for "cash and cash equivalents" used on the balance sheet differs from the definition for "cash and cash equivalents" used on the cash flow statement. B) A change in the composition of "cash and cash equivalents" is considered a financing activity on the cash flow statement. C) A change in the composition of "cash and cash equivalents" is considered a cash flow for purposes of the cash flow statement. D) The definition for "cash and cash equivalents" used on the balance sheet is the same as the definition for "cash and cash equivalents" used on the cash flow statement. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

23) Explain why a bank reconciliation is necessary. Answer: • A bank reconciliation ties together the amount of cash according to a company's records and the amount of cash according to the bank that holds its funds. • The reasons for preparing a bank reconciliation are threefold: to understand why the two sets of records differ, to identify any bookkeeping errors by either entity; and to contribute to the internal control over cash. • From a cash perspective, there will be timing differences between transactions being recorded in the general ledger for accounting purposes and when those transactions actually clear through the bank. Bank reconciliations use records from the enterprise and its bank to determine the corrected cash balance that should be used for financial reporting purposes. Diff: 1 Type: ES Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

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24) Identify the three criteria for classifying an investment as a cash equivalent. Answer: Cash equivalents must be (i) readily convertible to known amounts of cash (convertibility), (ii) have insignificant risks of changes in value (substantially risk-free), and (iii) be held for the purpose of meeting short-term cash commitments. Diff: 1 Type: ES Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

25) Identify if the following investments meet the requirements to be classified as cash and cash equivalents. Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. Cash and Readily cash convertible Risk of change in equivalents to cash? cash value? (Yes/No) (Yes/No) (High/Med/Low) a. b.

Chequing account in U.S. dollars Investment in a mutual fund that invests in common shares of public corporations c. Investment in long-term government bonds d. Term deposit maturing 100 days after the year-end e. Cash in a sinking fund account for a future re-purchase of common shares Answer: Cash and Readily cash convertible Risk of change in equivalents to cash? cash value? (Yes/No) (Yes/No) (High/Med/Low) a. Chequing account in U.S. dollars Yes Yes Low b. Investment in a mutual fund that invests No Yes High in common shares of public corporations c. Investment in long-term government No Yes Moderate bonds d. Term deposit maturing 100 days after No No Low the year-end e. Cash in a sinking fund account for a No No None future re-purchase of common shares Diff: 1 Type: ES Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

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26) Identify whether each of the following items should be classified in "cash and cash equivalents" on the balance sheet. Assume that (i) investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments and (ii) the reporting entity has operations in Canada. Cash and Readily cash convertible equivalents to cash?

Risk of change in cash value?

Cash and Readily cash convertible equivalents to cash? a. Negative balance in a chequing account Yes Yes (overdraft) b. Investment in Treasury bills maturing 70 Yes Yes days after the year-end c. 100 ounces of silver No Yes d. Chequing account in Canadian dollars Yes/No Yes e. Investment in U.S. government Treasury Yes/No Yes bills maturing 80 days after the year-end

Risk of change in cash value? None

Negative balance in a chequing account (overdraft) b. Investment in Treasury bills maturing 70 days after the year-end c. 100 ounces of silver d. Chequing account in Canadian dollars e. Investment in U.S. government Treasury bills maturing 80 days after the year-end Answer:

Low High Depends Depends

Diff: 2 Type: ES Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

27) During May 2026, ABC Company wrote a cheque (#345) to a supplier as a payment on its account. The cheque was written for the correct amount of $16,900. The May bank statement listed the cheque at $61,900 and an ending account balance of $(50,500) in overdraft.

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Required: a. Given the above information, prepare the portion of the May cash reconciliation that reconciles the bank balance to the cash balance to be used in the financial statements. b. Where on the balance sheet should the cash (or overdraft) balance be shown? Answer: a. ABC Company Bank Reconciliation May 31, 2026 Balance per bank statement ($50,500) Cheque #345 incorrectly recorded by bank 61,900 Cheque #345 correct amount (16,900) Corrected cash balance ($5,500) b. The overdraft balance should be included in assets as an offset against cash and cash equivalents, not as a separate liability. Should the overall balance of cash and cash equivalents be negative, the amount would then be reported as a current liability. Diff: 1 Type: ES Skill: Conceptual Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

28) Pomegranate Company's bank balance on its October 31, 2026, bank statement is $11,500. Pomegranate's accountant is preparing a bank reconciliation and determined that three cheques issued by Pomegranate to its suppliers for a total of $6,500 had not yet cleared the bank. Also, a deposit for $700 made by Pomegranate on October 31 did not appear on the bank statement. Bank service charges of $240 appear on the bank statement but have not yet been recorded in the general ledger. Given the above information, prepare a bank reconciliation to determine the correct cash balance that should be reflected in Pomegranate's general ledger at October 31, 2026. Answer: Pomegranate Company Bank Reconciliation October 31, 2026 Balance per bank statement $11,500 Outstanding cheques (6,500) Outstanding deposit 700 Bank service charges (240) Corrected cash balance $5,460 Diff: 1 Type: ES Skill: Computational Objective: 5.1 Apply the standards and procedures for recording, reconciling, and reporting cash and cash equivalents.

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Learning Objective 2 1) Which statement about internal controls over cash is correct? A) A bank reconciliation is the only control required for cash. B) A bank reconciliation is designed for detection of problems after the fact. C) A bank reconciliation is a tool to investigate employee fraud. D) A bank reconciliation is designed to prevent problems from happening. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

2) Which of the following would NOT be an example of segregation of duties? A) Sales employees have restricted ability to delete or modify accounts receivables. B) Employees make sales to customers and record the credit sales in the accounts receivables. C) Customer refunds are recorded on a written credit note. D) Employees depositing funds to the bank do not prepare the bank reconciliation. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

3) Which of the following would be an example of segregation of duties? A) Sales employees have the ability to delete or modify accounts receivables. B) Employees who make sales to customers record the credit sales in the accounts receivables. C) Customer refunds are not recorded on a credit note. D) Employees depositing funds to the bank do not prepare the bank reconciliation. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

4) What is one way to segregate duties to improve controls over cash? A) Request all customers to pay in cash. B) Separate sales employees from employees who book the accounting entries. C) Request all customers to pay by cheques made payable to "CASH." D) Have the employee who is responsible for making cash deposits to the bank also do the bank reconciliations. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

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5) Which statement about internal controls over cash is correct? A) Internal controls should not be designed to be preventative. B) A bank reconciliation is designed for prevention of problems before the fact. C) Controls should restrict sales staff ability to modify or delete accounts receivable. D) Credit notes should not be issued for customer refunds. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

6) Small Company (SC) is in its fourth year of retail operations. The owner/manager previously employed a part-time bookkeeper to sign cheques as well as to prepare journal entries, bank reconciliations, and monthly financial statements. SC has just hired you as the first full-time accountant to replace the bookkeeper, and you are preparing the December 31, 2026, financial statements. Required: a. Briefly explain the concept of "segregation of duties." b. Identify an internal control issue relating to SC's cash-handling procedures, and provide your recommendation(s) to improve SC's internal controls over cash. Answer: a. Segregation of duties is intended to ensure that a person in a position to misappropriate assets like cash is not in a position to cover up the theft. b. The existing cash-handling procedures are not sufficiently segregated. In fact, they are not segregated at all. The bookkeeper both handles the cash and prepares the bank reconciliation. To mitigate the risk of embezzlement, SC should assign someone other than me (the accountant) to prepare the bank reconciliations. Diff: 1 Type: ES Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

7) Explain why it is important to segregate duties of employees dealing with cash in an organization. Provide at least three examples of ways which this segregation could be made on the receivables side. Answer: Segregation of duties prevents any single employee from mishandling cash and/or changing the accounts receivable records for personal gain. When duties are segregated, fraud requires collusion among two or more employees, which is much more difficult to execute. • Restrict the ability of sales staff to modify or delete accounts receivable. Credits or refunds (for defective items, for example) need to be recorded by credit note. • Assign employees with no access to accounts receivable the task of recording cash and cheques received. • Assign different employees the task of depositing funds to the bank. • Have accounts receivable staff (separate from the above) record payments against the specific accounts. Diff: 2 Type: ES Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

8) Explain why it is important to segregate duties of employees dealing with cash in an organization.

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Provide an example of ways which this segregation could be made on the payable side Answer: When a company segregates the duties, it prevents any single employee from mishandling cash and/or changing the accounts receivable records for personal gain. When duties are segregated, fraud requires collusion among two or more employees, which is much more difficult to execute. On the payable side, it is important to limit who has access to the accounts payable master file that contains information on suppliers' names, addresses, and so on. Staff responsible for day-to-day processing of suppliers' invoices should not have this access; otherwise, they could obtain approval to pay a particular supplier, then redirect the cheque to a different payee and address. Diff: 2 Type: ES Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

9) Explain some controls that can be used in an organization to safeguard cash and other assets. Answer: • Bank reconciliations and separation of duties are important internal controls to reduce the likelihood of cash misappropriation. • Managerial and customer monitoring are also alternative ways to reduce the risk of fraud. • Internal controls for other assets are as important as for cash because people have less aversion to misappropriating non-cash items. Diff: 1 Type: ES Skill: Conceptual Objective: 5.2 Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations.

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Learning Objective 3 1) What are the general recognition criteria for non-cash assets under GAAP? A) If the item meets the definition of an asset, it must have an indefinite life. B) If the item meets the definition of an expense, it must be measurable. C) In order for the item to be an asset, it will have future economic benefits, be under the entity's control, and result form past transactions. D) Future transactions can be recorded under GAAP. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

2) The following accounts were abstracted from Almond Co.'s unadjusted trial balance at December 31, 2024: Debit Credit Accounts receivable 3,850,000 Allowance for uncollectible accounts 51,000 Net credit sales 5,950,000 The company estimates that 5% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2024, the allowance for doubtful accounts should have a credit balance of A) $192,500 B) $243,500 C) $246,500 D) $297,500 Answer: A Explanation: A) $3,850,000 × 5% = $192,500 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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3) The following accounts were abstracted from Almond Co.'s unadjusted trial balance at December 31, 2024: Debit Credit Net credit sales 2,950,000 Accounts receivable 800,000 Allowance for uncollectible accounts 11,000 The company estimates that 1.5% of the net credit sales will become uncollectible. After adjustment at December 31, 2024, the allowance for doubtful accounts should have a credit balance of A) $11,000 B) $12,000 C) $44,250 D) $55,250 Answer: D Explanation: D) $2,950,000 × 1.5% = $44,250; $44,250 + $11,000 = $55,250 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

4) Which of the following is one of the general criteria for recognizing an asset? A) The item must have future economic benefits. B) The item must have an indefinite life. C) The item must be tangible. D) The item must be material. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

5) A $50,000 sale transaction is made with terms of 2/10, net 30. Assuming that the customer takes the discount, what amount is booked to the "cash discount" account under the gross method of accounting for cash discounts? A) $0 B) $1,000 debit C) $1,000 credit D) $49,000 debit Answer: B Explanation: B) $50,000 × 2% = $1,000 debit Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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6) Jackie Co.'s allowance for doubtful accounts was $15,000 at the end of 2027 and $205,000 at the end of 2026. For the year ended December 31, 2027, Jackie reported bad debt expense of $48,000 in its income statement. What amount did Jackie debit to the appropriate account in 2027 to write off actual bad debts? Answer: $205,000 + $48,000 - $15,000 = $238,000 Diff: 2 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

7) Which statement about receivables is correct? A) Receivables are non-monetary items. B) Monetary items are measured at their present value. C) Trade receivables generally have payments terms extending beyond 3 months. D) Trade receivables should generally be recorded at their discounted present value. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

8) Which statement best describes the gross method of accounting for cash discounts? A) Records receivables at their present value amount. B) Records any discounts forfeited as income. C) Records any discounts taken as a reduction in revenue. D) Records any discounts taken as an expense. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

9) Which statement best describes the net method of accounting for cash discounts? A) Records receivables at their face value. B) Records any discounts forfeited as income. C) Records any discounts taken as an expense. D) Records any discounts taken as a reduction in revenue. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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10) Which statement is correct? A) The "net" method for recording cash discounts is conceptually inferior to the "gross" method. B) Under the "net" method, an entry is needed if the discount is not taken. C) The "gross" method for recording cash discounts is conceptually superior to the "net" method. D) The gross method overstates revenue. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

11) A $50,000 sale transaction is made with terms of 2/10, net 30. Assuming that the customer takes the discount, what amount is booked to the "cash discount" account under the net method of recording a discount? A) $0 B) $1,000 debit C) $1,000 credit D) $49,000 debit Answer: A Explanation: A) discount is booked up front at time of initial sale Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

12) A $50,000 sale transaction is made with terms of 2/10, net 30. What amount is debited to the accounts receivable account when the sale is made under the gross method of accounting for cash discounts? A) $49,000 credit B) $49,000 debit C) $50,000 credit D) $50,000 debit Answer: D Explanation: D) Discount is recorded when cash is received Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

13) Which statement is correct? A) The "gross" method for recording cash discounts is conceptually better than the "net" method. B) The net method understates expenses. C) The gross method overstates revenue. D) Under the "gross" method, an entry is needed if the discount is taken. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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14) Which statement is correct? A) A transfer without recourse means that the purchaser can go back to the company for compensation of bad debts. B) A transfer without recourse means that the purchaser of the receivables takes the collection risk. C) A transfer without recourse means that the seller of the receivables takes the collection risk. D) A transfer with recourse means that the purchaser of the receivables takes the collection risk. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

15) A $100,000 sale transaction is made with terms of 5/10, net 30. What amount is debited to the accounts receivable account when the sale is made under the gross method of recording a discount? A) $95,000 credit B) $95,000 debit C) $100,000 credit D) $100,000 debit Answer: D Explanation: D) Discount is recorded when cash is received Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

16) Which statement is correct? A) A transfer with recourse means that the purchaser cannot go back to the company for compensation of bad debts. B) A transfer with recourse means that the purchaser of the receivables takes the collection risk. C) A transfer with recourse means that the seller of the receivables takes the collection risk. D) A transfer without recourse means that the seller of the receivables takes the collection risk. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

17) Which statement is correct? A) A transfer with recourse means that the purchaser of the receivables takes the collection risk. B) A transfer without recourse means that the seller of the receivables takes the collection risk. C) Factoring with recourse reduces a current ratio that is >1. D) Factoring without recourse creates a liability on the balance sheet. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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18) Which statement is NOT correct? A) Factoring with recourse creates a liability on the balance sheet. B) Factoring with recourse reduces a current ratio that is >1. C) Factoring with recourse negatively impacts working capital. D) Factoring without recourse reduces a current ratio that is >1. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

19) Which statement is correct? A) Factoring without recourse creates a receivable on the balance sheet. B) Factoring without recourse reduces a current ratio that is >1. C) Factoring with recourse negatively impacts working capital. D) Factoring without recourse creates a liability on the balance sheet. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

20) Which statement is NOT correct? A) Factoring with recourse creates a liability on the balance sheet. B) Factoring with recourse creates a receivable on the balance sheet. C) Factoring without recourse negatively impacts working capital. D) Factoring without recourse means that the seller takes the collection risk. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

21) Philip Corp reported credit sales of $240,000 and write-offs of bad debts of $57,000 for last year. Accounts receivable had a balance of $1,127,000 at the beginning of the year and $881,000 at the end of the year. How much cash was collected from customers during the year? A) $246,000 B) $429,000 C) $486,000 D) $669,000 Answer: B Explanation: B) Opening balance + credit sales – cash collections – write-offs = closing balance $1,127,000 + $240,000 – collections – $57,000 = $881,000; Collections = $429,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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22) EasyCredit Inc. reported cash sales of $45,000, credit sales of $280,000, and write-offs of bad debts of $7,000 for last year. Accounts receivable had a balance of $327,000 at the beginning of the year and $381,000 at the end of the year. How much cash was collected from customers during the year? A) $54,000 B) $219,000 C) $264,000 D) $334,000 Answer: C Explanation: C) Opening balance + credit sales – cash collections – write-offs = closing balance $327,000 + $280,000 – collections – $7,000 = $381,000; Collections = $219,000 Cash = Cash from accounts receivables payments + cash sales = $219,000 + $45,000 = $264,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

23) Maximum Inc. reported credit sales of $880,000, bad debt write-offs of $297,000, and bad debt expense of $257,000 for last year. Accounts receivable had a balance of $1,367,000 at the beginning of the year and $1,381,000 at the end of the year. How much cash was collected from customers during the year? A) $457,000 B) $569,000 C) $714,000 D) $866,000 Answer: B Explanation: B) Opening balance + credit sales – cash collections – write-offs = closing balance $1,367,000 + $880,000 – collections – $297,000 = $1,381,000; Collections = $569,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

24) Lenient Corp. reported cash sales of $1,145,000, credit sales of $1,880,000, cash returns of $50,000, bad debt write-offs of $300,000, and bad debt expense of $250,000 for last year. Accounts receivable had a balance of $3,400,000 at the beginning of the year and $2,350,000 at the end of the year. How much cash was collected from customers during the year? A) $2,630,000 B) $2,975,000 C) $3,725,000 D) $3,775,000 Answer: C Explanation: C) Opening balance + credit sales – cash collections – write-offs = closing balance $3,400,000 + $1,880,000 – collections – $300,000 = $2,350,000; Collections = $2,630,000 Cash collected = cash from accounts receivables + cash sales – cash returns = $2,630,000 + $1,145,000 $50,000 = $3,725,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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25) Fitness Machines reported credit sales of $880,000 and bad debt expense of $250,000 for last year. Accounts receivable had a balance of $1,400,000 at the beginning of the year and $1,350,000 at the end of the year. Assuming there are no write-offs made during the year, how much cash was collected from customers during the year? A) $630,000 B) $680,000 C) $930,000 D) $1,180,000 Answer: C Explanation: C) Opening balance + credit sales – cash collections – write-offs = closing balance $1,400,000 + $880,000 – collections - $0 = $1,350,000; Collections = $930,000 Diff: 1 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

26) Fitness Machines reported cash sales of $50,000, credit sales of $800,000, and bad debt expense of $150,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year and $1,250,000 at the end of the year. Assuming there are no write-offs during the year, how much cash was collected from customers during the year? A) $400,000 B) $450,000 C) $550,000 D) $600,000 Answer: D Explanation: D) Opening balance + credit sales – cash collections – write-offs = closing balance $1,000,000 + $800,000 – collections - $0 = $1,250,000; Collections = $550,000 Cash = cash from accounts receivables + cash sales = $550,000 + $50,000 = $600,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

27) Medical Machines reported credit sales of $800,000, cash returns of $25,000, and bad debt expense of $150,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year and $1,250,000 at the end of the year. Assuming there are no write-offs during the year, how much cash was collected from customers during the year? A) $375,000 B) $525,000 C) $550,000 D) $650,000 Answer: B Explanation: B) Opening balance + credit sales – cash collections – write-offs = closing balance $1,000,000 + $800,000 – collections - $0 = $1,250,000; Collections = $550,000 Cash = cash from accounts receivables – cash returns = $550,000 – $25,000 = $525,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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28) Pauline Company estimates the allowance for doubtful accounts by aging its accounts receivable. At the end of 2026, the balance in the allowance account was $50,000. During 2027, the company wrote off $5,000 and collected a $3,000 receivable that had been previously written off as uncollectable. At the end of 2027, the aging schedule indicated that the balance of the allowance for doubtful accounts should be $64,000. What is the bad debt expense for 2027? A) $16,000 B) $19,000 C) $66,000 D) $69,000 Answer: A Explanation: A) $64,000 - ($50,000 - $5,000) - $3,000 = $16,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

29) A $100,000 sale transaction is made with terms of 5/10, net 30. What entry is made to the accounts receivable account when the sale is made under the net method of recording a discount? A) $95,000 credit B) $95,000 debit C) $100,000 credit D) $100,000 debit Answer: B Explanation: B) discount recorded up front when sale is made Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

30) Which statement is correct about recording an allowance for doubtful accounts? A) Accounts receivable are not adjusted for known uncollectable amounts. B) Net accounts receivable is recalculated when there are changes recorded in the Allowance for Doubtful Accounts contra account. C) Comparability is the reason an allowance for doubtful accounts is needed. D) An allowance for doubtful accounts does not require estimates or judgments. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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31) Which statement is correct about estimating the allowance for doubtful accounts? A) Under the income statement approach, bad debt expense is based on the accounts receivable amount. B) Under the income statement approach, bad debt expense is based on the percentage of credit sales. C) Under the income statement approach, bad debt expense is based on an aging of the accounts receivable amount. D) Under the income statement approach, bad debt expense is based on the volume of sales transactions. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

32) Karin-Jones Ltd. reported an opening balance of $1,712,000 in accounts receivable and of $147,000 in allowance for doubtful accounts for last year. During the year, sales on account were $2,500,000, collections of accounts receivable were $1,300,000, and bad debt expense was $89,000. At the end of the year, the company had a credit balance of $172,000 in the allowance for doubtful accounts. What amount of accounts receivable was written off during the year? A) $25,000 B) $64,000 C) $83,000 D) $2,912,000 Answer: B Explanation: B) $147,000 + $89,000 - $172,000 = $64,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

33) Which statement is NOT correct about estimating the allowance for doubtful accounts under the balance sheet approach? A) Accounts receivable are stated at their net realizable value. B) Accounts receivable are stated at their fair value. C) Bad debt expense is based on the accounts receivable balance. D) Bad debt expense is based on an aging of the accounts receivable. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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34) Medical Machines reported credit sales of $800,000, cash collections of $550,000, and bad debt write-offs of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year. What was the ending balance in the accounts receivable account? A) $450,000 B) $1,235,000 C) $1,250,000 D) $1,800,000 Answer: B Explanation: B) Opening balance + credit sales – cash collections – write-offs = closing balance $1,000,000 + $800,000 – $550,000 – $15,000 = $1,235,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

35) Family Fun reported credit sales of $800,000, cash collections of $550,000, and bad debt expense of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the ending balance in the accounts receivable account? A) $450,000 B) $1,235,000 C) $1,250,000 D) $1,800,000 Answer: C Explanation: C) Opening balance + credit sales – cash collections – write-offs = closing balance $1,000,000 + $800,000 – $550,000 - $0 = $1,250,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

36) Family Fun reported cash sales of $250,000, credit sales of $750,000, cash collections from receivables of $500,000, bad debt write-offs of $25,000, and bad debt expense of $35,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year. What was the ending balance in the accounts receivable account? A) $1,190,000 B) $1,225,000 C) $1,440,000 D) $1,475,000 Answer: B Explanation: B) Opening balance + credit sales – cash collections – write-offs = closing balance $1,000,000 + $750,000 – $500,000 – $25,000 = $1,225,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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37) Micelle Inc. reported credit sales of $600,000, cash collections of $450,000, and bad debt expense of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the end of the year. Assuming there are no write-offs made during the year, what was the balance in the accounts receivable account at the beginning of the year? A) $400,000 B) $850,000 C) $865,000 D) $1,150,000 Answer: B Explanation: B) Opening balance + credit sales – cash collections – write-offs = closing balance Opening balance + $600,000 – $450,000 - $0 = $1,000,000; Opening balance = $850,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

38) Fruit Valley Inc. reported cash sales of $250,000, credit sales of $850,000, cash collections from receivables of $500,000, bad debt write-offs of $25,000, and bad debt expense of $35,000 for last year. Accounts receivable had a balance of $1,000,000 at the end of the year. What was the balance in the accounts receivable account at the beginning of the year? A) $425,000 B) $460,000 C) $650,000 D) $675,000 Answer: D Explanation: D) Opening balance + credit sales – cash collections – write-offs = closing balance Opening balance + $850,000 – $500,000 – $25,000 = $1,000,000; Opening balance = $675,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

39) Micelle Inc. reported credit sales of $600,000 and cash collections of $450,000 for last year. The ending balance in accounts receivable was $800,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $80,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the end of the year? A) $6,000 B) $8,000 C) $81,500 D) $86,000 Answer: D Explanation: D) $80,000 + ($600,000 × 0.01) = $86,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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40) Micelle Inc. reported credit sales of $700,000 and cash sales of $100,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the end of the year? A) $7,000 B) $8,000 C) $47,000 D) $150,000 Answer: C Explanation: C) $40,000 + ($700,000 × 0.01) = $47,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

41) Marvelos Inc. reported credit sales of $1,000,000 and cash sales of $100,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of ending accounts receivable. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. Assuming there are no write-offs made during the year, what was the balance in the allowance for doubtful accounts at the end of the year? A) $11,000 B) $15,000 C) $51,000 D) $55,000 Answer: D Explanation: D) $40,000 + ($1,500,000 × 0.01) = $55,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

42) Sahil Inc. reported credit sales of $600,000 and cash collections of $450,000 for last year. The ending balance in accounts receivable was $800,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $80,000 at the beginning of the year. What was the bad debt expense for the year? A) $1,500 B) $6,000 C) $8,000 D) $86,000 Answer: B Explanation: B) $600,000 × 0.01 = $6,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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43) Sabrina Inc. reported credit sales of $700,000 and cash sales of $100,000. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of credit sales. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. What was the bad debt expense for the year? A) $7,000 B) $8,000 C) $15,000 D) $47,000 Answer: A Explanation: A) $700,000 × 0.01 = $7,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

44) Thineesha Corp. reported credit sales of $1,000,000 and cash sales of $100,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of ending accounts receivable. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. What was the bad debt expense for the year? A) $9,000 B) $10,000 C) $15,000 D) $55,000 Answer: C Explanation: C) $1,500,000 × 0.01 = $15,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

45) Marvelos Inc. reported credit sales of $1,000,000, cash sales of $100,000, and bad debt write-offs of $10,000 for last year. The ending balance in accounts receivable was $1,500,000. Bad debt expense is estimated at 1% of ending accounts receivable. The allowance for doubtful accounts had a balance of $40,000 at the beginning of the year. What was the bad debt expense for the year? A) $15,000 B) $45,000 C) $55,000 D) $65,000 Answer: A Explanation: A) $1,500,000 × 0.01 = $15,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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46) Super Corp. reported credit sales of $2,000,000, cash sales of $200,000, and bad debt write-offs of $100,000 for last year. The ending balance in accounts receivable was $4,500,000. Bad debt expense was $250,000. The allowance for doubtful accounts had a balance of $400,000 at the beginning of the year. What was the balance in the allowance for doubtful accounts at the end of the year? A) $100,000 B) $300,000 C) $500,000 D) $550,000 Answer: D Explanation: D) Opening balance + bad debt expense – write-offs = closing balance $400,000 + $250,000 – $100,000 = $550,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

47) Super Corp. reported credit sales of $2,000,000, cash sales of $200,000, and bad debt write-offs of $100,000 for last year. The ending balance in accounts receivable was $4,500,000. Bad debt expense was 2% of credit sales. The allowance for doubtful accounts had a balance of $400,000 at the beginning of the year. What was the balance in the allowance for doubtful accounts at the end of the year? A) $40,000 B) $340,000 C) $344,000 D) $440,000 Answer: B Explanation: B) Opening balance + bad debt expense – write-offs = closing balance $400,000 + ($2,000,000 × 0.02) – $100,000 = $340,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

48) K-Jones Ltd. reported opening balances of $1,712,000 in accounts receivable and $147,000 in the allowance for doubtful accounts at the beginning of last year. During the year, sales on account totaled $2,500,000, collections of accounts receivable were $1,300,000, bad debt write-offs were $65,000, and bad debt expense was $89,000. What was the ending balance in the allowance for doubtful account? A) $82,000 B) $171,000 C) $326,000 D) $2,847,000 Answer: B Explanation: B) Opening balance + bad debt expense – write-offs = closing balance $147,000 + $89,000 – $65,000 = $171,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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49) Propel Fly reported opening balances of $1,712,000 in accounts receivable and $147,000 in the allowance for doubtful accounts at the beginning of last year. During the year, sales on account totaled $2,500,000, collections of accounts receivable were $1,300,000, bad debt write-offs were $65,000, and bad debt expense was $89,000. What was the ending balance in accounts receivable? A) $171,000 B) $2,758,000 C) $2,823,000 D) $2,847,000 Answer: D Explanation: D) Opening balance + credit sales – collections – write-offs = closing balance $1,712,000 + $2,500,000 – $1,300,000 – $65,000 = $2,847,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

50) Which statement about using the percentage of credit sales to estimate bad debt expense is NOT correct? A) This method has the same results as estimating the bad debt expense by aging the accounts receivable. B) This method records an adjustment to the allowance account irrespective of the balance in that account immediately prior to the adjustment. C) This method focuses on the income statement. D) This method only indirectly measures accounts receivable at net realizable value. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

51) Which statement about using the aging of accounts receivable to estimate bad debt expense is correct? A) This method has the same results as estimating the bad debt expense by using the percentage of credit sales. B) This method records an adjustment to the allowance account irrespective of the balance in that account, immediately prior to the adjustment. C) This method focuses on the income statement. D) This method focuses on the balance sheet. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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52) Based on the following information for calendar 2026: Accounts receivable, January 1 Credit sales during the year Allowance for doubtful accounts, January 1 Cash collected on accounts receivable during the year

$125,000 1,400,000 15,000 1,350,000

If the allowance for doubtful accounts is estimated at 10% of the ending accounts receivable balance, what is the bad debts expense for 2026? A) $1,500 B) $2,500 C) $9,500 D) $17,500 Answer: B Explanation: B) [($125,000 + $1,400,000 - $1,350,000) × 10%] - $15,000 = $2,500 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

53) Based on the following information for calendar 2026: Accounts receivable, January 1 Credit sales during the year Allowance for doubtful accounts, January 1 Cash collected on accounts receivable during the year Uncollectible accounts written off during the year

$125,000 1,400,000 15,000 1,350,000 8,000

If bad debts expense is estimated at 1.5% of credit sales, what is the balance in the allowance for doubtful accounts at year end? A) $13,000 B) $15,625 C) $28,000 D) $36,000 Answer: C Explanation: C) $15,000 + ($1,400,000 × 1.5%) - $8,000 = $28,000 Diff: 3 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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54) Pauline Company estimates the allowance for doubtful accounts by aging its accounts receivable. At the end of 2026, the balance in the allowance account was $50,000. During 2027, the company wrote off $5,000 in bad debts and collected a $3,000 receivable that had been previously written off as uncollectable. At the end of 2027, the aging schedule indicated that the balance of the allowance for doubtful accounts should be $64,000. What is the bad debts expense for 2027? A) $16,000 B) $19,000 C) $66,000 D) $69,000 Answer: A Explanation: A) $64,000 - ($50,000 - $5,000) - $3,000 = $16,000 Diff: 2 Type: MC Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

55) Explain the differences and relationships among expenditures, assets, and expenses. Use an example to support your discussion. Answer: An expenditure is an outlay of cash or incurment of a liability that could result in an expense or an asset being recorded for accounting purposes. The expenditure results in an asset if it satisfies the definition and recognition criteria for an asset; otherwise, the amount must be expensed. Previously recorded assets turn into expenses as the benefits from the assets are used up. For example, a payment to purchase a machine would result in an asset (property, plant, and equipment) because the machine is expected to generate future benefits, it results from a past transaction, it is under the control of the enterprise, and its future benefits are reasonably estimable. As the equipment is used, depreciation expense is recorded. Diff: 2 Type: ES Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

56) Royal Inc. offers terms of 4/10, net 60 for its accounts receivable. The company issues an invoice for $73,000. How should Royal record the invoice if it uses (a) the gross method and (b) the net method? Answer: Gross method Net Method Dr. Accounts receivable 73,000 Dr. Accounts receivable* 70,080 Cr. Sales revenue 73,000 Cr. Sales revenue 70,080 * $73,000 × 96% = $70,080 Diff: 1 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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57) Spiders Geophysics issues an invoice to Huslia Goldmines for $150,000 on August 5, 2026. The invoice states the payment terms are 5/10, net 30. Huslia pays the invoice on August 14, 2026. How should Spiders record the invoice and its subsequent collection if it uses (a) the gross method or (b) the net method? Answer: Gross method Net Method Issue Dr. Accounts receivable 150,000 Dr. Accounts receivable* 142,500 invoice Cr. Sales revenue 150,000 Cr. Sales revenue 142,500 August 5 $150,000 × 95% Receive Dr. Cash 142,500 Dr. Cash 142,500 payment Dr. Cash discount [I/S] 7,500 Cr. Accounts receivable 142,500 August 14 Cr. Accounts receivable 150,000 Diff: 2 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

58) Intercoastal Shelving Company made a sale to Superb Knives for $8,800 on December 10, 2024. Since it was approaching year end, Intercoastal wanted to encourage prompt payment, so it provided generous discounts for those clients able to pay promptly. Thus Intercoastal offered terms of 5/10, net 20. Superb paid the invoice on January 20, 2025. How should Intercoastal record the invoice and its subsequent collection if the company uses (a) the gross method or (b) the net method? Answer: Gross method Net Method Issue Dr. Accounts receivable 8,800 Dr. Accounts receivable* 8,360 invoice Cr. Sales revenue 8,800 Cr. Sales revenue 8,360 Dec. 10 $8,800 × 95% Receive Dr. Cash 8,800 payment Dr. Cash 8,800 Cr. Interest or other revenue 440 Jan. 20 Cr. Accounts receivable 8,800 Cr. Accounts receivable 8,360 Diff: 2 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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59) Explain two problems associated with the direct write-off method. Answer: • Poor matching: With the direct write-off method, revenue is recorded in one period while the associated bad debts expense is recorded in a subsequent period. • Direct write-off method results in an A/R balance that overstates net realizable value. • Note: this question has nothing to do with the A/R sub-ledger. The use of a contra account for bad debts allows for the reconciliation of the sub-ledger with the A/R balance on the general ledger, but a sub-ledger is used regardless of the method of accounting for bad debts. Diff: 1 Type: ES Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

60) On January 1, 2024, Color Company agreed to sell a diamond to a customer at a special price of $4,000. In return, the customer signed a non-interest-bearing note payable to Color Company. Payment terms were $800 on January 1, 2024, and $800 each January 1 from 2025 to 2028. Color normally charges 8% interest to its customers. What amount of revenue and accounts receivable should Color recognize on January 1, 2024? Answer: Receivable = 2,650 (n 4 i 8 PMT 800 CPT PV = 2,650) Revenue = $3,450 ($2,650 + $800) JE would be

Cash Acct Receivable Revenue

800 2,650 3,450

Diff: 1 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

61) XYZ Company estimates its allowance for doubtful accounts (ADA) by aging its accounts receivable. At the end of 2026, the balance in the ADA was $165,000. During 2027, XYZ wrote off $16,000 and collected a $14,500 receivable that had been previously written off as uncollectable. At the end of 2027, the aging schedule indicated that the balance in the ADA should be $187,000. How much is the bad debts expense for 2027? Answer:

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62) Beebo Ltd. provides for doubtful accounts based on 6% of credit sales. The following data are available for 2026. Credit sales during 2026 Allowance for doubtful accounts, Jan. 1, 2026 Collection of accounts written off in prior years Customer accounts written off as uncollectable during 2026

$3,550,000 59,000 Cr 3,500 37,000

How much should the balance in the allowance for doubtful accounts be at December 31, 2026? Answer:

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63) At the end of its first year of operations, December 31, 2024, Felicity Ltd.'s accounts show the following amounts: Accounts receivable Allowance for doubtful accounts as at December 31, 2024, before any adjusting or closing entries Bad debt expense for 2024 prior to any adjusting or closing entries Customer accounts written off as uncollectable during 2024

$1,485,000 11,000 Cr 48,000 Dr 37,000

The company estimates that the following amounts of accounts receivable will not be collectible: Days outstanding Amount % not collectible

0 - 30 $510,000 5%

31 - 75 $444,000 9%

76 - 120 $403,000 15%

120 + $128,000 28%

Total $1,485,000 ---

What should be the amount of bad debt expense for the year ended December 31, 2024? Answer: Days outstanding 0 - 30 31 - 75 76 - 120 120 + Total Amount $510,000 $444,000 $403,000 $128,000 $1,485,000 % not collectible 5% 9% 15% 28% --Estimated amount uncollectible $25,500 $39,960 $60,450 $35,840 $161,750 Estimated ADA based on aging schedule - ADA prior to adjusting/closing + BDE prior to adjusting/closing = 2024 BDE; $161,750 - $11,000 + $48,000 = $198,750 Diff: 2 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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64) Pessimist Inc. reported credit sales of $5,400,000 and $4,800,000 for the years ended December 31, 2025 and 2026, respectively. Information on trade accounts receivable for the company is presented below. Days outstanding Balance in A/R. Dec. 31, 2025 Balance in A/R. Dec. 31, 2026 % of AR est. to be uncollectible

Current $397,000 392,000 0.8%

31-60 $156,000 141,000 5.0%

61-90 91+ $47,000 $17,000 33,000 26,000 6.0% 9.0%

The balance of the allowance for doubtful accounts as of January 1, 2025, was $15,000. In addition, you learn that the company wrote off specific accounts of $18,500 in 2025, and the bad debts expense was $13,000 in 2026. Required: a. Determine the bad debts expense for 2025. b. Determine the amount of receivables written off during 2026. c. Prepare the journal entry to record the bad debts expense for 2025. Answer: a. Calculate the bad debts expense for 2025. Days outstanding Balance in A/R. 12/31/2025 % of AR est. uncollectible Est. uncollect. 12/31/2025

Current $397,000 0.8% $3,176

31-60 $156,000 5.0% $7,800

61-90 $47,000 6.0% $2,820

91+ $17,000 9.0% $1,530

Total

$15,326

Since the 2025 write-offs during the year exceeded the beginning of the year ADA, the ending ADA prior to adjustment/closing is equal to zero. Also, the bad debts expense prior to adjustment/closing is equal to the write-offs less the initial balance in the ADA account. So, BDE prior to adjustment = $18,500 - $15,000 = $3,500 Estimated ADA based on aging schedule - ADA prior to adjusting/closing + BDE prior to adjusting/closing = 2025 BDE; $15,326 - $0 + $3,500 = $18,826

b. Calculate the amount of receivables written off during 2026. Days outstanding Balance in A/R. Dec. 31, 2026 % of AR estim. uncollectible

Current $392,000 0.8% $3,136

31-60 $141,000 5.0% $7,050

61-90 91+ $33,000 $26,000 6.0% 9.0% $1,980 $2,340

Total

$14,506

Beginning ADA - Ending ADA + BDE = 2026 write-offs; $15,326 + $13,000 - $14,506 = $13,820 c. Prepare the journal entry to record the bad debts expense for 2025. Dr. Bad debts expense Cr. Allowance for doubtful accounts

18,826 18,826

Diff: 2 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the

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balance sheet date, and derecognition of trade receivables.

65) Speed Motorcycles sold $550,000 of receivables to a factor to increase the company's liquidity. The company chose to factor these receivables without recourse. In exchange for these receivables, the factor paid Speed $485,000 on the date of transfer. Ultimately, the factor collected $525,000 from these receivables. Record the entry on Speed's books relating to the $550,000 factoring of accounts receivable. Answer: Upon transfer Dr. Cash 485,000 of receivables Dr. Interest expense 65,000 Cr. Accounts receivable 550,000 Note: subsequent collection by factor is irrelevant since Speed sold without recourse. Diff: 1 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

66) McGraw Motors both sells and leases vehicles. With sales temporarily slowing due to the economy, the company factored a significant portion of its lease receivables. The company factored with recourse receivables with a carrying amount of $22 million in exchange for $21.45 million less a holdback of $550,000 for potential uncollectable accounts. Due to poor economic conditions, the actual uncollectable accounts amounted to $900,000. Record the entries on McGraw's books relating to the $22 million factoring of lease receivables. Answer: Upon transfer Dr. Cash 20,900,000 of receivables Dr. Due from factor 550,000 Cr. Short-term debt–asset-backed financing 21,450,000 Completion of collection

Dr. Allowance for doubtful accounts Cr. Due from factor Cr. Cash Dr. Short-term debt–asset-backed financing Dr. Interest expense Cr. Accounts receivable

900,000 550,000 350,000 21,450,000 550,000 22,000,000

Diff: 2 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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67) Gossamer Furnishings extends generous payment terms to its customers. As a result, it has accumulated a substantial portfolio of accounts receivable. To improve cash flow, the company decided to sell $600,000 of these receivables to a factor. The company had previously checked the credit worthiness of its customers, so it is confident that few accounts will become uncollectable. Therefore, Gossamer chose to factor these receivables with recourse. In exchange for these receivables, the factor paid Gossamer 93¢ on each dollar of receivables on the date of transfer. The factor also held 2¢ on each dollar for potential uncollectable accounts. Ultimately, the factor collected $593,800 from these receivables. Record the entries on Gossamer's books relating to the $600,000 factoring of accounts receivable. Answer: Upon transfer Dr. Cash ($600,000 × 93%) 558,000 of receivables Dr. Due from factor ($600,000 × 2%) 12,000 Cr. Short-term debt–asset-backed financing 570,000 Completion of collection

Dr. Cash Dr. ADA ($600,000 - $593,800) Cr. Due from factor

5,800 6,200 12,000

Dr. Short-term debt–asset-backed financing Dr. Interest expense Cr. Accounts receivable

570,000 30,000 600,000

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68) Johnson Credit Union is a small, regional financial institution with a loyal customer base. Like most financial institutions, Johnson has a significant portfolio of home mortgages. Because of the nature of its operations, the risks relating to these mortgages are geographically concentrated. To reduce this risk, the credit union securitized $25 million of mortgages receivable for proceeds of $21.5 million. Under the securitization arrangement, investors in the mortgage-backed securities bear the cost of any defaults on the mortgages. Johnson's only continuing involvement in the mortgages is the administration of the cash receipts and the transfer of that cash to the investors. Required: a. Should Johnson record this securitization as a sale or as a borrowing transaction? Explain. b. Record the entry in Johnson's books relating to Johnson's securitization of mortgage receivables. Answer: a. The securitization transaction transfers the risks and rewards of ownership to the investors in the mortgage-backed securities because it is the investors who bear the cost of non-payment. Consequently, the transactions should be recorded as a sale. b. Dr. Cash Dr. Interest expense Cr. Mortgages receivable

21,500,000 3,500,000 25,000,000

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69) The accounting records of 10Com Ltd. show the following for 2026: Accounts receivable, Jan. 1, 2026 Accounts receivable, Dec. 31, 2026 Allowance for doubtful accounts, Jan. 1, 2026 Bad debt expense before year end adjusting or closing entries, Dec. 31, 2026 Customer accounts written off as uncollectable during 2026

$55,000 85,000 6,300 3,400 Dr * 5,550 **

*The credit side of the journal entry (or entries) related to this amount went to allowance for doubtful accounts. ** Account write-offs were debited to the allowance for doubtful accounts. More Info For 2026, cash sales were $970,000 while credit sales were $720,000. Recently, 10Com's management has become concerned about various estimates used in its accounting system, including those relating to receivables and uncollectable accounts. The company is considering two alternatives. For the purpose of comparing these two alternatives, the company has made the following estimates for each alternative. • Alternative 1: Bad debts approximating 0.7% of credit sales. • Alternative 2: Aging of the accounts receivable at the end of the period, where 80% would incur a 2% loss, while the remaining 20% would incur a 9% loss. Required: For each of the two alternatives listed above, calculate the bad debts expense for 2026 and the allowance for doubtful accounts balance at the end of 2026.

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Answer: Alternative 1 (% of sales method):

Alternative 2 (aging method): First calculate the amount of ADA. Of the $85,000 balance of accounts receivable, management expects 80% to incur a 2% loss and the remaining 20% to incur a 9% loss. Thus, the balance in ADA should be ($85,000 × 80% × 2%) + ($85,000 × 20% × 9%) = $2,890. Combined with other information relating to the ADA account, we can determine the amount of adjustment required to the ADA account to be $1,260 debit and a corresponding credit to BDE.

Diff: 3 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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70) Eastwick Company is preparing its financial statement for the year ended December 31, 2025. A summary of Eastwick's accounts receivable sub-ledger shows the following information: Days outstanding Balance outstanding 12/31/2025 Estimated default rate

0-30 $5,500,000 0.6%

31-90 $2,500,000 2.0%

Accounts written off in 2025 Collection of accounts written off in other periods Allowance for doubtful accounts, 01/01/2025

91+ $250,000 9.0%

Total $8,250,000

$80,000 1,000 115,000

Required: a. Calculate the amount of bad debts expense required for 2025. b. Present the journal entry to record bad debts expense for 2025. c. Present the journal entry that was used to record write-offs for 2025. d. Independent of the information above, suppose Eastwick factored $1,500,000 of receivables without recourse. In exchange, it received $1,380,000. Present the journal entry to record this transfer of receivables. e. Independent of part (d), Eastwick instead factored the $1,500,000 of receivables with recourse and received $1,430,000 cash. Both Eastwick and the factor anticipate that 2% of these receivables will prove to be uncollectable, so the factor has held this amount to cover any uncollectable accounts. Should the amount of uncollectable accounts prove to be more or less than 2%, the difference will be paid by/refunded to Eastwick. Present the journal entry to record this transfer of receivables.

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Answer: a. Calculate the bad debts expense (BDE) by showing the activity in the allowance for doubtful accounts T –account during 2025.

b. Dr. Bad debts expense Cr. Allowance for doubtful accounts

69,000

Dr. Allowance for doubtful accounts Cr. Accounts receivable

80,000

69,000

c. 80,000

d. Dr. Cash Dr. Interest expense Cr. Accounts receivable

1,380,000 120,000

Dr. Cash Dr. Due from factor (2% × $1,500,000) Cr. Short-term debt-asset-backed financing

1,430,000 30,000

1,500,000

1,460,000

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Learning Objective 4 1) Explain how a company's revenue recognition policy can be used to manipulate earnings. Answer: A company seeking to temporarily boost earnings can do so by accelerating its revenue recognition policy (i.e., recognizing revenue at an earlier point in time relative to cash collection). Such actions will increase both sales revenue and accounts receivable, but the percentage change in receivables will tend to be higher, because the increase in revenue will be in receivables. Financial statement readers therefore should be alert to increases in days of receivables that are out of proportion to any increases in sales, as such discrepancies could indicate an acceleration in revenue recognition policy that is possibly undisclosed. The discrepancy could also indicate a decline in credit quality of the customer base, or an active change in credit policy. Diff: 2 Type: ES Skill: Conceptual Objective: 5.4 Apply the standards to account for non-trade receivables.

2) What is a "promissory note"? A) A written promise to repay a specified amount at a specified date. B) A verbal promise to repay a specified amount at a specified date. C) A written promise to repay for the goods purchased under regular business terms and conditions. D) A short term highly liquid investment that is readily convertible to known amounts of cash. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 5.4 Apply the standards to account for non-trade receivables.

3) Which of the following is a difference between trade and non-trade receivables? A) Trade receivables are generally recorded using present value techniques versus non-trade receivables, which are generally recorded using market interest rates. B) Trade receivables are generally outstanding for long periods of time versus non-trade receivables, which are generally outstanding for short periods of time. C) Trade receivables are generally verbal contracts versus non-trade receivables, which are generally written contracts. D) Trade receivables are generally verbal contracts versus non-trade receivables, which are generally constructive contracts. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 5.4 Apply the standards to account for non-trade receivables.

4) Explain how a company can use its credit policy for customers and allowance for bad debts policies to manipulate earnings. Answer: A legitimate way to increase sales is to relax the company's credit policy. The company may sell to less credit worthy clients, or allow longer payment terms. However, if the company does not correspondingly increase its allowance for doubtful accounts and bad debts expense, then it will be able to increase current earnings. Future earnings will be lower when it is found that the allowance for bad debts was not sufficient for the lax credit policy. Diff: 3 Type: ES Skill: Conceptual Objective: 5.4 Apply the standards to account for non-trade receivables.

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5) Explain what is meant by "channel stuffing" and how this can be used to manipulate earnings. Answer: This practice involves filling the distribution channel by selling on favourable terms not usually offered. For example, a manufacturer could offer its distributor an unlimited right of return so that the distributor would take more of the manufacturer's products than normal. These "sales" do not fulfill the criteria for revenue recognition. Diff: 3 Type: ES Skill: Conceptual Objective: 5.4 Apply the standards to account for non-trade receivables.

6) Collier Port Authority has had a long-standing relationship with a nearby lumber company, which ships a significant amount of lumber through the port. To help finance the lumber company's operations, Collier advanced $10 million to them in return for a promissory note that specified payment of the $10 million, plus interest at 15%, due at the end of two years. However, due to adverse conditions in the lumber industry, the lumber company was unable to meet its obligation and pay Collier at the end of the two years. In light of the importance of the relationship between Collier and the lumber company, Collier extended the due date by three years (after the original two years) but increased the repayment amount to $14 million, inclusive of interest. The market interest rate for the loan remained at 15%. Record the journal entries relating to the note receivable from the date of issuance to the restructuring date, inclusive. Answer: Issuance of Dr. Note receivable 10,000,000 promissory note Cr. Cash 10,000,000 Interest accrual Yr 1

Dr. Note receivable ($10,000,000 × 15%) Cr. Interest income

1,500,000

Interest accrual Yr 2

Dr. Note receivable ($11,500,000 × 15%) Cr. Interest income

1,725,000

Loan restructuring

Dr. Restructured note receivable 3N 15 I 14000000 FV CPT PV = 9,205,227 Dr. Loss on note restructuring Cr. Note receivable $10,000,000 + $1,500,000 + $1,725,000

9,205,227

Diff: 2 Type: ES Skill: Computational Objective: 5.4 Apply the standards to account for non-trade receivables.

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1,500,000

1,725,000

4,019,773 13,225,000

7) The December 31, 2026, financial statements of Pure Air Works (PAW) show $125,000 for "Note receivable." You learn that the company provided cash of $125,000 to a customer (a new chain of hotdog stands) in exchange for a promissory note. The note was issued on January 1, 2025, bearing interest at 7% per year (which approximates the market interest rate), with principal and interest (total $133,750) due on January 1, 2026. However, the hotdog chain has had numerous delays obtaining the required licenses to operate on street corners. Consequently, on January 1, 2026, the chain and PAW renegotiated the promissory note so that the $133,750 in principal and interest would come due on January 1, 2028. Aside from the initial recording of the note receivable on January 1, 2025, PAW has not recorded any other journal entries relating to this note. Present the necessary journal entries to correct PAW's accounts in 2025 and 2026. Round all values to the nearest dollar. Answer: 2025 Dr. Note or interest receivable ($125,000 × 7%) 8,750 Cr. Interest income 8,750 2026 Dr. Restructured note receivable (2 N 7 I 133750 FV CPT PV = 116,822) Dr. Loss on note restructuring Cr. Note receivable

116,822 16,928 133,750

Dr. Restructured note receivable (or interest receivable) Cr. Interest income ($116,822 × 7%)

Diff: 3 Type: ES Skill: Computational Objective: 5.4 Apply the standards to account for non-trade receivables.

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8,178 8,178

Comprehensive Learning Objectives 1) Khanna Inc. had the following transactions, information, and balances in its accounting records for fiscal 2026: (CAD = Canadian dollars; USD = U.S. dollars)

Postdated cheque from Delhi Holdings Certified cheque from Bora Corp. Stamps on hand USD chequing account at Bank National CAD chequing account at Bank National Chequing account in a foreign currency that is not stable USD savings account at Bank National CAD treasury bill due in 100 days CAD treasury bill due in 40 days USD term deposit at Bank National due in 80 days Euro term account at Bank National due in 120 days Cash advance received from customer Cash advance given to supplier Money market mutual fund Cash advance to executive, due on demand Cash restricted for future land purchase Refundable deposits paid to provincial government to secure construction contracts Installment accounts receivable, due in 2027 Shares in Boomer Inc. Bonds of Chelsea Corp. Accounts receivable, due in 30 days Credit balances in Accounts Receivable Advances to sales employees Allowances for doubtful accounts

Balance in CAD at December 31, 2026 $10,500 9,200 2,000 110,000 105,000 9,500 20,000 10,000 25,000 15,000 8,000 14,000 7,000 17,000 8,000 90,000 35,000 225,000 12,500 8,000 325,000 19,000 5,500 67,500

Required: a) Determine the amount of "cash" that will be reported on the balance sheet. b) Determine the amount of "cash equivalents" that will be reported on the balance sheet. Assume that investments that otherwise meet the definition of cash equivalents are being held for the purpose of meeting short-term cash commitments. c) Determine the amount of "trade accounts receivable" that will be reported on the balance sheet. d) Determine the amount of "other receivables" that will be reported on the balance sheet. e) Explain how the allowance for doubtful accounts will be presented on the balance sheet.

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Answer: (a) — (d) Balance

(a) "cash"

$10,500 9,200

$9,200

110,000

105,000

NOT CASH

NOT CASH - only if currency is stable

20,000 10,000 25,000

NOT CASH

2,000 110,000

9,500

(b) "cash equivalents"

$20,000 Exceeds 90 days 25,000

15,000

8,000

Exceeds 90 days

14,000

7,000

$7,000

17,000

8,000

90,000 35,000

35,000

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secure construction contracts Installment accounts receivable, due in 2027 Accounts receivable, due in 30 days Credit balances in Accounts Receivable Advances to sales employees Allowance for doubtful accounts Shares in Boomer Inc. Bonds of Chelsea Corp. Totals

225,000

$225,000

325,000

19,000

(19,000)*

5,500

67,500 12,500 8,000

$224,200

$77,000

$531,000

$55,500

*students could also exclude from A/R if they feel this amount should be presented as a current liability instead of A/R. e) allowance for doubtful accounts is presented on the balance sheet as a contra account to the accounts receivable balance. Diff: 3 Type: ES Skill: Computational Objective: 5.1/ 5.2/ 5.3 Apply the standards and procedures for recording, reconciling and reporting cash and cash equivalents./Explain the need for internal controls for cash specifically and other assets more generally, and evaluate the adequacy of cash controls in different situations./Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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2) Soorya Inc. had the following balances for fiscal 2026.

Accounts receivable Allowance for doubtful accounts

Jan. 1, 2026 $2,500,000 125,000

Additional information on 2026 transactions: Q1 Sales -Cash $100,000 -Credit 500,000 -Discounts given (only on credit 25,000 sales) Bad debts -write-offs 15,000 -collection on previously 10,000 written off accounts

Dec. 31, 2026 $2,000,000 unknown

$200,000 700,000 40,000

$150,000 600,000 35,000

$250,000 800,000 50,000

10,000 0

20,000 5,000

5,000 20,000

Here is an aging of the accounts receivable: Days Accounts receivable Accounts receivable Estimate % uncollectible outstanding balance @ Jan. 1, 2026 balance @ Dec. 31, 2026 (consistent rate for 5 years) 0-30 $1,900,000 $1,000,000 0% 31-60 250,000 350,000 10% 61-90 250,000 350,000 20% >90 100,000 300,000 50% Required: a) How much cash was collected from accounts receivable during 2026? b) Prepare the journal entry to record the discounts using both the gross and net method of accounting; assume that the total discounts given related to sales totaling $450,000. Also prepare the journal entry that would be required if the discounts were not taken by customers under the net method. c) Assume all discounts were taken by customers and that the company used the gross method. Complete the following chart: Balance at end of fiscal 2026 Gross Sales Net Sales Bad debt expense d) What would the bad debt expense be if Soorya wanted to use the percentage of sales method and felt that its experience showed that 4.5% of sales were not collectible?

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Answer: a) How much cash was collected from accounts receivable during 2026? Opening accounts receivables + sales on credit during the year - discounts given - closing accounts receivable $2,500,000 + $2,600,000 - $150,000 - $2,000,000 = $2,950,000 b) Prepare the journal entry to record the discounts using both the gross and net method of accounting. Gross method Dr. Accounts receivable 450,000 Cr. Sales 450,000 Dr. Cash 300,000 Dr. Cash discounts 150,000 Cr. Accounts receivable 450,000 Net Method Dr. Accounts receivable Cr. Sales

300,000 300,000

Dr. Cash Cr. Accounts receivable

300,000 300,000

If discount not taken under net method Dr. Cash Cr. Interest or other revenue Cr. Accounts receivable

450,000 150,000 300,000

c) Complete the following chart: Balance at end of fiscal 2026 Gross sales (cash + credit sales) $2,600,000 + $700,000 = $3,300,000 Net sales $3,300,000 - $150,000 = $3,150,000 ($350,000 × 10%) + ($350,000 × 20%) + ($300,000 × 50%) = Allowance for doubtful $255,000 Bad debts expense * $145,000 *Bad debt expense for 2025 Closing allowance for doubtful accounts balance + write-offs - collections on previous write-offs - opening allowance for doubtful accounts balance $255,000 + $50,000 - $35,000 - $125,000 = $145,000 d) What would the bad debt expense be if Soorya wanted to use the percentage of sales method and felt that its experience showed that 4.5% of sales were not collectible? Net Credit Sales × 4.5% = ($2,600,000 - $150,000) × 4.5% = $110,250 Diff: 3 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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3) Explain why an allowance for doubtful accounts is required under GAAP. Discuss how such an allowance should be established. Answer: • Enterprises should report trade receivables at expected net realizable value to mitigate the moral hazard that would result from the mismatch in timing between the recording of bad debts expense and the recognition of revenue. • Evaluation of receivables' value should take account of information available concerning the enterprise's revenue recognition policy, credit policy, sales return policy, whether the enterprise has factored a portion of their receivables, as well as whether management has particular incentives to bias earnings. Diff: 1 Type: ES Skill: Conceptual Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

4) At December 31, 2026, Pinebrook Inc. reported $135,000 in accounts receivable and $9,300 in the allowance for doubtful accounts. In 2027, the company had $875,000 in credit sales and collected $915,000 on accounts receivable. Pinebrook also wrote off $2,500 in uncollectable accounts. The company uses the aging method to estimate bad debts, and management has estimated that the allowance for doubtful accounts for December 31, 2027 should be $8,800. Required: a. Provide the journal entry to record bad debts expense for the year 2027. (Ignore information contained in part (b) below.) b. While auditing the books of Pinebrook, you discover that the company's bookkeeper has erroneously recorded a transaction: for one customer who went bankrupt in 2027, she wrote off the $6,800 receivable with a debit to bad debts expense. Determine the error's effects (overstated/understated) on the December 31, 2027 balance sheet (accounts receivable, allowance for doubtful accounts) and the income statement for the year 2027. c. In January 2028, the company factored all of its receivables ($95,000) without recourse for proceeds of $77,000. Present the journal entry to record this transaction.

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Answer: a.

Journal entry to record bad debts expense Dr. Bad debts expense Cr. Allowance for doubtful accounts

2,000 2,000

b. Both the December 31, 2027 balance sheet and the income statement for 2027 will be correctly stated as a result of the errors. c. Journal entry to record the sale of all receivables for $77,000 Dr. Cash Dr. Allowance for doubtful account Dr. Interest expense or loss on sale of accounts receivable Cr. Accounts receivable

77,000 8,800 9,200 95,000

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5) Brasser Co. started using the percentage of sales method to account for bad debts in 2026. In 2025, the company's first fiscal year, the company had used the direct write-off method because the amount of bad debts was judged to be immaterial. The following information relates to the company's sales and receivables.

Credit sales Estimated bad debts as a percentage of credit sales Accounts written off

2025 $18,750,000

2026 $18,900,000

0.5% 65,750

0.4% 93,600

Required: a. Calculate the correct balance in the allowance for doubtful accounts (ADA) at the end of 2026. Remember to include the effect of the change in accounting policy on 2025 accounts. b. Record the write-off entry for 2026 and the year-end adjusting entries for 2026 to adjust the ADA. (Ignore income tax effects.) Answer: a. The balance of the allowance for doubtful accounts is determined as follows: AFDA Write-offs

65,750

Write-offs

93,600

0 93,750 28,000 75,600 10,000

Opening balance BDE for 2025 Dec. 31, 2025 BDE for 2026

b. Write-off entry (2026): Dr. Allowance for doubtful accounts Cr. Accounts receivable

93,600 93,600

Adjusting entry: Dr. Retained earnings (to adjust for BDE not recorded in 2025) 28,000 Dr. Bad debts expense (for 2026 BDE) 75,600 Cr. Allowance for doubtful accounts 103,600 Diff: 3 Type: ES Skill: Computational Objective: 5.3 Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables.

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 6 Inventories Learning Objective 1 1) Which statement is NOT correct about the perpetual inventory system for inventory management? A) This system keeps track of additions to and withdrawals from inventory. B) It is not necessary to conduct an inventory count if the perpetual system is used. C) This method produces timely information for management. D) With this method, the company knows the inventory on hand and the related cost of goods sold at any point in time. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

2) Which statement is correct about the system used to account for inventories? A) Organizations must use the perpetual system to determine the amount of inventory and cost of goods sold. B) The perpetual system is used to determine the amount of inventory and the periodic system is used to determine the cost of goods sold. C) The perpetual and periodic system are both acceptable methods to use for inventory control. D) The balance sheet under the perpetual system is different than that under the periodic system. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

3) Which statement is NOT correct about the periodic inventory system for inventory management? A) The periodic inventory system keeps continuous information about the amount of inventory on hand. B) The cost of goods sold is a calculated number under the periodic inventory system. C) Under both the periodic and perpetual systems, the final amounts reported in financial statements are the same. D) The perpetual inventory system provides more information to allow an enterprise to better manage its inventories. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

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4) Using the following information, what amount of "shrinkage" would be identified under the periodic inventory system? Inventory at the beginning of the year Inventory based on count at the end of the year Inventory purchases during the year

$300,000 650,000 1,000,000

A) $ 0 B) $300,000 C) $650,000 D) $700,000 Answer: A Explanation: A) Cannot calculate; under the periodic system, the company only keeps track of a single sum of $650,000 for cost of goods sold (Beg Bal + purchase - End Bal based on count). It is not possible to determine how much is from the actual goods sold versus the amount from shrinkage. Diff: 3 Type: MC Skill: Computational Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

5) Which statement is correct for about inventory systems? A) The periodic inventory system provides more information to allow an enterprise to better manage its inventories. B) Cost of goods sold is a not a calculated number under the periodic inventory system. C) The final amounts reported in statements are the same under both the periodic and perpetual systems. D) The periodic inventory system continuously updates information about the amount of inventory on hand. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

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6) Which of the following is a potential journal entry required after the inventory count under the periodic inventory system? A) Dr Cost of goods sold Cr Inventory B) Dr Cost of goods sold Cr Inventory Cr Purchases C) Dr Inventory Cr Accounts payable D) Dr Cost of goods sold Cr Inventory shrinkage or inventory gain Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

7) What journal entry is required after the inventory count under the perpetual inventory system when shrinkage has been detected? A) Dr Cost of goods sold Cr Inventory B) Dr Cost of goods sold Cr Inventory Cr Purchases C) Dr Inventory Cr Accounts payable D) Dr Purchases Cr Accounts payable Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

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8) What journal entry is required when inventory is purchased under the perpetual inventory system? A) Dr Cost of goods sold Cr Inventory B) Dr Cost of goods sold Cr Inventory Cr Purchases C) Dr Inventory Cr Accounts payable D) Dr Purchases Cr Accounts payable Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

9) What journal entry is required when inventory is purchased under the periodic inventory system? A) Dr Cost of goods sold Cr Inventory B) Dr Cost of goods sold Cr Inventory Cr Purchases C) Dr Inventory Cr Accounts Payable D) Dr Purchases Cr Accounts Payable Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

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10) What journal entry is required when inventory is sold during the year under the periodic inventory system? A) Dr Cost of goods sold Cr Inventory B) Dr Cost of goods sold Cr Inventory Cr Purchases C) No journal entry is required D) Dr Purchases Cr Accounts payable Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

11) What journal entry is required when inventory is sold during the year under the perpetual inventory system? A) Dr Cost of goods sold Cr Inventory B) Dr Cost of goods sold Cr Inventory Cr Purchases C) No journal entry is made D) Dr Purchases Cr Accounts payable Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

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12) Compare the perpetual inventory control system and the periodic inventory control system. Which system provides better information for inventory management? Answer: Perpetual inventory system: One that directly keeps track of additions to and withdrawals from inventory. Periodic inventory system: An inventory system that relies on periodic inventory counts to infer the amounts withdrawn from inventory. A perpetual inventory system maintains information about purchases and cost of sales (i.e., information about flows) on an ongoing basis, whereas the periodic system calculates these amounts when the enterprise completes an inventory count. Consequently, the perpetual system is more informative and allows better inventory management. Diff: 1 Type: ES Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

13) Identify whether the following are benefits of using a perpetual inventory system (in comparison to a periodic system). Potential benefit A perpetual system is less costly than a periodic system. A perpetual system helps to estimate expected amounts of inventory at year-end. A perpetual system is required by IFRS and ASPE. A perpetual system helps to determine the amount of shrinkage. Answer: Potential benefit A perpetual system is less costly than a periodic system. A perpetual system helps to estimate expected amounts of inventory at year-end. A perpetual system is required by IFRS and ASPE. A perpetual system helps to determine the amount of shrinkage.

True/False

True/False F T F T

Diff: 1 Type: ES Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

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14) Identify whether the following are benefits of using a perpetual inventory system (in comparison to a periodic system). Potential benefit True/False A perpetual system is less costly than a periodic system. A perpetual system produces information that is more useful for inventory management. A perpetual system allows a company to avoid conducting costly inventory counts. A perpetual system is required by IFRS and ASPE. Answer: Potential benefit True/False A perpetual system is less costly than a periodic system. F A perpetual system produces information that is more useful for inventory management. T A perpetual system allows a company to avoid conducting costly inventory counts. F A perpetual system is required by IFRS and ASPE. F Diff: 1 Type: ES Skill: Conceptual Objective: 6.1 Describe the informational differences between perpetual and periodic systems of inventory control.

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Learning Objective 2 1) What costs are NOT included in the cost of inventories? A) Raw materials. B) Labour used to make the finished product. C) Costs to deliver raw materials to the company. D) Costs to ship goods to customers. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

2) Explain how manufacturing companies can manipulate earnings through its production process. What should an auditor or financial statement user do to detect this type of manipulation? Answer: For manufacturing companies, producing more goods than the optimal amount for good inventory management can give a boost to income. Production volume that is over the normal level results in lower per unit costs because there are more units to absorb the fixed costs. The lower per unit cost then reduces the amount of COGS that flows through income, increasing net income. For users and auditors, it is important to be alert to a buildup of inventory at year-end, which could indicate excessive production for the purpose of earnings management. Diff: 2 Type: ES Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

3) Explain how a manufacturing company can manipulate earnings by including non-production costs in inventories. What does an auditor or financial statement user do to detect this type of manipulation? Answer: When an enterprise incurs an expenditure, it either expenses that cost or capitalizes it as an asset such as inventory. Including a cost that would otherwise be expensed would keep that cost from flowing through the income statement temporarily until the inventory itself is sold. For example, including in inventory cost the wages of management staff who are not involved in production would inflate the cost of inventory and reduce wage expense. Auditors need to scrutinize whether costs are production related. Users will have a difficult task of discerning this type of earnings management, but a potential sign is a decrease in the gross margin percentage because including too much cost in inventories would increase cost of goods sold. Diff: 2 Type: ES Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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4) What issues arise on the initial recognition and measurement of inventory? A) Determining which expenditures to capitalize into the "inventory" account. B) Determining which expenditures to expense into the "cost of goods sold" account. C) Determining how much of the costs recognized in inventory should be expensed in the year. D) Determining the appropriate valuation of inventories that remain on hand. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

5) What is the meaning of the terms "F.O.B. destination point"? A) The buyer has ownership of the goods only when they arrive. B) The point at which the buyer takes legal possession of the goods. C) The buyer has ownership of the goods as soon as they are shipped. D) The buyer remains liable for any loss during shipment. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

6) Which goods in transit would be recorded in inventory at year end? A) Goods purchased with terms F.O.B. destination point that were received after year end. B) Goods sold with terms F.O.B. shipping point that were shipped before year end. C) Goods purchased with terms F.O.B. shipping point that were received after year end. D) Goods sold with terms F.O.B. destination point that were shipped before year end. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

7) Which transaction would be included in the year-end inventory? A) Goods received on consignment at year end. B) Goods shipped out on consignment at year end. C) Goods shipped out F.O.B. shipping point at year end. D) Goods received after year end, shipped FOB destination. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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8) What costs are NOT included in the cost of manufactured inventories? A) Raw materials. B) Labour to make the finished product. C) Administrative costs. D) Manufacturing overhead. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

9) What is the meaning of the terms "F.O.B. shipping point"? A) The buyer takes ownership of the goods once they arrive at their receiving location. B) The point at which the buyer takes legal possession of the goods. C) The buyer takes ownership of the goods as soon as they are shipped to the buyer. D) The seller remains liable for any loss or damage incurred during shipment. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

10) Which goods in transit would be recorded in inventory at year end? A) Goods sold with terms F.O.B. destination point that were shipped at year end. B) Goods sold with terms F.O.B. shipping point that were shipped before year end. C) Goods purchased F.O.B. destination that have not been received by year end. D) Goods returned for credit before year end, with terms F.O.B. shipping point. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

11) Which goods in transit would be recorded in inventory at year end? A) Goods purchased with terms F.O.B. destination point that were received after year end. B) Goods purchased with terms F.O.B. shipping point that were received after year end. C) Goods sold F.O.B. shipping point that were shipped two weeks before year end. D) Goods returned for credit, with terms F.O.B. destination point, received two days after year end. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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12) Which goods in transit would NOT be recorded in the seller's inventory at year end? A) Goods sold with terms F.O.B. destination point that were shipped at year end. B) Goods sold with terms F.O.B. shipping point that were shipped one day before year end. C) Goods sold F.O.B. destination point that remained on the shipping dock until one day after year end. D) Goods sold F.O.B. shipping point that were shipped two days after year end. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

13) Which goods in transit would NOT be recorded in the buyer's inventory at year end? A) Goods purchased with terms F.O.B. destination point that were received at year end. B) Goods purchased with terms F.O.B. shipping point that were received at year end. C) Goods purchased with terms F.O.B. destination point that were received after year end. D) Goods purchased F.O.B. shipping point that were lost in shipment. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

14) Which statement is correct about variable costing? A) Under this method, fixed overhead is considered a product cost because production cannot take place without these costs. B) Under this method, fixed overhead is considered a period cost because such costs do not vary according to production level. C) Under this method, variable overhead is considered a period cost because production cannot take place without these costs. D) Under this method, selling costs are considered a product cost because production cannot take place without these costs. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

15) Which statement is correct about overhead? A) Fixed overhead is expensed under absorption costing. B) Fixed overhead is never capitalized. C) Variable overhead is always capitalized. D) Fixed overhead is capitalized under absorption costing. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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16) Which transaction would NOT be included in year end inventory? A) Goods received on consignment at year end. B) Goods shipped out on consignment at year end. C) Goods shipped FOB shipping point after year end. D) Goods received at year end. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

17) Which statement is correct about absorption costing? A) Under this method, fixed overhead is considered a product cost because production cannot take place without these costs. B) Under this method, fixed overhead is considered a period cost because such costs do not vary according to production level. C) Under this method, variable overhead is considered a period cost because such costs do not vary according to production level. D) Under this method, selling costs are considered a product cost because such costs do not vary according to production level. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

18) Which statement is NOT correct about overhead? A) Fixed overhead is capitalized under absorption costing. B) Fixed overhead is expensed under variable costing. C) Variable overhead is expensed under both absorption and variable costing. D) Both fixed and variable overhead are capitalized under absorption costing. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

19) Which statement is correct about overhead? A) Fixed overhead is capitalized under absorption costing. B) Fixed overhead is capitalized under variable costing. C) Variable overhead is always expensed. D) Selling costs are part of fixed overhead. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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20) Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the year, purchases of $141,700 were made and debited to office supplies account. At the end of the year, a physical count of the office supplies indicated $41,800 on hand. What was the office supplies expense for the year? A) $141,700 B) $152,200 C) $183,500 D) $194,000 Answer: B Explanation: B) $52,300 + $141,700 - $41,800 = $152,200 Diff: 3 Type: MC Skill: Computational Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

21) A company has actual and budgeted fixed production overhead costs totalling $20,000. The normal production level is 2,000 units per year, yielding a standard fixed overhead rate of $10.00 per unit. If the actual production level is 3,200 units, and assume all actual production goes to inventory, how much would be the amount of fixed overhead per unit and the amount of total fixed overhead included in inventory? Select the letter for the best answer: A) Fixed overhead per unit Fixed overhead included in inventory $10.00 $32,000 B) Fixed overhead per unit

C) Fixed overhead per unit

D) Fixed overhead per unit

Fixed overhead included in inventory $6.25 $12,500

Fixed overhead included in inventory $10.00 $20,000

Fixed overhead included in inventory $6.25 $20,000

Answer: D Diff: 1 Type: MC Skill: Computational Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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22) A company has fixed production overhead costs totalling $25,000. The normal production level is 2,500 units per year, yielding a standard fixed overhead rate of $10.00 per unit. If the actual production level is 2,000 units, how much would be the amount of fixed overhead per unit and the amount of total fixed overhead included in inventory? Select the letter for the best answer: A) Fixed overhead per unit Fixed overhead included in inventory $12.50 $25,000 B) Fixed overhead per unit

C) Fixed overhead per unit

Fixed overhead included in inventory $10.00 $25,000

Fixed overhead included in inventory $10.00 $20,000

D) Fixed overhead per unit $12.50

Fixed overhead included in inventory $20,000

Answer: C Diff: 1 Type: MC Skill: Computational Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

23) Explain the meaning of product costs and period costs. Discuss which costs should be included in the cost of inventories. Answer: • Product costs are those that should be capitalized in inventory because they are incurred as part of the production process. • Period costs are those that should not be capitalized in inventory because they are not closely related to the production process. • Product costs include materials, labour, variable overhead, and fixed overhead. For financial reporting purposes, enterprises should include all costs necessary to purchase or to produce the inventory. Manufactured inventories should include product costs but exclude period costs. • An enterprise should allocate fixed production overhead using actual units produced unless production volume is abnormally low, in which case it should use the normal production level and expense any unallocated overhead. Diff: 1 Type: ES Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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24) Explain why the absorption costing method is appropriate under GAAP. Answer: While managerial accounting and internal decision-making purposes favour the variable costing method, IFRS and ASPE require the use of absorption costing for external financial reporting. Absorption costing is consistent with the conceptual framework: enterprises incur fixed overhead costs to produce goods that generate revenue in the future, so such costs meet the definition of an asset. In addition, the later expensing of these costs through COGS when the products are sold matches costs to the revenues generated. Diff: 2 Type: ES Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

25) Explain what problems are created for the auditor by the use of the absorption costing method under GAAP. Answer: While consistent with the conceptual framework, the capitalization of fixed overhead creates issues when production levels significantly deviate from normal production levels. Under absorption costing an enterprise can lower cost of goods sold by increasing production volume. If a manager needed a little extra income to, say, meet an earnings target, then he/she could raise production at the end of the year so that ending inventories absorbed more fixed overhead. Additionally, unusually low production volumes will result in unusually high fixed costs per unit being capitalized into inventory, and this outcome potentially overstates the value of inventory. While absorption costing is the treatment required for financial reporting, an auditor should be alert to such manipulations, as this behaviour could be indicative of other earnings management activities. Diff: 3 Type: ES Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

26) When can inventory be overstated under the absorption costing method? Explain the precautions within GAAP to prevent a potential overstatement of inventory under the absorption costing method. Answer: Unusually low production volumes will result in unusually high fixed costs per unit being capitalized into inventory, and this outcome potentially overstates the value of inventory. Under GAAP, companies should allocate fixed overhead based on the normal production level expected over several periods. If the actual production volume is significantly below normal, some fixed overhead would remain unallocated and should be expensed. Diff: 3 Type: ES Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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27) Explain how fixed overhead costs should be accounted for if a plant is made idle due to a prolonged strike. Answer: Under GAAP, companies should allocate fixed overhead based on the normal production level expected over several periods. If the actual production volume is significantly below normal, some fixed overhead would remain unallocated and should be expensed. In a strike situation, there would be no units of production to absorb the fixed overhead incurred. The only reasonable way to account for the unallocated overhead is to expense it. Diff: 2 Type: ES Skill: Conceptual Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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28) Inventive Controls Ltd. was incorporated and started business early in January 2024 to manufacture electronic control devices to monitor traffic. Inventive purchased a small manufacturing plant and office building in a new industrial park and was in operation immediately. General ledger account balances at December 31, 2024, are as follows: Sales commission Supervisory salaries, production manager Executive salaries Raw material purchases Miscellaneous plant supplies Depreciation, office building Depreciation, plant equipment Property tax (80% for office building; 20% for plant building) Sales Direct labour Raw material inventory, Dec. 31, 2024 Utilities expense (60% related to office) General administrative expense

$62,000 66,000 120,000 136,500 13,700 7,900 9,900 4,400 850,000 64,000 13,600 19,000 42,300

At December 31, 2024, there was no work-in-process, but 30% of the units manufactured remained in ending finished goods inventory. Inventive uses the straight-line method to calculate depreciation. Required: a. Calculate the value of cost of goods sold and ending finished goods inventory under IFRS. b. Prepare an income statement for Inventive for the year ended December 31, 2024.

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Answer: a. To calculate cost of goods sold and ending inventory, first calculate the cost of goods available for sale (COGAS). Since this is the first year of operations, COGAS equals the current year's production costs. (Later years would also need to include the cost of beginning inventory.) Product costs Raw material purchases Raw material inventory, December 31, 2024 Raw materials used in production Miscellaneous plant supplies Direct labour Supervisory salaries, production manager Utility expenses ($19,000 × 40%)

Amount $136,500 (13,600) 122,900 13,700 64,000 66,000 7,600

Property taxes ($4,400 × 20%) Depreciation, plant equipment Total production costs - COGAS

880 9,900 $284,980

Cost of goods sold (70% of COGAS) $284,980 × 0.7 = $199,486 Ending inventory of finished goods (30% of COGAS) $284,980 × 0.3 = $85,494 b. Using the amounts for COGS and ending inventory from (a), and the other information given, the income statement that results would be as follows: Incentive Controls Ltd. Income statement For the Year Ended December 31, 2024 Sales $850,000 Cost of goods sold 199,486 Gross margin 650,514 Sales commissions 62,000 General administrative expenses 42,300 Executive salaries 120,000 Utility expenses ($19,000 × 60%) 11,400 Property taxes ($4,400 × 80%) 3,520 Depreciation, office building 7,900 Income before tax $403,394 Diff: 2 Type: ES Skill: Computational Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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29) Outdoor Devices Inc. manufactures sport hunting equipment. The company's operations had the following results for 2024. Actual production volume approximated normal levels. F = favourable variance, meaning actual costs were below standard; U = unfavourable variance, meaning actual costs exceeded standard. Assume all variances are considered to be material. Item Raw materials, at standard cost Production wages, at standard cost Variable production overhead, at standard cost Fixed production overhead, at standard cost Total production cost, at standard cost

Standard Cost $ 220,000 719,000 310,000 825,000 $2,074,000

Raw material variance Labour variance Variable overhead variance Fixed overhead variance Net variance

$47,000 22,000 3,100 59,000 $80,900

U F F F U

Required: a. Determine the amount that Outdoor should include in the cost of inventories produced in the year. b. If actual production volume were higher than normal, what would be the effect on the cost of inventories on a per unit basis? What if actual production volume were lower than normal? Answer: a. This question indicates that the actual production volume approximated normal levels, so all material production variances should be adjusted through inventories (rather than expensed).

Item Raw materials Production wages Variable production overhead Fixed production overhead Total production cost

Standard cost $ 220,000 719,000 310,000 825,000 $2,074,000

Variance $47,000 U 22,000 F 3,100 F 59,000 U $80,900 U

Inventory amount $ 267,000 697,000 306,900 884,000 $2,154,900

b. If actual volume exceeded normal, the fixed cost per unit would need to be decreased so that total fixed cost absorbed by production equals total fixed costs. If actual volume is lower than normal, the unallocated fixed cost would be expensed. Diff: 2 Type: ES Skill: Computational Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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30) Muscle Concrete mixes concrete and trucks it to construction sites. The company uses a standard costing system for the batches of concrete produced. The company has a fleet of 10 mixing trucks, each of which goes on three runs per day, 350 days per year under normal circumstances. The standard costs are as follows: Standard costs per batch based on 1,050 batches per year Raw material — gravel, sand, cement, chemicals Wages Variable overhead — mixing truck depreciation, diesel fuel, etc. Fixed overhead — depreciation on raw materials silo Total production cost per batch Opening inventory cost — all raw materials Ending inventory cost — all raw material

Amount $1,000 400 450 400 $2,250 $1,000,000 450,000

During 2025, the company received an unusually large order for a big construction project. As a result, Muscle Concrete had to extend its operating hours and days, temporarily increasing output to 1,250 batches for the year. The company used the first-in, first-out cost flow assumption. Actual variable costs approximated standard costs per batch. Depreciation rates established at the beginning of the year remain valid for the year. Required: Determine the amount of cost of goods sold for 2025. Answer: Cost per batch Variables costs (2,250 - 400) $1,850 Fixed production costs (400 × $1,050)/1,250 336 Total production cost to include in inventories $2,186 Add: Opening inventory (raw materials) Less: Ending inventory (raw materials) Cost of goods sold

# batches 1,250 1,250

Amount $2,312,500 420,000 $2,732,500 1,000,000 ( 450,000) $3,282,500

Diff: 2 Type: ES Skill: Computational Objective: 6.2 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories.

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Learning Objective 3 1) Which statement best depicts the inventory cost flow equation? A) Cost of goods available for sale = Beginning inventory + Ending inventory. B) Beginning inventory + Purchases = Cost of sales + Ending inventory. C) Sales - Cost of goods sold = Gross margin. D) Gross margin - Operating expenses = Operating income. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

2) Explain how a merchandising company can manipulate earnings through its year-end inventories. What can an auditor do to detect this type of manipulation? Answer: Inventories need to be assessed for impairment using the lower of cost and net realizable value of the inventories. Clearly, not recording a writedown on impaired inventory (e.g., obsolete items, damaged items, demo units not for sale) will increase income. For retailers, the application of the retail inventory method relies on an accurate separation of discounted products from those that have normal markups. If management reverses markdowns just prior to year-end, then those items would appear to be regularly priced products and counted as such; the retail inventory method would then impute a higher value to that product. Financial statement readers will be unable to discern this type of earnings management, but auditors should verify that recent sale prices support the value of the items in inventory. Diff: 2 Type: ES Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

3) Which statement is correct about cost allocation methods under GAAP? A) FIFO method expenses the oldest costs first. B) FIFO method has the oldest costs on the balance sheet. C) FIFO method has the most recent costs in the income statement. D) FIFO is not an acceptable cost allocation method. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

4) Which statement is correct about cost allocation methods under GAAP? A) LIFO method expenses the oldest costs first. B) LIFO method has the most recent costs on the balance sheet. C) LIFO method has the most recent costs in the income statement. D) LIFO is an acceptable cost allocation method. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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5) Which statement is correct about the various cost allocation methods available in GAAP? A) FIFO is used in the initial recognition and measurement of inventory. B) LIFO is used to measure the ending inventory balance on the balance sheet. C) Weighted average is not an acceptable allocation method for the income statement. D) Moving weighted average is the perpetual weighted average cost method. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

6) What is the purpose of using a "cost allocation system" such as FIFO? A) Determining which expenditures to capitalize into the "inventory" account. B) Determining which expenditures to expense into the "cost of goods sold" account. C) Determining how much of the costs recognized in inventory should be expensed in the year. D) Determining the appropriate valuation of inventories that remain on hand. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

7) Which method cannot be used in Canada to allocate inventory costs between the income statement and the balance sheet? A) Specific identification. B) FIFO. C) Retail inventory method. D) LIFO. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

8) Which statement is correct about the specific identification method? A) It is prone to earnings management if used for distinguishable items. B) This method is most appropriate for low-value inventory items. C) It is inexpensive to maintain inventory records under this method. D) This method is most appropriate for high-value inventory items. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

9) Which statement best depicts the inventory cost flow equation? A) Beginning inventory + Sales = Cost of sales + Ending inventory. B) Beginning inventory + Goods manufactured = Cost of sales + Ending inventory. C) Beginning inventory - Purchase returns = Cost of sales + Ending inventory. D) Ending inventory + Purchases = Cost of sales + Beginning inventory. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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10) Why is a cost flow assumption used? A) This is a systematic method for allocating costs between beginning inventory and ending inventory. B) This is a systematic method for allocating costs between cost of goods available for sale and ending inventory. C) This is a systematic method for allocating costs between cost of goods sold and ending inventory. D) This is a systematic method for allocating costs between cost of goods manufactured and cost of goods sold. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

11) Which statement is correct about using a cost flow assumption? A) This is an assumption about the flow of goods through the various departments in an organization. B) This is an assumption about the flow of costs between the income statement and the balance sheet. C) There is only one acceptable cost flow assumption under GAAP in Canada. D) Specific identification and LIFO are both acceptable cost flow assumptions in Canada. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

12) Which statement is correct about using a cost flow assumption? A) An organization must use the same cost flow assumption as other organizations in its industry. B) There is only one acceptable cost flow assumption under GAAP in Canada. C) In Canada, organizations can use the FIFO or weighted average cost flow assumptions. D) In Canada, organizations can use the FIFO, LIFO or weighted average cost flow assumptions. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

13) Which statement best explains the FIFO cost flow assumption? A) A method that uses the most recent costs in the calculation of cost of sales. B) A method that uses the cost of goods available for sale divided by the number of units available for sale. C) A method that assigns costs to inventories and cost of sales based on actual costs of each item. D) A method that uses the oldest costs in the calculation of cost of sales. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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14) Which inventory method provides the highest quality information for the balance sheet? A) LIFO. B) FIFO. C) Weighted average. D) Retail inventory. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

15) Which inventory method provides the highest quality information for the income statement? A) LIFO. B) FIFO. C) Weighted average. D) Retail inventory. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

16) Which statement best explains the LIFO cost flow assumption? A) A method that uses the most recent costs in the calculation of cost of sales. B) A method that uses the cost of goods available for sale divided by the number of units available for sale. C) A method that assigns costs to inventories and cost of sales based on actual costs of each item. D) A method that uses the oldest costs in the calculation of cost of sales. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

17) Which statement best explains the specific identification method? A) A method that uses the most recent costs in the calculation of cost of sales. B) A method that uses the cost of goods available for sale divided by the number of units available for sale. C) A method that assigns costs to inventories and cost of sales based on actual costs of each item. D) A method that uses the oldest costs in the calculation of cost of sales. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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18) Which statement best explains the weighted average cost flow assumption? A) A method that uses the most recent costs in the calculation of cost of sales. B) A method that uses the cost of goods available for sale divided by the number of units available for sale. C) A method that assigns costs to inventories and cost of sales based on actual costs of each item. D) A method that uses the oldest costs in the calculation of cost of sales. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

19) Which statement best explains the retail inventory method? A) A method for estimating cost of goods sold by applying an average gross margin to the amount of sales recorded in a period. B) A method that assigns costs to inventories and cost of sales based on actual costs of each item. C) A method of estimating the cost of ending inventory by applying an average sales margin to the retail price of products. D) This method is least appropriate for inventory items that are not distinguishable from one another. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

20) Which statement best explains the gross margin method? A) A method for estimating cost of goods sold by applying an average gross margin to the amount of sales recorded in a period. B) A method that assigns costs to inventories and cost of sales based on actual costs of each item. C) A method of estimating the cost of ending inventory by applying an average sales margin to the retail price of products. D) This method is least appropriate for inventory items that are not distinguishable from one another. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

21) Which statement is NOT correct about the retail inventory method? A) It is an alternative to using a cost flow assumption. B) It is acceptable for annual financial reporting in Canada. C) It should only be used if reliable information is available about profit margins. D) It is a method that estimates ending inventory by applying an average sales margin. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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22) Which statement is correct about the retail inventory method? A) It represents a cost flow assumption. B) It estimates cost of goods sold by applying an average gross margin to the amount of sales recorded in the period. C) It can misstate inventory values if unreliable information is used about profit margins. D) It provides direct information about actual cost of goods sold or ending inventory. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

23) Which statement is correct? A) The retail inventory method estimates ending inventory cost using wholesale prices and an average gross margin. B) The retail inventory method estimates cost of goods sold using the inventory cost flow equation. C) The gross margin method estimates ending inventory cost using retail prices and an average gross margin. D) The gross margin method estimates cost of goods sold using the inventory cost flow equation. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

24) Under which cost flow assumption is it the easiest for management to manipulate income? A) LIFO. B) FIFO. C) Weighted average. D) Income manipulation is not possible through any of these methods. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

25) Which statement best explains the difference between the retail inventory and gross margin methods? A) The gross margin method estimates cost of goods sold by applying an average gross margin to the amount of sales recorded for the period. B) The gross margin method estimates ending inventory cost using retail prices and an average gross margin. C) The retail inventory method estimates cost of goods sold by applying an average gross margin to the amount of sales recorded for the period. D) The retail inventory method estimates ending inventory cost using purchase prices and an average gross margin. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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26) Which statement best explains the difference between the retail inventory and gross margin methods? A) The retail inventory method estimates cost of goods sold by applying an average gross margin to the amount of sales recorded for the period. B) The retail inventory method estimates ending inventory cost using wholesale prices and an average gross margin. C) The gross margin method calculates an estimated ending inventory balance by using the inventory cost flow equation. D) The gross margin method calculates an estimate of cost of goods sold using the inventory cost flow equation. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

27) If the gross margin percentage used in the gross margin method were overstated (for example, 36% instead of 32%), what would happen? A) Cost of goods sold would be overstated. B) Ending inventory would be understated. C) Ending inventory would be overstated. D) Ending inventory would be correctly stated, but beginning inventory would be incorrect. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

28) The following information was taken from the inventory records of Hari Ltd.: Dates Inventory — February 1 Purchases — April 1 Purchases — July 15 Units available for sale

Inventory units 100 units at $3.00 300 units at $3.10 200 units at $3.20 600 units

Sales — May 10 Sales — November 15

200 units at $6.00 100 units at $6.10

What would be the cost of goods sold, assuming that the LIFO method is used in a perpetual inventory system? A) $920 B) $930 C) $940 D) $950 Answer: C Explanation: C) (200 × $3.10) + (100 × $3.20) = $940 Diff: 2 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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29) The following information was taken from the inventory records of Helena Ltd.: Dates Inventory — February 1 Purchases — April 1 Purchases — July 15 Units available for sale

Inventory units 100 units at $3.00 300 units at $3.10 200 units at $3.20 600 units

Sales — May 10 Sales — November 15

200 units at $6.00 100 units at $6.10

What would be the cost of goods sold, assuming that the FIFO method is used in a periodic inventory system? A) $920 B) $930 C) $940 D) $950 Answer: A Explanation: A) (100 × $3.00) + (200 × $3.10) = $920 Diff: 2 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

30) The following information was taken from the inventory records of Penelope Ltd.: Dates Inventory — February 1 Purchases — April 1 Purchases — July 15 Units available for sale

Inventory units 100 units at $3.00 300 units at $3.10 200 units at $3.20 600 units

Sales — May 10 Sales — November 15

200 units at $6.00 100 units at $6.10

What would be the gross margin, assuming that the weighted-average method is used in a periodic inventory system? A) $310 B) $875 C) $935 D) $1,810 Answer: B Explanation: B) (200 × $6.00) + (100 × $6.10) = $1,810; (100 × $3.00) + (300 × $3.10) + (200 × $3.20) = $1,870; $1,810 - [$(1,870 / 600) × 300] = $875 Diff: 3 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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31) The following information was taken from the inventory records of Hope Corp.: Dates Inventory — February 1 Purchases — April 1 Purchases — July 15 Units available for sale

Inventory units 100 units at $3.00 300 units at $3.10 200 units at $3.20 600 units

Sales — May 10 Sales — November 15

200 units at $6.00 100 units at $6.10

What would be the ending inventory, assuming that the LIFO method is used in a periodic inventory system? A) $920 B) $930 C) $940 D) $950 Answer: A Explanation: A) (200 × $3.10) + (100 × $3.00) = $920 Diff: 2 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

32) West Retail uses the retail method of inventory valued at average cost, lower of cost and market. The following information relates to 2024: Cost ($) $700

Beginning inventory, January 1, 2024 Sales revenue Purchases Net mark-downs Net mark-ups

2,940

Retail ($) $1,000 4,300 4,000 100 200

What is the retail value of the 2024 ending inventory? A) $560 B) $700 C) $800 D) $1,000 Answer: C Explanation: C) GAFS at retail - sales ($1,000 + $4,000 + $200 – $100) – $4,300 = $800 Diff: 3 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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33) A fire destroyed the inventory of Mantis Company in June. Reconstructed data follows: Gross margin as a percentage of sales Sales to date of fire Gross purchases to date of fire Purchase returns and allowances to date of fire Freight-in Sales returns Beginning inventory

40% $460,000 280,000 8,000 4,000 10,000 28,000

What was the cost of the inventory lost in the fire? A) $50,000 B) $34,000 C) $30,000 D) $26,000 Answer: B Explanation: B) COGAS = $28,000 + $280,000 – $8,000 + $4,000 = $304,000 Est COGS = ($460,000 – $10,000) = $450,000; $450,000 × 0.60 = $270,000 COGAS – est COGS = EI; $304,000 – $270,000 = $34,000 Diff: 3 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

34) Given the following information, what would the gross margin be for the December 15 sale under the FIFO method in a perpetual inventory system? Dates Opening Inventory Purchases: April 12 July 7 Sales: August 12 December 15

Units of Inventory 200 units at $5.00 300 units at $5.10 400 units at $5.25 100 units at $8.00 500 units at $8.20

A) $1,813 B) $1,845 C) $1,785 D) $3,055 Answer: B Explanation: B) 500 × $8.20 = $4,100; $4,100 - [(100 × $5.00) - (300 × $5.10) - (100 × $5.25)] = $1,545 Diff: 3 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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35) Given the following information, what would the ending inventory value be on December 31 under the LIFO method in a periodic inventory system? Dates Opening Inventory Purchases: April 12 July 7 Sales: August 12 December 15

Units of Inventory 200 units at $5.00 300 units at $5.10 400 units at $5.25 100 units at $8.00 500 units at $8.20

A) $1,510 B) $1,575 C) $2,075 D) $3,120 Answer: A Explanation: A) (200 × $5.00) + (100 × $5.10) = $1,510 Diff: 3 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

36) Given the following information, what would the ending inventory value per unit be on April 30 under the weighted-average method in a perpetual inventory system? Dates Opening Inventory Purchases: April 12 July 7 Sales: August 12 December 15

Units of Inventory 200 units at $5.00 300 units at $5.10 400 units at $5.25 100 units at $8.00 500 units at $8.20

A) $5.05 B) $5.06 C) $5.075 D) $5.15 Answer: B Explanation: B) At April 30, (200 × $5.00) + (300 × $5.10) = $2,530; $2,530 / 500 = $5.06 Diff: 3 Type: MC Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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37) If the gross margin percentage used in the gross margin method were overstated (e.g., 36% instead of 32%), what would happen? A) Cost of goods sold would be overstated. B) Ending inventory would be understated. C) Ending inventory would be overstated. D) Ending inventory would be correctly stated, but beginning inventory would be incorrect. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

38) Garrit Limited's income statement reported the following for the year ended December 31, 2024: Sales revenue Cost of goods sold Expenses Net income

$881,000 573,000 129,000 $179,000

Which is the correct statement about the income statement? A) Mark-up on selling price is $573,000. B) Mark-up on cost is 53.75%. C) Gross margin percentage is 20.32%. D) Mark-up on the selling price is $308,000. Answer: B Explanation: B) $881,000 - $573,000 = $308,000; $308,000 / $573,000 = 53.75% Diff: 2 Type: MC Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

39) What inventory costing methods are permissible under GAAP? Explain the impact of these alternative methods on the income statement and the balance sheet. Answer: IFRS and ASPE permit specific identification, first-in, first-out (FIFO), and weighted-average cost flow assumptions. Due to the use of historical cost and the articulation of balance sheet and income statement numbers, more current inventory values (on the balance sheet) result in less current cost of sales (on the income statement), and vice versa. Diff: 2 Type: ES Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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40) Explain the meaning of the following inventory costing methods: FIFO, specific identification, LIFO, and weighted average. Answer: • First-in, first-out (FIFO): A cost flow assumption that uses the oldest costs in the calculation of cost of sales. • Last-in, first-out (LIFO): A cost flow assumption that uses the most recent costs in the calculation of cost of sales. • Specific identification: A method of assigning costs to inventories and cost of sales based on actual costs of each item. • Weighted-average cost: A cost flow assumption that uses the weighted-average cost in the calculation of cost of sales; weighted average is calculated using cost of goods available for sale divided by the number of units available for sale. Diff: 1 Type: ES Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

41) What is the difference between the gross margin and the retail method for estimating ending inventory? Answer: Gross margin method: A method for estimating cost of goods sold by applying an average gross margin to the amount of sales recorded in a period. Retail inventory method: A method of estimating the cost of ending inventory by applying an average sales margin to the retail price of products. Retailers use this method due to the relative ease of determining selling prices of each item. Diff: 1 Type: ES Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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42) Compare the FIFO and LIFO methods of inventory valuation. Which method provides better quality information and why? Answer: • To evaluate the quality of the information that results, we should consider information conveyed by both the balance sheet and the income statement. In addition, the resilience of the method to earnings management is also important because this affects the reliability of the reported information. • The balance sheet is most relevant for valuation if the amount reported for an asset approximates current value. Since FIFO leaves the cost of the most recent purchases in ending inventory, it provides high-quality information about the value of inventory. In contrast, LIFO values for ending inventory are low quality because they consist of the oldest costs, potentially years or decades old, which have little resemblance to current value. • The income statement is most relevant for evaluating performance if the basis for recognizing expenses matches the basis for revenue recognition. Sales revenue will generally reflect market conditions in the reporting period, so inventory costs that also come from the reporting period are the most relevant. The FIFO method includes costs from beginning inventory in the calculation of COGS, so some of these costs are outdated. In contrast, LIFO cost of goods sold consists of costs from the most recent purchases. Therefore, LIFO provides better matching of COGS with revenue. Exhibit 6-13

Comparison of FIFO and LIFO cost flow assumptions Weighted FIFO average Quality of balance sheet for valuation High Medium Quality of income statement expense (matching) Low Medium Ease of income manipulation Difficult Difficult

LIFO Very low High Easy

Diff: 2 Type: ES Skill: Conceptual Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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43) Consider the following inventory information for last year:

Beginning inventory, January 1 Purchase, March Purchase, July Purchase, October Goods available for sale

Number of units 2,500 10,000 5,000 7,500 25,000

Cost per unit $130 100 90 80

The company uses a periodic inventory system. The year-end inventory count indicated 5,300 units left in inventory. Required: Using the first-in, first-out (FIFO) method, calculate the ending inventory value and the cost of goods sold for the year. Answer: EI = 5,300 × $80 = $424,000 COGAS - EI = cost of goods sold COGAS = 2,500 × $130 + 10,000 × $100 + 5,000 × $90 + 7,500 × $80 = $2,375,000 $2,375,000 - $424,000 = $1,951,000 Diff: 1 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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44) Consider the following inventory information for last year:

Beginning inventory, January 1 Purchase, March Purchase, July Purchase, October Goods available for sale

Number of units 8,000 7,000 10,000 5,000 30,000

Cost per unit $20 25 30 41

Total cost $160,000 175,000 300,000 205,000 840,000

The company uses a periodic inventory system. The year-end inventory count indicated 3,700 units in inventory. Required: a. Calculate the weighted-average cost per unit for the year. b. Calculate the ending inventory value and the cost of goods sold for the year. Answer: a. Cost of goods available for sale / units available for sale = WAC per unit $840,000 / 30,000 units = $28/unit b. EI = WAC per unit × ending units $28 × 3,700 = $103,600 COGAS - EI = cost of goods sold $840,000 - $103,600 = $736,400 Diff: 1 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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45) Consider the following inventory information:

Beginning inventory, January 1 Purchase, January 7 Purchase, January 22 Units sold in January Ending inventory, January 31

Cost per unit $300 350 325 ?? ??

# units 900 250 550 1,400 300

Using the first-in, first-out (FIFO) method and the periodic inventory system, calculate the cost of goods sold in January and the cost of inventory on January 31. Answer: Cost per # units unit Total cost Beginning inventory, January 1 900 $300 $ 270,000 Purchase, January 7 250 350 87,500 Purchase, January 22 550 325 178,750 Goods available for sale 1,700 536,250 Ending inventory, January 31 (300) 325 (97,500) COGS 1,400 $438,750 Diff: 2 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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46) Johnson Ltd. began operations on January l, 2024. Merchandise purchases and four alternative methods of valuing inventory for the first two years of operations are summarized below:

Purchases Ending inventory Specific identification FIFO Average cost Lower of cost and market

2024 $700,000

2025 $850,000

210,000 238,000 224,000 190,000

203,000 188,000 189,000 178,000

Required: a. Which of the four methods listed above does not apply the matching principle? Briefly explain. b. Determine the cost flow assumption or inventory valuation method that would report the highest net income for 2024. c. Assuming that FIFO had been used for both years, how much would the cost of goods sold be for 2025? Answer: a. The lower of cost and market method does not apply the matching principle. Rather, it is a method to value the ending inventory. The amount that would result does not necessarily match the revenue recognized in the period. b. The highest income corresponds to the lowest cost of goods sold. Since 2024 is the first year of operations, the lowest cost of goods sold occurs when the ending inventory is the highest. Thus, the answer is the FIFO method.

Opening inventory$ + Purchases - Ending inventory = Cost of goods sold

Spec. ID 0 $ 700,000 (210,000) $490,000

FIFO 0 $ 700,000 (238,000) $462,000

Avg. cost 0 $ 700,000 (224,000) $476,000

LOCM 0 700,000 (190,000) $510,000

c. The cost of goods sold for 2025 under FIFO would be $900,000, calculated as follows: FIFO $238,000 850,000 (188,000) $900,000

Opening inventory + Purchases - Ending inventory = Cost of goods sold

Diff: 2 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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47) Connect has been selling cellular phones for the last five years. Its best-selling model is the E-PHONE. The following information pertains to the E-PHONE inventory for August 2025:

Opening inventory Purchase 1 Sale 1 Purchase 2 Sale 2 Ending inventory

Units 4,000 2,400 (1,800) 4,400 (4,200) 4,800

Unit cost $50 40 53

Required: a. If Connect uses the FIFO method under a periodic inventory system, what would be the cost of ending inventory for August 2025? b. If Connect uses the weighted-average method under a periodic inventory system, what would be the cost of goods sold for August 2025? c. If Connect uses the weighted-average method under a perpetual inventory system, what would be the cost of ending inventory for August 2025? Answer: a. Units × Unit cost = Total cost Ending inventory from purchase #2 4,400 $53 $233,200 Ending inventory from purchase #1 400 40 16,000 EI (# units given) 4,800 $249,200 b. COGAS / units available for sale = WAC per unit; $529,200 / 10,800 = $49.00 WAC per unit × ending units = EI; $49 × 4,800 = $235,200 COGAS - EI = cost of goods sold under WAC method; $529,200 - $235,200 = $294,000 c.

Opening inventory Purchase #1 Balance

Units 4,000 2,400 6,400

× Unit cost $50.00 40.00 46.25

= Total cost $200,000 96,000 296,000

Cost of sales #1 Purchase #2 Subtotal

(1,800) 4,400 9,000

46.25 53.00 49.55

(83,250) 233,200 $445,950

Cost of sale #2 Ending inventory

4,200 4,800

49.55 $49.55

(208,110) $237,840

Diff: 2 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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48) The inventory records of ZUP indicate the following regarding its best-selling product for the month of January: Units 6,000 4,000 (3,600) 8,000 (5,000) 9,400

Opening inventory Purchase 1 Sale 1 Purchase 2 Sale 2 Ending inventory

Unit cost $4.00 3.70 2.80

Required: Calculate the dollar amount of ending inventory and cost of goods sold under each of the following cost flow assumptions: a. Weighted-average cost, periodic inventory. b. First-in, first-out (FIFO), perpetual inventory. c. Weighted-average cost, perpetual inventory. Answer: a. COGAS / units available for sale = WAC per unit; $61,200 / 18,000 = $3.40 WAC per unit × ending units = EI; $3.40 × 9,400 = $31,960 COGAS - EI = cost of goods sold; $61,200 - $31,960 = $29,240 b. Ending inventory from purchase #2 Ending inventory from purchase #1 EI (# units given)

Units 8,000 1,400 9,400

× Unit cost $2.80 3.70

= Total cost $ 22,400 5,180 $27,580

× Unit cost $4.00 3.70 3.88

= Total cost $24,000 14,800 $38,800

Cost of goods sold = $61,200 – $27,580 = $33,620 c. Opening inventory Purchase #1 Balance

Units 6,000 4,000 10,000

Cost of sale #1 Purchase #2 Subtotal

(3,600) 8,000 14,400

3.88 2.80 3.28

(13,968) 22,400 47,232

Cost of sale #2 Ending inventory

(5,000) 9,400

3.28

(16,400) $30,832

Cost of goods sold = $61,200 - $30,832 = $30,368 Diff: 2 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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49) A retailer has a standard mark-up of 50% on invoiced cost. At the year-end, 200 out of 5,000 products had been discounted by 20% of retail price. Required: Calculate the estimated costs as a percentage of retail price, separately for regular and discounted products. Answer: Cost as % of retail price Regular 66.7% Discounted 83.3% Diff: 1 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

50) A retailer has a standard mark-up of 25% on cost. For the month of June, the company recorded sales of $200,000 and purchases of $170,000. Inventory at the beginning of June was estimated to be $240,000. Required: Using the gross margin method, estimate the cost of goods sold for the month of June and the cost of inventory at the end of June. Answer: Sales × cost as a fraction of retail price = cost of goods sold $200,000 × 80% = $160,000 Beginning inventory + Purchased - Cost of goods sold = Ending inventory $240,000 + $170,000 - $160,000 = $250,000 Diff: 1 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

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51) Crossway Outfitters is a retailer of outdoor clothing and equipment. The company has a standard markup of 60% on invoiced cost. Inventory at the beginning of the year was $1,840,000. During the year, the company purchased $14,300,000 of goods and recorded sales of $24,000,000. The year-end inventory count showed $2,590,000 in inventory measured at actual retail prices. Included in this total of $2,590,000 is $390,000 of goods that had been discounted by 25% relative to regular prices. Required: Using the retail inventory method, estimate the cost of inventory at the year-end and the amount of cost of goods sold. Answer: Mark-down Estimated (% of Retail price Cost as % cost Product Mark-up regular per dollar of retail Retail value (cost % × category (% on cost) price) of cost price of inventory retail value) Regular 60% -1.60 62.5000% $2,200,000 $1,375,000 Discounted 60% 25% 1.20 83.3333% 390,000 325,000 Total $2,590,000 $1,700,000 COGS = Beginning inventory + Purchases - Ending inventory = $1,840,000 + $14,300,000 - $1,700,000 = $14,440,000 Diff: 2 Type: ES Skill: Computational Objective: 6.3 Apply the different methods of allocating costs between inventory and cost of sales.

Learning Objective 4 1) Why are inventories reported at the lower of cost and market? A) Neutrality. B) Matching. C) Conservatism (prudence). D) Comparability. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

2) Which statement best explains "net realizable value"? A) The amount required to re-manufacture an item of inventory. B) The amount that can be obtained from the sale of inventory less selling costs. C) The amount it would cost to repurchase an item of inventory. D) The lowest amount that can be obtained from the sale of inventory. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

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3) What definition is used for "market" under IFRS and ASPE? A) The amount it would cost to repurchase an item of inventory. B) The lowest amount that can be obtained from the sale of inventory. C) The amount required to be paid to replace an item of inventory. D) The amount that can be obtained from selling the inventory less selling costs. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

4) What definition is used for "market" under IFRS and ASPE? A) Replacement cost. B) Net realizable value. C) Net recoverable amount. D) Fair value. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

5) Using the following cost information regarding finished goods, what would be the ending value of the finished goods inventory if the market value of the goods is $300,000?

Materials Costs to process into finished product

Cost $150,000 100,000

A) $0 B) $100,000 C) $150,000 D) $250,000 Answer: D Explanation: D) $150,000 + $100,000 = $250,000 Diff: 1 Type: MC Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

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6) Using the following cost information regarding finished goods, what would be the ending value of the finished goods inventory if the market value of the goods is $200,000?

Materials Costs to process into finished product

Cost $150,000 100,000

A) $0 B) $150,000 C) $200,000 D) $250,000 Answer: C Explanation: C) $200,000 = LOCM value Diff: 3 Type: MC Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

7) For the year ended December 31, 2024, Complex Company reported gross margin of $29,700, which was 30% of the sales for the period. The cost of goods available for sale was 120% of the cost of goods sold. The beginning inventory was twice as much as the ending inventory. What was the amount of purchases for 2024? A) $13,860 B) $29,700 C) $41,580 D) $55,440 Answer: D Explanation: D) GP = Sales - COGS Beg inv + Purchases – End inv = COGS $29,700 / 0.30 = $99,000; $99,000 × 0.70 = $69,300; $69,300 × 1.20 = $83,160; $83,160 – $69,300 = $13,860; $13,860 × 2 = $27,720; $83,160 – $27,720 = $55,440 Diff: 3 Type: MC Skill: Computational Objective: 6.4 Evaluate whether and by how much inventories should be written down.

8) At the end of 2024, a company reported cost of goods sold of $4,800, which represented 80% of the goods available for sale. The beginning inventory amount was twice as much as the ending inventory amount. What was the amount of purchases for 2024? A) $1,200 B) $2,400 C) $3,600 D) $5,400 Answer: C Explanation: C) $4,800 / 0.8 = $6,000; $6,000 - $4,800 = $1,200; $1,200 × 2 = $2,400; $6,000 - $2,400 = $3,600 Diff: 3 Type: MC Skill: Computational Objective: 6.4 Evaluate whether and by how much inventories should be written down.

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9) Use the following information:

Materials Costs to process into finished product

Cost $150,000 100,000

If the market price at year end is $210,000, what is the write-down required? A) $0 B) $40,000 C) $210,000 D) $250,000 Answer: B Explanation: B) $210,000 = market value or NRV of inventory. $150,000 + $100,000 = $250,000 = cost of inventory $250,000 – $210,000 = $40,000 = write down needed Diff: 3 Type: MC Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

10) Explain the meaning of net realizable value and when raw materials, work in progress and finished goods inventories need to be written down. Answer: Net realizable value: The amount that can be obtained from the sale (of inventory) less selling costs. Finished goods inventory: should write down inventories when their net realizable value falls below their cost. Raw materials and work-in-process inventories should only be written down if the finished products' net realizable value falls below cost. Diff: 1 Type: ES Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

11) Explain what happens if the value of inventory recovers after it has been written down. How often will such an adjustment actually be made to inventory? Answer: • If the market value of inventory recovers in a subsequent period, an enterprise can reverse some or all of the write-down in the prior period(s) and record a gain. • However, this reversal is rare because it can apply only to the same inventory on hand both at the time of the write-down and the reversal. • For most enterprises, the turnover in inventory is such that items will not be on hand for long enough for the reversal to be valid. Diff: 2 Type: ES Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

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12) Explain how items of inventory should be grouped for purposes of testing for impairment. Answer: • Inventories are usually written down to net realizable value item by item. • In some circumstances, however, it may be appropriate to group similar or related items. • This may be the case with items of inventory relating to the same product line that have similar purposes or end uses, are produced and marketed in the same geographic area, and cannot be practicably evaluated separately from other items in that product line. • It is not appropriate to write inventories down on the basis of a classification of inventory, for example, finished goods or all the inventories in a particular operating segment. • Thus, inventories should be evaluated for write-downs at the most detailed level possible. Diff: 2 Type: ES Skill: Conceptual Objective: 6.4 Evaluate whether and by how much inventories should be written down.

13) A specialized retailer has a selection of five products. The following is information relating to these products. Cost per Selling Product # Units unit price A 80 $ 60 $ 50 B 130 100 180 C 60 70 220 D 80 120 60 E 60 90 120 The company estimates selling costs to be 4% of selling price, primarily for sales commissions. Required: Determine the amount of inventory write-down per product required, if any. Answer: Net Write-down Selling realizable per unit costs (2% value (price required Total Cost per Selling of selling - selling (cost - NRV) write-down Product # Units unit price price) cost) or 0 for product A 80 $60.00 $50.00 $2.00 $48 .00 $ 12.00 $ 960.00 B 130 100.00 180.00 7.20 172.80 0 0 C 60 70.00 220.00 8.80 211.20 0 0 D 80 120.00 60.00 2.40 57.60 62.40 4,992.00 E 60 90.00 120.00 4.80 115.20 0 0

Diff: 2 Type: ES Skill: Computational Objective: 6.4 Evaluate whether and by how much inventories should be written down.

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14) A particular production process requires two types of raw materials to produce the end product. Each unit of finished product requires three units of raw material A and 2 units of raw material B and processing costs of $35. The following provides information on inventories at year-end:

Inventory item Finished product Raw material A Raw material B

# units 800 150 110

Cost per unit $181 10 58

Replacement Net realizable cost value NA $161 $17 NA 53 NA

Required: a. Evaluate these inventories to determine the amount of write-down, if any. b. Would your answer change if the replacement cost of raw material A were $11 per unit? Answer: a. The finished product's NRV < cost. Therefore, it needs to be written down by $20 per unit on 800 units, for a total of $16,000. The raw materials need to be evaluated together, not individually, because they are both required to produce the finished product.

Inventory item Finished product Raw material A Raw material B Total

# units 800 150 110

Cost per unit $181 10 58

Replace. cost/ NRV $161 17 53

Total cost $144,800 $1,500 6,380 $7,880

Total replace. cost/NRV $128,800 $1,550 5,830 $8,380

Writedown $16,000

none

b. If the replacement cost of raw material A were $11 per unit, the answer would change as follows: Total Cost per Replace. replace. WriteInventory item # units unit cost Total cost cost down Raw material A 150 10 $ 11 $1,500 $1,650 Raw material B 110 58 45 6,380 5,830 Total $7,880 $8,380 $400 Diff: 2 Type: ES Skill: Computational Objective: 6.4 Evaluate whether and by how much inventories should be written down.

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Learning Objective 5 1) Which statement is correct about inventory errors? A) Misstatements in inventory usually affect two reporting periods. B) Misstatements in inventory usually affect only the current accounting period. C) Misstatements in inventory usually affect only beginning inventory amounts. D) Misstatements in inventory usually affect only ending inventory amounts. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

2) What issues arise on the subsequent measurement of inventory? A) Determining which expenditures to capitalize into the "inventory" account. B) Determining which expenditures to expense into the "cost of goods sold" account. C) Determining how much of the costs recognized in inventory should be expensed in the year. D) Determining the appropriate valuation of inventories that remain on hand. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

3) Which statement is correct about inventory errors? A) Misstatements in inventory can affect the beginning inventory amounts. B) Misstatements in inventory are likely to affect only the current accounting period. C) Misstatements in inventory are likely to only affect one reporting period. D) Misstatements self-correct over three reporting periods. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

4) Which statement is NOT correct about inventory errors? A) Misstatements in inventory can affect the beginning inventory amounts. B) Misstatements in inventory can affect the ending inventory amounts. C) Misstatements in inventory affect current ratios. D) Misstatements in inventory have no effect on net income. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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5) Assume that a $100 purchase invoice received close to year-end is not recorded in fiscal 2024, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2024 financial reporting? A) Cost of sales is understated by $100. B) Gross margin is understated. C) Sales are understated by $100. D) Operating profit is understated by $100. Answer: A Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

6) Assume that a $500 purchase invoice received close to year-end of 2024 is not recorded until fiscal 2025, but the inventory is appropriately included in the ending inventory count of 2024. What impact will this have on fiscal 2025 financial reporting? A) Cost of sales is understated by $500. B) Gross margin is understated by $500. C) Operating expenses are overstated by $500. D) Operating profit is overstated by $500. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

7) Assume that a $400 purchase invoice received close to year-end of 2024 is not recorded until fiscal 2025, but the inventory is appropriately included in the ending inventory count of 2024. What impact will this have on fiscal 2025 financial reporting? A) Cost of sales is overstated by $400. B) Gross margin is overstated by $400. C) Cost of goods available for sale is understated by $400. D) There is no effect on fiscal 2025. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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8) Assume that a $1,000 purchase invoice received close to year-end is not recorded in fiscal 2024, but the inventory is appropriately included in the ending inventory count. What impact will this have on fiscal 2024 financial reporting? A) Purchases are overstated. B) Purchases are understated. C) Gross margin is understated. D) Cost of sales is overstated. Answer: B Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

9) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2024 financial reporting? A) Gross margin is overstated by $1,000. B) Cost of sales is overstated by $1,000. C) Ending inventory is overstated by $1,000. D) Cost of goods available for sale is overstated by $1,000. Answer: B Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

10) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2024 financial reporting? A) Cost of goods sold is understated by $1,000. B) Gross margin is overstated by $1,000. C) Ending inventory is understated by $1,000. D) Net income is overstated by $1,000. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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11) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Gross margin is understated by $1,000. B) Cost of sales is overstated by $1,000. C) Ending inventory is understated by $1,000. D) Beginning inventory is understated by $1,000. Answer: D Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

12) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Gross margin is overstated by $1,000. B) Cost of sales is overstated by $1,000. C) Ending inventory is understated by $1,000. D) Beginning inventory is overstated by $1,000. Answer: A Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

13) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Gross margin is understated by $1,000. B) Cost of sales is overstated by $1,000. C) Ending inventory is not affected by the prior year inventory counting error. D) Beginning inventory is overstated by $1,000. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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14) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Gross margin is understated by $1,000. B) Cost of goods available for sale is overstated by $1,000. C) Cost of sales is understated by $1,000. D) Beginning inventory is overstated by $1,000. Answer: C Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

15) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Gross margin is understated by $1,000. B) Cost of goods available for sale is understated by $1,000. C) Cost of sales is overstated by $1,000. D) Beginning inventory is overstated by $1,000. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

16) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this NOT have on fiscal 2025 financial reporting? A) Beginning inventory is understated by $1,000. B) Gross margin is overstated by $1,000. C) Cost of sales is understated by $1,000. D) Inventory is overstated on the balance sheet. Answer: D Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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17) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Beginning inventory is understated by $1,000. B) Gross margin is understated by $1,000. C) Cost of sales is overstated by $1,000. D) Inventory is understated on the balance sheet. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

18) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Beginning inventory is overstated by $1,000. B) Gross margin is overstated by $1,000. C) Cost of sales is overstated by $1,000. D) Inventory is understated on the balance sheet. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

19) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2024 financial reporting? A) Beginning inventory is understated by $1,000. B) Gross margin is understated by $1,000. C) Cost of sales is understated by $1,000. D) Inventory is overstated on the balance sheet. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

20) Assume that ending inventory in fiscal 2024 is overstated by $1,000. What impact will this have on fiscal 2024 financial reporting? A) Retained earnings is overstated by $1,000. B) Gross margin is understated by $1,000. C) Cost of sales is overstated by $1,000. D) Inventory is understated on the balance sheet. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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21) Assume that ending inventory in fiscal 2024 is overstated by $1,000. What impact will this have on fiscal 2025 financial reporting? A) Retained earnings is overstated by $1,000. B) Gross margin is understated by $1,000. C) Cost of sales is understated by $1,000. D) Inventory is understated on the balance sheet. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

22) Assume that ending inventory in fiscal 2024 is overstated by $1,000. What impact will this have on fiscal 2025 financial reporting? A) Retained earnings is overstated by $1,000. B) Retained earnings is understated by $1,000. C) No effect on retained earnings. D) Inventory is understated on the balance sheet. Answer: C Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

23) Assume that ending inventory in fiscal 2024 is overstated by $1,000. What impact will this have on fiscal 2024 financial reporting? A) Retained earnings is overstated by $1,000. B) No effect on inventory value on the balance sheet. C) No effect on retained earnings. D) Inventory is understated on the balance sheet. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

24) Assume that ending inventory in fiscal 2024 is understated by $1,000. What impact will this have on fiscal 2025 financial reporting? A) Retained earnings is overstated by $1,000. B) No effect on inventory value on the balance sheet. C) Retained earnings is understated by $1,000. D) Cost of goods sold is overstated. Answer: B Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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25) Assume that ending inventory in fiscal 2024 is overstated by $1,000 and that ending inventory in fiscal 2025 is overstated by $3,000. What impact will this have on fiscal 2025 financial reporting? A) Retained earnings is overstated by $2,000. B) Gross margin is overstated by $3,000. C) Cost of goods sold is understated by $2,000. D) Opening inventory is understated by $1,000. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

26) JP Corporation had net income of $1,000,000 for 2025. After issuing its financial statements, the corporation realized that it had failed to include inventory from one of its small warehouses for two years. Specifically, it forgot to include $20,000 on December 31, 2024, and $30,000 on December 31, 2025. Which of the following is TRUE regarding JP's 2025 net income? A) Net income was understated by $10,000. B) Net income was overstated by $10,000. C) Net income was understated by $30,000. D) Net income was overstated by $30,000. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

27) Lee Limited began operations on January 1, 2024. The following data relate to the company's first 2 years in business: Inventory December 31, 2024 December 31, 2025 Cost of goods sold For 2024 For 2025

Reported Amount Correct Amount $25,000 $20,000 35,000 30,000 400,000 450,000

?????? ??????

What is the correct cost of goods sold for 2025? A) $400,000 B) $405,000 C) $450,000 D) $460,000 Answer: C Explanation: C) $450,000 - ($25,000 -$ 20,000) + ($35,000 - $30,000) = $450,000 Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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28) Assume that ending inventory in fiscal 2024 is overstated by $1,000 and that ending inventory in fiscal 2025 is understated by $3,000. What impact will this have on fiscal 2025 financial reporting? A) Cost of goods sold is overstated by $4,000. B) Gross margin is understated by $3,000. C) Retained earnings is understated by $4,000. D) Opening inventory is understated by $1,000. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

29) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Gross margin is understated by $1,000. B) No effect on cost of goods available for sale. C) Cost of sales is understated by $1,000. D) Beginning inventory is overstated by $1,000. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

30) Assume that a purchase invoice for $1,000 was appropriately recorded in fiscal 2024, but the inventory was excluded in error during the ending inventory count. What impact will this have on fiscal 2025 financial reporting? A) Gross margin is overstated by $1,000. B) Cost of sales is overstated by $1,000. C) Ending inventory is understated by $1,000. D) No effect on beginning inventory. Answer: A Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

31) Assume that a $500 purchase invoice received close to year-end of 2024 is NOT recorded until fiscal 2025, but the inventory is appropriately included in the ending inventory count of 2024. What impact will this have on fiscal 2025 financial reporting? A) Cost of sales is understated by $500. B) No effect on gross margin. C) Operating expenses are overstated by $500. D) Operating profit is overstated by $500. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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32) For each of the following independent scenarios, indicate the effect of the error (if any) on: i. 2024 net income; ii. 2025 net income; and iii. 2025 closing retained earnings. The company uses the periodic system of inventory and its fiscal year-end is December 31. Ignore income tax effects. Consider each of the following independent scenarios: a. Your analysis of inventory indicates that inventory at the end of 2024 was overstated by $27,000 due to an inventory count error. Inventory at the end of 20 13 was correctly stated. b. Invoices in the amount of $107,000 for inventory received in December 2024 were not entered on the books in 2024. They were recorded as purchases in January 2025 when they were paid. The goods were counted in the 2024 inventory count and included in ending inventory on the 2024 financial statements. c. Goods received on consignment amounting to $89,000 were included in the physical count of goods at the end of 2025 and included in ending inventory on the 2025 financial statements. d. For each of the three scenarios, provide the journal entry that should be recorded in 2025 to correct the error. Answer: 2024 income 2025 income 2026 income a. Inventory count error overstated $27,000 understated $27,000 Correct b. Invoice recorded to late overstated $107,000 understated $107,000 Correct c. Incorrect inclusion of consignment goods in inventory correct overstated $89,000 overstated $89,000 a.

Dr. Retained earnings (re: cost of goods sold for 2024) Cr. Cost of goods sold

27,000

Dr. Retained earnings (re: cost of goods sold for 2024) Cr. Cost of goods sold

107,000

Dr. Cost of goods sold Cr. Inventory

89,000

27,000

107,000

89,000

Diff: 3 Type: ES Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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33) In early 2025, Darwin's Pet Shop discovered that some of its inventory of puppies were not what the supplier purported them to be. A total of 550 puppies that were supposed to be purebred (and therefore expensive) were in fact sired by parents with unknown history. As at the fiscal year ended December 31, 2024, 300 of these puppies had been sold while 250 remained in inventory. Purebred puppies cost $140 each and they would retail for $415. Non-purebreds have replacement cost of $30 each, and the estimated sale price is $100 each. Darwin is pursuing the supplier to obtain a refund for the cost difference. However, whether there will be compensation is uncertain. Required: a. Record the journal entry for the write-down of puppy inventory on December 31, 2024. Note any assumptions necessary. b. Suppose the error (non-purebreds treated as purebreds) had not been discovered. Indicate the effect of this error on the following accounts (i.e., were they over- or understated, and by how much?): i. Inventory, December 31, 2024; ii. Cost of goods sold, year 2024; and iii. Cost of goods sold, year 2025. Note: The owners of Darwin's Pet Shop do not intend to disclose the puppy inventory error to the buyers of the 300 puppies, nor do they intend to compensate them. This is clearly an ethical issue, but it is not a factor in this question. Answer: a. The puppy inventory needs to be written down to the lower of cost and market. "Market" should be net realizable value, or $100 each. The replacement cost of $30 each is not relevant. Since the purchases had been recorded at $140 each, but their realizable value is $100, the inventory value needs to be written down by $40 per puppy. Dr. Loss on write-down of inventory (or cost of sales) Cr. Inventories (250 puppies × $40 / puppy)

10,000 10,000

b. Inventory, December 31, 2024: overstated by $10,000 (250 in EI × $40 cost w/down) Cost of goods sold, year 2024: understated by $10,000 Cost of goods sold, year 2025: overstated by $10,000 Diff: 2 Type: ES Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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34) A particular production process requires two types of raw materials to produce the end product. Each unit of finished product requires three units of raw material A and 2 units of raw material B, plus processing costs of $35. The following provides information on inventories at fiscal 2024 year-end:

Inventory item Finished goods Raw material A Raw material B

# units 800 150 110

Cost per unit $181 10 58

Replacement cost NA $17 53

Net realizable value $161 NA NA

Required: a. Evaluate these inventories to determine the amount of write-down, if any. b. If the entry required in part (a) is not made in fiscal 2024, what is the effect on i) 2024 and 2025 inventory on the balance sheet? ii) 2024 and 2025 cost of goods sold? iii) 2024 and 2025 net income? iv) 2024 and 2025 retained earnings?

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Answer: a. The finished product's NRV < cost. Therefore, it needs to be written down by $20 (181 - 161) per unit on 800 units, for a total of $16,000. The raw materials need to be evaluated together, not individually, because they are both required to produce the finished product.

Inventory item

# units

Cost per unit

Replace. cost/ NRV

Finished goods Raw material A Raw material B Total

800 150 110

$181 10 58

$161 17 53

Total cost

Total replace. cost/NRV

$144,800 $1,500 6,380 $7,880

$128,800 $1,550 5,830 $8,380

Writedown $16,000

b. i) 2024 and 2025 inventory on the balance sheet • 2024 balance sheet inventory: overstated by $16,000 • 2024 balance sheet inventory: no effect ii) 2024 and 2025 cost of goods sold • 2024 cost of goods sold: understated by $16,000 • 2025 cost of goods sold: overstated by $16,000 iii) 2024 and 2025 net income • 2024 net income: overstated by $16,000 • 2025 net income: understated by $16,000 iv) 2024 and 2025 retained earnings • 2024 retained earnings: overstated by $16,000 • 2025 retained earnings will be stated correctly Diff: 2 Type: ES Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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35) Use the chart provided below to determine the impact of a company processing a $3,500 purchase invoice in fiscal 2026 for a purchase made near its fiscal 2025 year-end. The goods were appropriately included in the year-end inventory count. Goods included in inventory count Purchases recorded during the year 2025 Beginning inventory + Purchases - Ending inventory = Cost of goods sold Operating expense Net income

N/A

2026

N/A

Assets Liabilities Equity Answer: Goods included in inventory count Purchases recorded during the year Beginning inventory + Purchases - Ending inventory = Cost of goods sold Operating expense Net income Assets Liabilities Equity

Included Omitted 2025

2026

- $3,500

+ $3,500

- 3,500

+ 3,500

+ $3,500

- $3,500

$0 - $3,500 +$3,500

$0 0 0

Diff: 2 Type: ES Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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36) Use the chart provided below to determine the impact if a company forgets to include $3,500 of inventory that was shipped FOB shipping point on December 15, 2025, but was still in transit at year-end. The purchase invoice was received before year-end and appropriately included in the purchases and accounts payable. Goods included in inventory count Purchases recorded during the year 2025 Beginning inventory + Purchases - Ending inventory = Cost of goods sold Operating expense Net income

N/A

2026

N/A

Assets Liabilities Equity Answer: Goods included in inventory count Purchases recorded during the year

Omitted Included 2025

2026 + $3,500

Beginning inventory + Purchases - Ending inventory = Cost of goods sold Operating expense Net income

- $3,500 + 3,500

- 3,500

- $3,500

+ 3,500

Assets Liabilities Equity

-$3,500 0 -$3,500

$0 0 0

Diff: 2 Type: ES Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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37) Use the chart provided below to determine the impact if a company forgets to include $3,500 of inventory that was shipped FOB shipping point on December 25, 2025, but was still in transit at year end. The purchase invoice was processed in fiscal 2026. Goods included in inventory count Purchases recorded during the year 2025

2026

Omitted Omitted 2025

2026

Beginning inventory + Purchases - Ending inventory = Cost of goods sold Operating expense Net income Assets Liabilities Equity Answer: Goods included in inventory count Purchases recorded during the year Beginning inventory + Purchases - Ending inventory = Cost of goods sold Operating expense Net income Assets Liabilities Equity

- $3,500 -3,500 0

- $3,500 - $3,500 0

$0 0 0

Diff: 2 Type: ES Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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38) Use the chart provided below to determine the impact of a company expensing $4,000 transportation costs related to the purchase of its inventory. At year end, the company had sold 50% of the affected inventory items. Goods included in inventory count Purchases recorded during the year Transportation costs included in inventory 2025

2026

Included Included Omitted 2025

2026

Beginning inventory + Purchases - Ending inventory = Cost of goods sold Operating expense Net income

- $4,000 - 2,000 - 2,000 + 4,000 - $2,000

+ $2,000

Assets Liabilities Equity

- $2,000 0 -$2,000

$0 0 0

-$2,000 -2,000

Diff: 2 Type: ES Skill: Computational Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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39) Give some examples of how a manufacturing company can manipulate earnings by including non-production costs in inventories. What does an auditor or financial statement user do to detect this type of manipulation? Answer: When an enterprise incurs an expenditure, it either expenses that cost or capitalizes it as an asset such as inventory. Including a cost that would otherwise be expensed would keep that cost from flowing through the income statement temporarily until the inventory itself is sold. For example, including in inventory cost the wages of management staff who are not involved in production would inflate the cost of inventory and reduce wage expense. Auditors need to scrutinize whether costs are production related. Users will have a difficult task of discerning this type of earnings management, but a potential sign is a decrease in the gross margin percentage because including too much cost in inventories would increase cost of goods sold. Diff: 2 Type: ES Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

40) Give some examples of how a merchandising company can manipulate earnings through its year-end inventories. What can an auditor do to detect this type of manipulation? Answer: Inventories need to be assessed for impairment using the lower of cost and net realizable value of the inventories. Clearly, not recording a writedown on impaired inventory (e.g., obsolete items, damaged items, demo units not for sale) will increase income. For retailers, the application of the retail inventory method relies on an accurate separation of discounted products from those that have normal markups. If management reverses markdowns just prior to year-end, then those items would appear to be regularly priced products and counted as such; the retail inventory method would then impute a higher value to that product. Financial statement readers will be unable to discern this type of earnings management, but auditors should verify that recent sale prices support the value of the items in inventory. Diff: 2 Type: ES Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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41) Give some examples of how manufacturing companies can manipulate earnings through its production process. What should an auditor or financial statement user do to detect this type of manipulation? Answer: For manufacturing companies, producing more goods than the optimal amount for good inventory management can give a boost to income. Production volume that is over the normal level results in lower per unit costs because there are more units to absorb the fixed costs. The lower per unit cost then reduces the amount of COGS that flows through income, increasing net income. For users and auditors, it is important to be alert to a buildup of inventory at year-end, which could indicate excessive production for the purpose of earnings management. Diff: 2 Type: ES Skill: Conceptual Objective: 6.5 Synthesize the relationship between the income statement and balance sheet through analysis of inventory errors.

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Comprehensive Learning Objectives 1) Top Trimaran manufactures sailboats. Due to recessionary conditions which have significantly depressed sales, the company had to cut back production to levels significantly below the normal level of 900 units a year. In 2025, the company's production resulted in the following figures: Item Number of boats Opening inventory Production Sales Ending inventory

Amount 50 740 (690) 100

Standard cost per unit based on 500 units per year Raw materials Production wages Variable production overhead Fixed production overhead Total production cost

$13,000/unit 28,000/unit 15,000/unit 25,000/unit $81,000/unit

Opening inventory cost Sales

3,950,000 89,700,000

Actual amounts of variable and fixed costs were not materially different from standard costs. Required: Determine the amount of cost that should be included in inventories and the gross margin for the year. Top Trimaran uses the first-in, first-out cost flow assumption. Answer: Cost per unit # units Amount Variable costs $56,000 740 $41,440,000 Fixed production costs 25,000 740 18,500,000 Total production cost to include in inventories $81,000 $59,940,000 Sales Cost of sales From opening inventory From current year production Gross margin

$89,700,000 50 × $79,000 640 × $81,000

(3,950,000) (51,840,000) $33,910,000

Diff: 2 Type: ES Skill: Computational Objective: 6.2/ 6.3 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories./Apply the different methods of allocating costs between inventory and cost of sales.

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2) Sarabjit Inc. produced the following information for December 2024: Inventory balances: Opening inventory — December 1 -Raw materials (120,000 units) -Work in process (30,000 units) -Finished goods (10,000 units) Closing inventory (determined by inventory count) — December 31 -Raw materials (85,000 units) -Work in process (42,500 units) -Finished goods (12,500 units) Purchases in December: -Raw materials Net realizable value of inventory at December 31: -Raw materials (85,000 units) -Work in process (42,500 units) -Finished goods (12,500 units) Transactions near year-end that have NOT been included in the inventory count balances provided above: Purchased raw materials, FOB shipping point — shipped December 5, but arrived December 30 Purchased raw materials FOB destination point — shipped December 10, but arrived January 8 Purchased raw materials FOB shipping point — shipped December 15, but arrived January 10 Purchased raw materials FOB destination point that arrived December 28 Sold finished goods FOB destination point on December 31 that were shipped December 31 Sold finished goods FOB shipping point on December 30 that were shipped January 11 Sold finished goods FOB shipping point on December 30; these items were shipped December 30 Sold finished goods FOB shipping point that were shipped December 18 Sold finished goods FOB shipping point that were shipped December 31 Sold finished goods FOB shipping point that were shipped January 5

$120,000 45,000 90,000 $85,000 85,000 125,000 $100,000 $80,000 92,500 122,500

$10,000 20,000 10,500 10,000 12,000 5,000 2,000

4,500 8,100 3,700

Required: NOTE THAT EACH REQUIREMENT IS INDEPENDENT OF THE OTHERS. a) Determine if any of the transactions near year-end should be included in the December 31, 2024, inventory balance. b) Determine if there is any impairment of inventory at December 31, 2024. c) Determine the cost of goods sold for December 2024. d) The company has a historical gross margin of 25%. If sales were $400,000, what should ending

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inventory be at December 31, 2024?

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Answer: a) Determine if any of the transactions near year-end should be included in the December 31, 2024, inventory balance. Transactions near year-end that have NOT been included in the inventory count balances provided above: Purchased raw materials, FOB shipping point that arrived December 30 Purchased raw materials FOB destination point that arrived January 8 Purchased raw materials FOB shipping point that arrived January 10 Purchased raw materials FOB destination point that arrived December 28 Total impact to raw materials INVT Sold finished goods FOB destination point that were shipped December 31 Add back since not included in count Sold finished goods FOB shipping point on December 30; these items were shipped January 11 Add back since shipped after y/e and not included in count Sold finished goods FOB shipping point on December 30; these items were shipped December 30 Sold finished goods FOB shipping point that were shipped December 18 Sold finished goods FOB shipping point that were shipped December 31 Sold finished goods FOB destination point that were shipped January 5 Add back since not included in count Total impact to finished goods INVT

$10,000

Add/Deduct from Dec 31 Inventory $10,000

20,000

10,500

10,000

$12,000

$30,500 $12,000

5,000

2,000

4,500

8,100

3,700

$20,700

b) Determine if there is any impairment of inventory at December 31, 2024. Closing inventory Net realizable Lower of cost (determined by value of or NRV inventory count) — inventory at December 31 December 31: -Raw materials (85,000 units) -Work in process (42,500 units) -Finished goods (12,500 units)

$85,000 85,000 125,000

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$80,000 92,500 122,500

$80,000 85,000 122,500

There is impairment of raw material and finished goods inventory of $5,000 and $2,500 respectively. Note there is no impairment of work in process. c) Determine the cost of goods sold for December 2024. Open Inv ($120,000 + $45,000 + $90,000) + Purchases -Ending Inv ($85,000 + $85,000 + $125,000) Cost of goods sold

$255,000 100,000 (295,000) $60,000

d) The company has a historical gross margin of 25%. If sales were $400,000, what should ending inventory be at December 31? Based on 25% gross margin, gross margin should be $100,000 (25% × $400,000) Cost of goods sold will then be $300,000 (75% × $400,000) Ending inventory should then be: (Open Inv + Purchases - Cost of goods sold) = $255,000 + $100,000 - $300,000 = $55,000 Diff: 3 Type: ES Skill: Computational Objective: 6.2/ 6.3/ 6.4 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories./Apply the different methods of allocating costs between inventory and cost of sales./Evaluate whether and by how much inventories should be written down.

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3) SimBis Enterprises incurred the following costs to produce and sell its inventory in 2024: Raw materials consumed Labour used Variable overhead incurred Fixed overhead incurred Selling costs General administration Freight costs to bring in raw materials Freight costs on shipments to customers

$100,000 75,000 50,000 25,000 20,000 10,000 12,000 7,000

SimBis also noted that the following errors were made in recording transactions in 2024 (note that these errors only affect part (d) of this question): Omitted recording the purchase invoice in 2024; ending inventory was properly stated Omitted counting inventory in 2024; purchase account was properly stated Omitted from inventory count and from purchase account in 2024 Counted inventory twice in error in 2024 Consignment inventory out at consignee excluded in error in 2024 Recorded a purchase invoice twice in 2024

$6,000 7,000 3,000 5,000 10,000 7,500

Required: a) Determine the cost of inventory under the absorption costing method. b) Determine the cost of inventory under the variable costing method. c) Explain how management could potentially manipulate net income by using absorption costing. What can an analyst or investor do to check if income has been manipulated through the use of absorption costing? d) Assume that, before any corrections, gross margin was $500,000 and ending retained earnings was $750,000. Determine the impact of any inventory errors on cost of goods sold and ending retained earnings for 2024.

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Answer: a) and b)

Raw materials consumed Labour used Variable overhead incurred Fixed overhead incurred Selling costs General administration Freight costs to bring raw materials Freight costs on shipment to customers Total

Absorption costing $100,000 $100,000 75,000 75,000 50,000 50,000 25,000 25,000 20,000 10,000 12,000 12,000 7,000 $262,000

Variable costing $100,000 75,000 50,000

12,000 $237,000

c) Under absorption costing an enterprise can lower cost of goods sold by increasing production volume. If a manager needed extra income to, say, meet an earnings target, then they could increase production at the end of the year so that ending inventories absorbed more fixed overhead. An analyst or investor should be careful when interpreting gross margin figures and take into consideration the impact of possible changes in inventory levels. In particular, it is important to distinguish increasing gross margins that are due to improved cost management from the portion due to changes in production levels. d) Error

Impact on Impact on GM R/E $500,000 $750,000 $6,000 (6,000) (6,000)

Unadjusted balances Omitted recording the purchase invoice in 2024; ending inventory was properly stated Omitted counting inventory in 2024; purchase account was properly stated Omitted from inventory count and from purchase account in 2024 Counted inventory twice in error in 2024 Consignment inventory out at consignee excluded in error in 2024 Recorded a purchase invoice two times in 2024 Adjusted balances

7,000

3,000

5,000 10,000

(5,000) 10,000

7,500

7,500 $513,500

7,500 $763,500

Diff: 3 Type: ES Skill: Computational Objective: 6.2/ 6.3/ 6.5 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories./Apply the different methods of allocating costs between inventory and cost of sales./Synthesize the relationship between the income statement and the balance sheet through analysis of inventory errors.

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4) Comfy Feet manufactures slippers. In 2025, the company hired a new bookkeeper who did not have appropriate training. The bookkeeper charged all of the following costs for manufacturing 70,000 pairs of slippers to "Production Expense." Raw materials Factory labour Variable manufacturing overhead Fixed manufacturing overhead Factory depreciation Finished goods storage Interest for carrying finished goods Total

$34,000 115,000 14,000 17,000 30,000 1,500 1,600 $213,100

The company had zero work-in-process at the end of both 2024 and 2025. Finished goods amounted to 20,000 pairs at $9.00 per pair at the end of 2024. There were 6,500 pairs in finished goods inventory at the end of 2025. Required: a. Provide the adjusting journal entry or entries at December 31, 2025, to correct the bookkeeper's errors and properly record the above expenditures recorded in the "Production Expense" account. b. Assume the company uses a periodic inventory system and the FIFO cost flow assumption for finished goods. Calculate the cost of goods sold and the ending value of finished goods inventory for the year 2025. c. Now assume the company uses the weighted-average cost flow assumption. Calculate the cost of goods sold and the ending value of finished goods.

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Answer: a. The costs related to production should be included in the inventory account (work-in-process). Non-product (period) costs should be expensed. Storage and interest costs are period costs; all other costs are product costs. The journal entry to correct the error is as follows:

Dr. Inventory (WIP) Dr. Storage expense Dr. Interest expense Cr. Production expense

Debit 210,000 1,500 1,600

Credit

213,100

b. Assuming the periodic FIFO method, the cost of goods sold and ending inventory are calculated as follows: # pairs

Cost per pair

Total

Opening inventory

20,000

$9.00

$180,000

Production in 2025

70,000

3.00

210,000

Cost of goods available for sale Ending inventory

90,000 (6,500)

3.00

390,000 (19,500)

Cost of goods sold

83,500

$370,500

c. Assuming the periodic weighted average cost method, the cost of goods sold and ending inventory are calculated as follows: Cost of goods avail for sale / unit avail for sale = WAC per unit $390,000 / 90,000 = $4.3333333 WAC per unit × ending units = ending inventory $4.3333 × 6,500 = $28,167 Cost of goods avail – end inventory = Cost of goods sold $390,000 - $28,167 = $361,833 Diff: 2 Type: ES Skill: Computational Objective: 6.3/ 6.5 Apply the different methods of allocating costs between inventory and cost of sales./Synthesize the relationship between the income statement and the balance sheet through analysis of inventory errors.

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5) ABHAY Co. prepares monthly income statements. Inventory is counted only at year end; thus, month-end inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 25%. The following information relates to the month of June. Accounts receivable, June 1 $121,000 Inventory, June 1 147,000 Collections of accounts during June 184,000 Purchases during June 165,000 Accounts receivable, June 30 127,000 Instructions Calculate the estimated cost of the inventory on June 30. Answer: GP % = 25% / (1 +25%) = 20% Cost of goods sold % = 1-20% = 80% AR Collections Deduct accounts receivable Add accounts receivable Sales during the month

$ 184,000 (121,000) 127,000 $ 190,000

Inventory, beginning of month Purchases during month Goods available for sale Cost of sales ($190,000 × 80%) Estimated cost of inventory, end of month

$ 147,000 165,000 312,000 (152,000) $ 160,000

Diff: 3 Type: ES Skill: Computational Objective: 5.3/ 6.3 Apply the standards and procedures for the initial recognition, subsequent measurement of the balance sheet date, and derecognition of trade receivables./ Apply the different methods of allocating costs between inventory and cost of sales.

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6) Dianna Co. prepares monthly income statements. Inventory is counted only at year end; thus, month-end inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 20%. The following information relates to the month of September. Accounts receivable, September 1 $121,000 Inventory, September 1 147,000 Collections of accounts during September 184,000 Purchases during September 165,000 Accounts receivable, September 30 127,000 Required: Calculate the estimated cost of the inventory on September 30. Answer: GP % = 20% / (1 +20%) = 16.667% Cost of goods sold % = 1 - 16.667% = 83.333% AR Collections Deduct accounts receivable Add accounts receivable, Sales during the month

$ 184,000 (121,000) 127,000 $ 190,000

Inventory, beginning of month Purchases during month Goods available for sale Cost of sales ($190,000 × 83.333%) Estimated cost of inventory, end of month

$ 147,000 165,000 312,000 (158,333) $ 153,667

Diff: 3 Type: ES Skill: Computational Objective: 6.2/ 6.3 Analyze costing information to determine the types and amounts of costs that can be included in the cost of inventories./Apply the different methods of allocating costs between inventory and cost of sales.

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7) On January 1, 2025, Franchisor Inc. sold the rights to open a new franchise location to Franchisee Corp. The franchise lasts for ten years. The terms of the contract include the following: • A one-time fee of $50,000, due upon contract signing and an annual payment of $25,000 due on December 31 each year for the duration of the franchise agreement (ten annual payments of $25,000 first due December 31, 2025). These payments are for equipment (delivered at time of contract signing) and a commitment by Franchisor Inc.'s to provide technical support on an ongoing basis. • 4% of gross franchisee sales is payable monthly by Franchisee Corp. to Franchisor Inc., to cover marketing and advertising costs for the franchise. Other information • The stand-alone sales price for the equipment and technical support are $160,000 and $9,000 per annum respectively. Franchisor Inc. has determined that a 5% discount rate appropriately reflects the credit risk rate associated with Franchisee Corp. • Franchisor Inc. delivered the equipment at time of the contract signing. It was carrying these items in its inventory at a cost of $135,000. • Franchisee Corp. pays both the upfront fee and the first payment on the instalment contract on the stipulated payment dates. • Franchisee Corp.'s gross franchise sales for 2025 totalled $1,000,000 but due to an oversight, Franchisor Inc. has not yet invoiced Franchisee Corp. for any marketing and advertising fees. Required: a. Identify the distinct performance obligations in this contract. b. Determine the transaction price. c. Allocate the transaction price to the performance obligations. d. Prepare Franchisor Inc.'s journal entries for 2025. Assume that it only accrues revenue at year-end.

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Answer: a. There are three distinct performance obligation: (i) delivery of the equipment; (ii) providing technical support on an ongoing basis for the duration of the franchise agreement; and (iii) providing advertising and marketing coverage for the duration of the franchise agreement. b. The fixed component of the contract price is $50,000 plus ten annual payments of $25,000. As the repayment terms are longer than one year, the financing component needs to be considered. PMT = 25,000; N = 10; I = 5; CPT PV = $193,043; $193,043 + $50,000 = $243,043. The variable component of the contract price is 4% of the franchisee's sales. We must be prudent when we face uncertainty in the transaction price, however. In this respect we must take care to ensure that we will not have to reverse a significant amount of revenue before recording that revenue. Given the nature of the amount, being based on future sales at a new franchise location, there are too many possible outcomes to be able to measure the expected revenue with a high enough degree of certainty. As such, the amount of variable consideration to be recognized cannot be determined at the onset of the contract and should not be included in the initial transaction price. Rather, the amount will be recognized on a monthly basis when the amount is known. c. The fixed fee covers the equipment and technical support and must be allocated on a pro-rata basis between the stand-alone fair values of these goods and services. Performance obligation Equipment Technical support Total

Consideration / fair value $243,043 / $250,000 243,043 / $250,000

Stand-alone price $160,000 $9,000 × 10 years = 90,000 $250,000

Allocation of contract price $155,548 87,495 $243,043

The variable component pertains solely to the advertising and marketing coverage and as such the variable consideration received will be allocated entirely to this component.

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d. January 1, 2025 Dr. Cash Dr. Notes receivable Cr. Deferred revenue

50,000 193,043 243,043

Dr. Deferred revenue Cr. Sales revenue - equipment

155,548

Dr. Cost of goods sold Cr. Inventory

135,000

155,548

135,000

December 31, 2025 Dr. Note receivable Cr. Interest revenue ($193,043 × 5%)

9,652 9,652

Dr. Cash Cr. Note receivable

25,000

Dr. Deferred revenue Cr. Sales revenue — franchise services ($87,495 /10)

8,750

Dr. Accounts receivable

40,000

25,000

Cr. Franchise fee — sales and marketing ($1,000,000 × 4%)

8,750

40,000

Diff: 3 Type: ES Skill: Computational Objective: 4.2/ 4.3/ 5.3/ 5.4/ 6.3 Apply the general revenue and expense recognition criteria to a variety of contexts./Apply the specific revenue and expense recognition criteria for long-term contracts, including the prospective treatment applicable to changes in estimates./Apply the standards and procedures for the initial recognition, subsequent measurement at the balance sheet date, and derecognition of trade receivables./Apply the standards to account for non-trade receivables./Apply the different methods of allocating costs between inventory and cost of sales.

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 7 Financial Assets Learning Objective 1 1) What is a financial asset? A) An asset that has a fixed or determinable cash flow. B) Assets such as land and buildings that generate future cash flows. C) An asset arising from contractual agreements on future cash flows. D) An asset that does not generate future cash flows. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

2) Which item is an example of a financial asset? A) Share certificate of a public company. B) Land. C) Inventory. D) Equipment. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

3) Which item is an example of a real asset? A) Share certificates. B) Building. C) Bonds. D) Accounts receivable. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

4) Which item is an example of real property? A) Land. B) Equipment. C) Inventory. D) Accounts receivable. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

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5) Which statement is correct about financial instruments? A) A contract whose value changes according to a specified variable, requires little or no initial investment and is settled at a future date. B) A contract that gives the holder the residual interest in an entity after deducting all of its liabilities. C) Any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. D) Any contract that entitles the holder to joint interest in an entity after deducting all of its liabilities. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

6) Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets. Answer: Financial assets are contractual agreements that entitle the holder to future cash flows. Being contractual, financial assets have counterparties who have promised to pay these future cash flows, although these cash flows can be uncertain in both amount and timing (e.g., dividends). There is no single measurement basis that is suitable for all financial assets because the trade-off between the relevance and reliability of those measurements depends on the objectives of the enterprise's business model with respect to those investments. Accounting standards provide different measurement standards according to the objectives of the business model. Management's intention for buying these investments is transparently provided in the balance sheet and income statement, resulting in decision-useful information. Diff: 2 Type: ES Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

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7) Identify whether each of the following items is a financial asset: Financial asset? (Yes/No) US dollars in petty cash Investment in 5-year bonds Investment in an option (derivative) Account receivable due in 30 days Investment in machinery Answer: Financial asset? US dollars in petty cash Investment in 5-year bonds Investment in an option (derivative) Account receivable due in 30 days Investment in machinery

Yes Yes Yes Yes No

Diff: 1 Type: ES Skill: Computational Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

8) Identify whether each of the following items is a financial asset: Financial asset? (Yes/No) 3-year bond issued by the reporting entity Finished goods inventory Prepaid rent Investment in a joint venture Investment in shares of another entity Answer:

3-year bond issued by the reporting entity Finished goods inventory Prepaid rent Investment in a joint venture Investment in shares of another entity

Financial asset? (explanation is not required in student response; provided to assist in instructor take up) No (this is a financial liability) No (operating asset) No (operating asset) Yes Yes

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9) Describe the single most important characteristic of a financial asset that distinguishes it from a real asset. Answer: A financial asset results from a contract with a counterparty that gives the holder rights to future benefits in the form of cash flows. For example, a loan is a financial asset to a bank and a financial obligation of the borrower; the bank is entitled to receive future cash payments from the borrower. A real asset does not have a counterparty. Diff: 1 Type: ES Skill: Computational Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

10) Explain the characteristics of a financial asset. Discuss if cash has the characteristics of a financial asset. Why is (or is not) cash a financial asset? Answer: Generally speaking, a financial asset results from a contract with a counterparty that gives the holder rights to future benefits in the form of cash flows. While cash does not strictly have this characteristic, paragraph 11 of IAS 32, Financial Instruments: Presentation specifically states that cash is a financial asset. Discussion - The holder of cash has a contract with the central bank that issued the cash, but the only right that cash gives to its holder is ... more cash (i.e., you can trade in old bills for new bills). During some periods in the past, currency represented a certain amount of gold, a real commodity. Modern currency is not backed by any real assets; it is fiat money – money issued at the discretion of the government. Cash has future benefits only to the extent that people attribute value to it. Diff: 1 Type: ES Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

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11) Eastern Company contributes $5 million while Western Company contributes management expertise toward the creation of a joint venture called Ying. Ying purchases a building and obtains a mortgage to finance the purchase. The joint venture renovates the building with the help of contractors, who are paid 25 days after they render their services. After completion of renovations, Ying operates the building as a hotel. It also sells some of the rooms to individual investors. As a part of the purchase of each room, an investor has rights to 30% of the revenue from the hotel room purchased, while Ying retains 70% to cover operating costs. Identify all the financial assets involved in the above situation. Answer: The following are the financial assets involved in the scenario. Exceptions are noted as necessary for informational purposes (not required in student response). Eastern Company investment in Ying. Western Company investment in Ying. Bank's investment in the mortgage issued to Ying. Contractors' accounts receivable from Ying. An investor's hotel room is NOT a financial asset, but a real asset that generates revenues. The 30% share of revenue is generated by the room that the investor owns, and is not a claim against the hotel operator, Ying. In other words, an investor owns his room while Ying is just an agent who manages his/her property for a fee. Diff: 2 Type: ES Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

12) Victoria purchases a hotel with 100 similar rooms. To help finance this purchase, Victoria sells these rooms to individual investors for $200,000 each. An investor who owns a single room receives 55% of 1% of the revenue of the hotel (i.e., 0.55%), while the hotel retains the other 0.45%. An investor who wishes to liquidate his/her investment may sell his/her room back to Victoria for the original $200,000, but cannot otherwise sell the room to other parties. Identify all the financial assets involved in the above situation. Answer: An investor buying into Victoria's hotel has a financial asset in the form of a 55% claim on 1% of the hotel's revenue, or a fixed $200,000 at the time of sale. The investment is not in a hotel room per se, because the investor does not have a right to sell his/her room at current market value (whatever that may be). In other words, the investor does not own a real asset because he/she does not have the risks and rewards of ownership. The investor has a purely financial claim on future cash flows. The uncertainty of those future cash flows does not invalidate this as a financial asset; many equity investments have similar characteristics. Victoria rather than the investors is the owner of the hotel rooms. Diff: 2 Type: ES Skill: Conceptual Objective: 7.1 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets.

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Learning Objective 2 1) Which of the following is correct about joint operations? A) Joint operation is not a type of joint arrangement. B) Joint operation is the same as a joint venture. C) Proportionate consolidation is used for a joint operation. D) Equity method of accounting is used for a joint operation. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

2) Explain the difference between a joint arrangement, joint control, joint operation and a joint venture. Answer: A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control by those parties. Joint control is the contractually agreed upon sharing of control over an economic activity. Joint control exists only when the strategic decisions relating to the activity require the unanimous consent of the parties sharing control. Joint operation is a type of joint arrangement where the investor has rights to the assets and obligations for the liabilities of the arrangement. Joint venture is a type of joint arrangement where the investor has rights to the net assets of the arrangement. Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

3) Explain the difference between a joint arrangement, joint control, joint operation and a joint venture. Explain how each type of investment is accounted for under IFRS. Answer: A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control by those parties. Joint control is the contractually agreed upon sharing of control over an economic activity. Joint control exists only when the strategic decisions relating to the activity require the unanimous consent of the parties sharing control. Joint operation is a type of joint arrangement where the investor has rights to the assets and obligations for the liabilities of the arrangement. The proportionate consolidation method is used. Joint venture is a type of joint arrangement where the investor has rights to the net assets of the arrangement. The equity method of accounting is used. Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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4) Explain the difference between a joint arrangement, joint control, joint operation and a joint venture. Explain how each type of investment is accounted for under IFRS. Explain the underlying reasons for the difference in accounting methods for these investments. Answer: A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control by those parties. Joint control is the contractually agreed upon sharing of control over an economic activity. Joint control exists only when the strategic decisions relating to the activity require the unanimous consent of the parties sharing control. Joint operation is a type of joint arrangement where the investor has rights to the assets and obligations for the liabilities of the arrangement. The proportionate consolidation method is used. Because joint operations have the characteristics of joint control, and this control relates to the specific assets and liabilities of the investee, some form of consolidation is logical—just as is for subsidiaries. Full consolidation, however, is inappropriate because more than one party shares the control (unlike in subsidiary where one party has control only). As such, proportionate consolidation is appropriate which picks up the proportionate share of the joint operation's assets, liabilities and income. Joint venture is a type of joint arrangement where the investor has rights to the net assets of the arrangement. The equity method of accounting is used. To reflect the exposure to net assets of the venture, the equity method is appropriate—this a condensed consolidation method that shows the financial position and results of operations on a net (one-line) basis. Full consolidation is not appropriate for the same reasons as provided above for joint operations and proportionate consolidation is not appropriate since this investment only give the investor control over the net assets—not the individual assets/ liabilities. Diff: 3 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

5) Which statement is correct about debt instruments? A) A contract whose value changes according to a specified variable. B) A contract that gives the holder the residual interest in an entity. C) A contract that gives the holder joint interest in an entity. D) A contract that is not an equity instrument or a derivative. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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6) Which statement is correct about an equity instrument? A) A contract whose value changes according to a specified variable, requires little or no initial investment and is settled at a future date. B) A contract that gives the holder the residual interest in an entity after deducting all of its liabilities. C) Any contract that entitles the holder to joint interest in an entity after deducting all of its liabilities, and is settled at a future date. D) Any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

7) Which statement is correct about derivative instruments? A) Any contract that entitles the holder to joint interest in an entity after deducting all of its liabilities. B) A contract whose value changes according to a specified variable, requires little or no initial investment, and is settled at a future date. C) Any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. D) A contract that gives the holder the residual interest in an entity after deducting all of its liabilities. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

8) Explain why there is no one single measurement basis that is suitable for all financial assets. Does this mean that a company can choose any measurement base for any investment? Answer: There is no single measurement basis that is suitable for all financial assets because the trade-off between the relevance and reliability of those measurements depends on the enterprise's business model with respect to those investments. Accounting standards provide different measurement standards according to the objectives of the enterprise's business model. Management's intention for buying these investments is transparently provided in the balance sheet and income statement, resulting in decision-useful information. The need for different measurement bases, however, does not imply that all measurement bases are possible for every kind of investment. Instead, accounting standards specify the criteria for different classifications of financial assets and the corresponding accounting treatment that is judged to be appropriate for that category. Diff: 3 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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9) Which statement is NOT correct? A) At fair value through profit or loss investments are carried at fair value. B) At fair value through OCI investments are carried at fair value. C) Amortized cost investments are carried at fair value. D) Investments in equity instruments cannot be classified at fair value through OCI. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

10) Which statement is correct about joint arrangements? A) IFRS distinguishes between joint operations and joint ventures. B) IFRS uses the terms joint operations and joint ventures inter-changeably. C) IFRS permits either the proportionate consolidation method or equity method. D) IFRS permits only the equity method. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

11) Which statement is correct about a financial instrument? A) An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity. B) An arrangement where one entity governs the financial and operating policies about another entity. C) A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties. D) An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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12) Elyse Inc. made the following investments during its 2024 fiscal year. a. The company places $3,000 in an 8-month term deposit with its bank. b. The company purchases from its broker a call option on 2,500 shares of BMO Financial, a publicly traded company, for $5,500, in anticipation of an increase in the stock price. c. The company buys 30% of the outstanding shares of NEXT Corp. The purchase was made in anticipation of a bid by BEFORE Corp. to purchase all of the shares of NEXT within the next nine months. d. The company buys $35,000 of shares in a publicly traded corporation with a market capitalization of more than $20 billion. Required: Identify how the company should categorize the above financial assets. Briefly explain the reason for the classification. Answer: a. Amortized cost—this is a debt instrument, so possible classifications include: at fair value through profit or loss; at fair value through OCI; and at amortized cost. A term deposit is not tradable, though, which precludes classifying the investment at FVPL or at FVOCI. b. At fair value through profit or loss—a call option is a derivative and all derivatives must normally be classified as at fair value through profit or loss. c. Significant influence or at fair value through profit or loss—the 30% ownership creates a presumption of significant influence and categorization as an affiliate; there is no specific information to refute this presumption. However, the purchase was made in anticipation of resale over the short term, making a classification as at fair value through profit or loss also acceptable. d. At fair value through profit or loss—this is a portfolio investment and it is in equity securities, so it would normally be classified at FVPL. The investment could also be classified at FVOCI providing that the entity made an irrevocable election to do so. Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

13) Explain the meaning of and give an example for the following categories of financial instruments: equity, a derivative, or debt. Answer: An equity instrument is a contract that gives the holder the residual interest in an entity after deducting all of its liabilities, such as a common share. A derivative is a financial instrument whose value changes in accordance with an underlying variable such as an interest rate or stock price; it requires little or no initial investment; and is settled at a future date. A debt instrument is any financial instrument that is not an equity instrument or a derivative. A bond is a common example of a debt instrument. Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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14) For each of the following financial asset classifications shown in the left column, identify the combinations of (i) the type of financial instrument in the middle column that can be put into that classification and (ii) the business model that would lead to that classification. Accounting classification FVPL FVOCI Amortized cost Associate Joint Venture Subsidiary Answer: Accounting classification

FVPL

FVOCI

Amortized cost Associate Joint Venture Subsidiary

Type of financial instrument

Business model

Type of financial = instrument + Business model i) Non-strategic investments in which the enterprise intends to sell the investment with the expectation of a profit. ii) Investments in derivatives are classified at FVPL. Equity iii) FVPL is the default category for any Debt financial assets not classified into one of the Derivatives other categories. Equity Non-strategic investments in which the (irrevocable enterprise intends to collect contractual cash election) flows to which it is entitled and profit from the Debt change in value. Non-strategic investments in which the enterprise intends to hold the investment for the purpose of collecting contractual cash Debt flows of principal and interest. Equity Significant influence Equity Joint control Equity Control

Diff: 1 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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15) For financial reporting purposes, financial assets can be put into one of seven categories: subsidiaries, joint ventures, associates, at fair value through profit or loss, at fair value through OCI, amortized cost, and joint operations. For each of the following items, identify the possible categories into which it can be placed. More than one category is possible for an item. Financial asset categories An exporter enters into a currency swap (a derivative contract) to fix the exchange rate on the US dollar denominated sale. Sweet things buys $180,000 bonds that mature in five years. Fish Firm Company buys 300 common shares of a publicly traded company that has 100 million shares outstanding. Answer: Financial asset categories An exporter enters into a currency swap (a derivative contract) to fix the exchange rate on the US dollar denominated sale. Fair value through profit or loss Fair value through profit or loss Sweet things buys $180,000 bonds that mature in Fair value through other comprehensive five years. income Amortized cost Fish Firm Company buys 300 common shares of a Fair value through profit or loss publicly traded company that has 100 million Irrevocable election - fair value through shares outstanding. other comprehensive income Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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16) For financial reporting purposes, financial assets can be put into one of seven categories: subsidiaries, joint ventures, associates, at fair value through profit or loss, at fair value through OCI, amortized cost, and joint operations. For each of the following items, identify the possible categories into which it can be placed. More than one category is possible for an item. Financial asset categories Colder Company buys 500 common shares of a publicly traded company that has 200 million shares outstanding. Bountiful gifts buys 1,000 preferred shares in another company. The shares do not have voting rights. Fast cars buys 800,000 common shares in Super Autos. There are 4,000,000 shares outstanding. Answer: Financial asset categories Colder Company buys 500 common shares of a Fair value through profit or loss publicly traded company that has 200 million Irrevocable election - fair value through shares outstanding. other comprehensive income Bountiful gifts buys 1,000 preferred shares in Fair value through profit or loss another company. The shares do not have voting Irrevocable election - fair value through rights. other comprehensive income Associate Fair value through profit or loss (if no significant influence) Irrevocable election - fair value through Fast cars buys 800,000 common shares in Super other comprehensive income (if no Autos. There are 4,000,000 shares outstanding. significant influence) Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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17) Classify each of the following items into one of the seven categories of financial assets relevant for financial reporting purposes. Select the category that BEST suits the situation given. Financial asset category relevant for financial reporting purposes

Investment in bonds maturing in 30 years Investment in bonds maturing in two years. Management made the purchase to invest idle cash until after two years, when it make a major capital expenditure. Investment in 900,000 shares of Hot. Corp. a public company with 2 million shares outstanding. Purchase of 600 shares of Delicious Treats, a private company with 1,000 shares outstanding. Answer: Financial asset category relevant for financial reporting purposes Subjectively fair value through profit or loss, although it could be classified at fair value through other comprehensive income or at amortized cost. Depends on the company's business model. Unlikely to hold thirty years to maturity, however.

Investment in bonds maturing in 30 years Investment in bonds maturing in two years. Management made the purchase to invest idle cash until after two years, when it make a Amortized cost. The intent it to hold until major capital expenditure. maturity, rather than to sell it in the interim. Investment in 900,000 shares of Hot. Corp. a public company with 2 million shares Associate outstanding. Purchase of 600 shares of Delicious Treats, a private company with 1,000 shares outstanding. Subsidiary

Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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18) Classify each of the following items into one of the seven categories of financial assets relevant for financial reporting purposes. Select the category that BEST suits the situation given. Financial asset category relevant for financial reporting purposes Purchase of 1000 shares of Hobster Corp., a public company with 10 million shares outstanding. Investment in 60% of the outstanding shares of HKY Inc. An agreement with the company's founder specifies that he retains the right to make all operating decisions for HKY. BEE Corp. buys 15% of the outstanding shares of CEE Corp. After the purchase, BEE appoints its chief executive officer to the board of directors of CEE. Investment in 8,000 shares of CIBC. Management believes that shares are currently underpriced. Answer: Financial asset category relevant for financial reporting purposes Subjectively fair value through profit or loss, although it could be irrevocably Purchase of 1000 shares of Hobster Corp., a public classified at fair value through other company with 10 million shares outstanding. comprehensive income. Investment in 60% of the outstanding shares of HKY Inc. An agreement with the company's Associate. While there is probably founder specifies that he retains the right to make significant influence, control does not all operating decisions for HKY. exist. Associate. While the ownership is less BEE Corp. buys 15% of the outstanding shares of than 20%, the appointment of BBE's CEE Corp. After the purchase, BEE appoints its CEO to the board of CEE indicates chief executive officer to the board of directors of significant influence. CEE. Subjectively fair value through profit or loss, although it could be irrevocably classified at fair value through other Investment in 8,000 shares of CIBC. Management comprehensive income if the investment believes that shares are currently underpriced. is not held for trading. Diff: 2 Type: ES Skill: Conceptual Objective: 7.2 Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint operations, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost.

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Learning Objective 3 1) What is the meaning of "control"? A) The power to participate in the financial and operating policy decisions of the investee. B) The power to govern the financial and operating policies of an entity. C) The power to share in strategic decisions affecting an entity. D) The power to sell the shares of an entity. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

2) What is a "subsidiary"? A) An entity where unanimous consent is required by the owners. B) An entity that is controlled by another entity. C) An entity over which the investor has the ability to participate in decisions affecting the entity's operations. D) An entity that sells shares to the public. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

3) Which statement is correct about joint arrangements? A) An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity. B) An arrangement where one entity governs the financial and operating policies of another entity. C) A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties. D) An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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4) Which statement is correct about subsidiaries? A) An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity. B) An arrangement where one entity governs the financial and operating policies about another entity. C) A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties. D) An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

5) Which statement is correct about an associate? A) An arrangement where one party has the power to participate in the financial and operating policy decisions of another entity. B) An arrangement where one entity governs the financial and operating policies about another entity. C) A contractual arrangement whereby two or more parties share control over an economic activity and all strategic decisions requires unanimous consent by all parties. D) An arrangement that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

6) Which of the following statements is TRUE about the equity method of accounting? A) This method is used when the investor has no influence over the associate. B) This method is a condensed consolidation that shows the investor's share of the net assets and net income of the investee. C) This method record dividends from the associate as income from operations. D) This method has the same accounting impact as the amortized cost method. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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7) Based on the following information, what amount will be presented for current assets on the consolidated balance sheet of Investor for its wholly owned subsidiary?

Current assets Long-term assets Investment in investee Current liabilities Long-term liabilities Equity

Investor $500 300 200 350 450 200

Investee $550 50 0 200 300 100

A) $300 B) $500 C) $550 D) $1,050 Answer: D Explanation: D) $500 + $550 = $1,050 Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

8) Based on the following information, what amount will be presented for "investment in investee" on the consolidated balance sheet of Spenser for its wholly owned subsidiary?

Current assets Long-term assets Investment in investee Current liabilities Long-term liabilities Equity

Investor $500 300 200 350 450 200

Investee $550 50 0 200 300 100

A) $0 B) $200 C) $300 D) $600 Answer: A Explanation: A) The investment account is eliminated upon consolidation Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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9) Based on the following information, what amount will be presented for "equity" on the consolidated balance sheet of Investor for its wholly owned subsidiary?

Current assets Long-term assets Investment in investee Current liabilities Long-term liabilities Equity

Investor $500 300 200 350 450 200

Investee $550 50 0 200 300 100

A) $100 B) $300 C) $600 D) $700 Answer: B Explanation: B) $500 + $550 + $300 + $50 + $200 - $350 - $200 - $450 - $300 = $300 Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

10) Which statement is NOT correct about "control"? A) Control is presumed when an entity has more than 50% of the voting power of the investee. B) Having control allows the entity to direct the strategic operations of the investee. C) Control is presumed when an entity owns more than 50% of the investee. D) Consolidation is used when an entity has control over the investee. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

11) Which statement is NOT correct about "joint arrangements"? A) Joint arrangements usually have a limited life and a defined set of objectives or activities. B) A joint arrangement is the same as a partnership for financial accounting purposes. C) Unanimous consent for all decisions is required of all parties. D) There is a contractually agreed sharing of control over economic activities. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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12) Which statement is NOT correct about strategic investments? A) Proportionate consolidation is used for joint ventures because of the presence of joint control. B) Proportionate share of the investee's assets is included in the joint venturer's balance sheet. C) Consolidation effectively results in two legal entities being reported as one economic unit. D) The fair value through profit or loss method is used for strategic investments. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

13) Which statement is NOT correct about "associates"? A) Holding 18% of the voting power of the investee may mean significant influence exists. B) The ability to exercise significant influence over the investee mitigates moral hazard. C) The ability to exercise significant influence over the investee mitigates adverse selection. D) Significant influence is presumed if 51% of the voting power of the investee is held. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

14) Which statement is NOT correct about the equity method? A) The investment account on the balance sheet equals the original cost plus the investor's share of the investee's post-acquisition changes in net assets. B) This method results in reflecting two legal entities as one economic unit for financial reporting purposes. C) Income is recognized equal to the investor's share of the investee's net income. D) Dividends from the investee are deducted from the investor's investment account. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

15) What is the meaning of "significant influence"? A) The power to participate in the financial and operating policy decisions of the investee. B) The power to govern the financial and operating policies of an entity. C) The power to share in strategic decisions affecting an entity. D) The power to sell the shares of an entity. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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16) What is the meaning of "joint control"? A) Ability to participate in the financial and operating policy decisions of the investee. B) Ability to govern the financial and operating policies of an entity. C) The power to share in strategic decisions affecting an entity. D) Ability to sell the shares of an entity. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

17) What is an "associate"? A) An entity where unanimous consent over decisions is required by the owners. B) An entity where the investor can exercise unilateral control over the decisions of the investee. C) An entity where the investor has the ability to participate in decisions affecting the investee. D) An entity that cannot sell shares to the public or issue debt in the marketplace. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

18) What is a "joint arrangement"? A) An entity where unanimous consent by the owners for all decisions is required. B) An entity that is controlled by another entity. C) An entity over which the investor has the ability to participate in decisions affecting the entity's operations. D) An entity that sells shares to the public. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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19) Philips has a 50% joint operation interest in Josef. Based on the following information, what amount will be presented for current assets on Philips' proportionately consolidated balance sheet?

Current assets Long-term assets Investment in investee Current liabilities Long-term liabilities Equity

Philips $500 300 200 350 450 200

Josef $550 50 0 200 300 100

A) $500 B) $550 C) $775 D) $1,050 Answer: C Explanation: C) $500 + ($550 × 50% interest) = $775 Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

20) Starts has a 60% joint operation interest in Fish. Based on the following information, what amount will be presented for current liabilities on Starts' proportionately consolidated balance sheet?

Current assets Long-term assets Investment in investee Current liabilities Long-term liabilities Equity

Starts $500 300 200 350 450 200

Fish $550 50 0 200 300 100

A) $550 B) $470 C) $350 D) $200 Answer: B Explanation: B) $350 + ($200 × 60% interest) = $470 Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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21) Philips has a 50% joint operation interest in Josef. Based on the following information, what amount will be presented for net income on Philips' proportionately consolidated income statement?

Revenue Income from Josef Expenses Net income

Philips $1,000 200 450 $750

Josef $2,000 1,600 $400

A) $200 B) $550 C) $750 D) $1,150 Answer: C Explanation: C) $750 + (50% × $400) - $200 = $750 Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

22) Kings has a 40% joint operation interest in Fisher. Based on the following information, what amount will be presented for "revenues" on Kings' proportionately consolidated income statement?

Revenue Income from Fisher Expenses Net income

Kings $1,000 160 450 $710

Fisher $2,000 1,600 $400

A) $1,000 B) $1,800 C) $2,000 D) $3,000 Answer: B Explanation: B) $1,000 + (40% × $2,000) = $1,800 Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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23) Kings has a 40% joint operation interest in Fisher. Based on the following information, what amount will be presented for "income from Fisher" on Kings' proportionately consolidated income statement?

Revenue Income from Fisher Expenses Net income

Kings $1,000 160 450 $710

Fisher $2,000 1,600 $400

A) $0 B) $160 C) $400 D) $710 Answer: A Explanation: A) Income from Fisher will be eliminated upon proportionate consolidation. Diff: 3 Type: MC Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

24) Explain the nature of and the appropriate accounting treatment for investments in subsidiaries, joint ventures, and associates. Answer: When an enterprise has control, joint control, or significant influence over another enterprise, it classifies that investment as a subsidiary, joint venture, or associate, respectively. These are strategic investments in which the enterprise has substantial and concentrated holdings in the equity of other enterprises. Enterprises should use consolidation, proportionate consolidation, and the equity method to account for subsidiaries, joint ventures, and associates. These three methods share substantial similarities in that they reflect the economic ties among the entities. Diff: 2 Type: ES Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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25) Accounting standards provide for a variety of different measurement bases for different types of financial assets. IFRS has several measurement bases, namely: • consolidation • fair value with changes through income • proportionate consolidation • fair value with changes through other comprehensive income • equity method • amortized cost Required: a. Explain why reporting entities should, on the one hand, use consolidation, proportionate consolidation, and the equity method for investments in subsidiaries, joint ventures, and associates, but on the other hand, use the fair value method for equity investments that are at fair value through profit or loss or at fair value through OCI. b. Explain, for investments in debt securities, why measurement at amortized cost is more appropriate for debt investments for which the business model is to collect contractual cash flows, but one of the fair value methods is more appropriate for investments for which the business model includes an intent to profit from changes in value of the investment. c. Explain why it is appropriate for changes in fair value to flow through income when the investment is classified as at fair value through profit or loss, but the same changes in fair value flow through other comprehensive income when the investment is classified as at fair value through OCI.

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Answer: a. There are three reasons. First, the two sets of investments differ in the amount of influence the reporting entity (the investor) has in the investee. When the investor has control, joint control, or significant influence in the operations of the investee, consolidation, proportionate consolidation, and the equity method are appropriate because these methods produce results as if the investor directly invested in the assets and liabilities of the investee. When this level of influence does not exist, the investor does not have direct decision-making authority over the assets and liabilities of the investee; rather, the investor's main decision is to buy, hold, or sell the security, so the fair value of the investment is more relevant information than the value of the investee's individual assets and liabilities. Second, fair values are not the most relevant amounts for investments in subsidiaries, joint ventures, and associates because such investors are privy to information not available to the general public (i.e., they have inside information). In addition, such investments are not likely to be sold on a piecemeal basis, but more likely in all-or-nothing transactions that will have prices that are transaction-specific and significantly differ from any available market prices. Third, the amount of information available to the investor differs. When the investor has control, joint control, or significant influence, it is able to obtain substantially more information about the internal operations of the investee, relative to other investors who do not have these levels of influence. Application of consolidation, proportionate consolidation, and the equity method require such inside information; therefore methods similar to these are not feasible for portfolio investors. b. Amortized cost rather than fair value is more appropriate for debt investments for which the business model is to collect contractual cash flows because fair values during the holding period are relevant only for sales of the investment, which is not expected to occur. In contrast, fair values are relevant for debt investments classified as at fair value through profit or loss or at fair value through OCI because the fair values may influence whether and/or when management decides to sell the securities. c. Income is intended to measure the results of operations. When management classifies investments as at fair value through profit or loss, those investments are then appropriately considered to be part of operations, and management should be evaluated on its ability to earn profits from such investments. In contrast, when management has no specific intentions to trade the investment, but may do so if it is profitable to do so (FVOCI), management is indicating that it is not actively managing these investments and that they are not part of operations. Consequently, the unrealized gains and losses from changes in fair value should not flow through income. If such unrealized gains and losses were to be included in income, the volatility of earnings would increase, which is not desirable for risk-averse managers and investors. Diff: 2 Type: ES Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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26) How does having significant influence over an investee alleviate information asymmetry? Answer: The ability to exert significant influence is valuable to the investor because it helps to reduce the two types of information asymmetry: moral hazard and adverse selection. Having representation on the board of directors and generally being able to participate in the governance of the investee alleviates moral hazard inherent in the agency relationship between ownership and management At the same time, an investor company with significant influence faces less adverse selection because it is able to obtain better (i.e., inside) information on the investee in comparison to other investors who do not have such influence. Diff: 3 Type: ES Skill: Conceptual Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

27) On January 1, 2025, Ella Ltd. purchased 25% of the common shares of JB Inc. for $2,200,000. In 2025, JB reported net income of $280,000 and paid dividends of $100,000. Required: a. Which of the following conditions must be met for Ella to use the equity method to report its investment in JB? i. Ella owns at least 20% of the voting shares of JB. ii. Ella has control over JB. iii. Ella has a significant interest in JB. iv. Ella is able to exercise significant influence over JB. b. How much income would be reported by Ella in 2025 related to its investment in JB under the equity method? Answer: a. iv —Ella is able to exercise significant influence over JB. b. Under the equity method Ella would report 2025 income of $70,000 related to its investment in JB [$280,000 × 25% = $70,000]. Note that dividends are not reported as income when using the equity method; they are a reduction of the investment account. Diff: 2 Type: ES Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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28) Invest Up Hardware operates a chain of hardware stores. Recent operations have been stable and profitable, resulting in a significant amount of cash inflows. During the past fiscal year ended December 31, the company made a number of investments, as described below. a. Invest Up bought 30,000 shares of Machine Mart, a supplier of equipment for construction and renovations. With in-depth knowledge of the hardware retailing business, Invest Up's management believes that Machine Mart's shares are undervalued and that the company could make a quick profit selling the shares within the next 12 months. Invest Up purchased the shares at $18 each, and received $0.30 per share dividends during the year. The shares traded at $29 at the fiscal year-end. b. The company purchased 12,000 units of a mutual fund which cost $28 each. Management had no specific trading intentions for this investment; rather, it was a means of parking excess cash. At the end of the year, the units had a quoted market value of $24. c. At the beginning of the year, Invest Up bought 25% of the common shares in Builder Bee, one of its smaller suppliers, for $6 million. These shares had a fair value of $6.6 million at the end of the year. During the year, Builder Bee reported net income of $1,500,000 and paid total dividends of $10,000 Required: Determine how Invest Up should report the above investments in its financial statements. Include both the effects on the balance sheet and the statement of comprehensive income. Answer: Total dollar value Total dollar increase/decrease to reported on statement of comprehensive Category balance sheet income a. At fair value through profit or loss $870,000 $339,000 b. At fair value through profit or loss, although the entity may irrevocably elect to classify at FVOCI 288,000 (48,000) c. Associate 6,372,500 375,000 Diff: 2 Type: ES Skill: Computational Objective: 7.3 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches.

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Learning Objective 4 1) Which statement about investments is NOT correct? A) An at fair value through profit or loss investment is a non-strategic investment. B) An investment in an associate is a strategic investment. C) An at fair value through OCI investment is a strategic investment. D) An investment for which the business model is to collect the contractual cash flows of principal and interest is a non-strategic investment. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

2) How would a short-term investment in bonds to earn a return on funds that would otherwise be held as cash be classified? A) Amortized cost. B) At fair value through profit or loss. C) At fair value through other comprehensive income. D) Associate. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

3) Which financial asset classification best describes the business model that includes acquiring portfolio investments with the intent to trade them for a profit? A) Associate. B) Amortized cost. C) At fair value through other comprehensive income. D) At fair value through profit or loss. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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4) Which financial asset classification best describes the business model that includes acquiring portfolio investments in debt securities with the intent to collect contractual cash flows to which it is entitled and profit from the change in value? A) Associate. B) Amortized cost. C) At fair value through other comprehensive income. D) At fair value through profit or loss. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

5) Which statement is correct about an at fair value through OCI investment? A) The investment is reported at historical cost. B) Changes in fair value are recorded in OCI. C) These investments are acquired exclusively for selling in the near term. D) Changes in fair value are recorded in income. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

6) What should an investment in a debt instrument be classified as when the business model does not include an intent to trade it? A) Associate. B) Amortized cost. C) At fair value through OCI. D) At fair value through profit or loss. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

7) What should an investment in a debt investment be classified as when management has not specifically identified the classification? That is to say, in the absence of an election, what is the default category? A) Associate. B) Amortized cost C) At fair value through OCI. D) At fair value through profit or loss. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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8) Which statement is correct about an at fair value through profit or loss investment? A) The investment is recorded at fair value. B) Changes in fair value are recorded in OCI. C) The investment is recorded at amortized cost. D) The category cannot include debt instruments. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

9) Fisher Corporation has the following investments at September 30, 2025:

Shares of ABC Bonds of Brooke Shares of CooksTown Shares of Davenport

Historical cost $25,000 10,000 12,000 18,000

Fair value Sept. 30, 2024 $15,000 12,000 18,000 20,000

Fair value Sept. 30, 2025 $25,000 11,000 16,000 19,000

What method of accounting will Fisher use to account for its investment in ABC, if this investment is held for trading purposes? A) Amortized cost. B) Equity method. C) Fair value through other comprehensive income. D) Fair value through profit or loss. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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10) Fisher Corporation has the following investments at September 30, 2025:

Shares of ABC Bonds of Brooke Shares of CooksTown Shares of Davenport

Historical cost $25,000 10,000 12,000 18,000

Fair value Sept. 30, 2024 $15,000 12,000 18,000 20,000

Fair value Sept. 30, 2025 $25,000 11,000 16,000 19,000

What method of accounting will Fisher use to account for its investment in Brooke, if the intent of the business model is to hold the investment for the purpose of collecting contractual cash flows of principal and interest? A) Amortized cost. B) Equity method. C) Fair value through other comprehensive income. D) Fair value through profit or loss. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

11) What factor is important in classifying an investment at fair value through profit or loss? A) Whether the instrument is a debt, equity or derivative instrument. B) Whether the instrument has a set maturity date. C) What is the business model within which the investments are held? D) Whether the instrument generates dividends. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

12) What factor is the most important in classifying an investment at fair value through other comprehensive income? A) Whether the instrument is a derivative instrument. B) Whether management intends to sell the instrument shortly after purchase. C) Whether gains will be realized in the next operating cycle. D) Whether the instrument has a fixed maturity date. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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13) Fisher Corporation has the following investments at September 30, 2025:

Shares of ABC Bonds of Brooke Shares of CooksTown (Fisher holds 30% of the outstanding voting shares of CooksTown) Shares of Davenport

Historical cost $25,000 10,000

Fair value Sept. 30, 2024 $15,000 12,000

Fair value Sept. 30, 2025 $25,000 11,000

12,000 18,000

18,000 20,000

16,000 19,000

What method of accounting will Fisher use to account for its investment in Brooke, if the intent of the business model is to hold the investment for the purpose of collecting contractual cash flows of principal and interest and profit from changes in value? A) Amortized cost. B) Equity method. C) Fair value through other comprehensive income. D) Fair value through profit or loss. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

14) Which investment could be classified at amortized cost? A) Equity instrument. B) Debt instrument. C) Derivative. D) Associate. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

15) How should derivatives be classified? A) At fair value through profit or loss. B) Amortized cost. C) At fair value through OCI. D) Proportionate consolidation. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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16) Fisher Corporation has the following investments at September 30, 2025:

Shares of ABC Bonds of Brooke Shares of CooksTown (Fisher holds 35% of the outstanding voting shares of CooksTown) Shares of Davenport

Historical cost $25,000 10,000

Fair value Sept. 30, 2024 $15,000 12,000

Fair value Sept. 30, 2025 $25,000 11,000

12,000 18,000

18,000 20,000

16,000 19,000

What method of accounting can Fisher NOT use to account for its investment in CooksTown? A) Amortized cost. B) Equity method. C) Fair value through other comprehensive income. D) Fair value through profit or loss. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

17) Fisher Corporation has the following investments at September 30, 2025:

Shares of ABC Bonds of Brooke Shares of CooksTown (Fisher holds 35% of the outstanding voting shares of CooksTown) Shares of Davenport

Historical cost $25,000 10,000

Fair value Sept. 30, 2024 $15,000 12,000

Fair value Sept. 30, 2025 $25,000 11,000

12,000 18,000

18,000 20,000

16,000 19,000

What method of accounting will Fisher use to account for its investment in CooksTown if this investment is classified as an associate? A) Amortized cost. B) Equity method. C) Fair value through other comprehensive income. D) Fair value through profit or loss. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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18) Fisher Corporation has the following investments at December 31, 2025:

Shares of ABC Bonds of Brooke (purchased at par value) Shares of CooksTown (Fisher holds 35% of the outstanding voting shares of CooksTown) Shares of Davenport

Historical cost $25,000

Fair value Sept. 30, 2024 $15,000

Fair value Sept. 30, 2025 $25,000

Fair value Dec. 31, 2025 $30,000

10,000

12,000

11,000

12,500

12,000 18,000

18,000 20,000

16,000 19,000

If Fisher classifies its investment in Brooke at amortized cost, what amount will be reported in Fisher's 2025 year-end balance sheet? A) $10,000 B) $11,000 C) $12,000 D) $12,500 Answer: A Explanation: A) Will be reported at cost since purchased at par (no premium or discount). Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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19) Satellite Corporation has the following investments at December 31, 2025:

Shares of ABC Bonds of Brooke (purchased at par value) Shares of CooksTown (Satellite holds 35% of the outstanding voting shares of CooksTown) Shares of Davenport

Historical cost $25,000

Fair value Sept. 30, 2024 $15,000

Fair value Fair value Sept. 30, 2025 Dec. 31, 2025 $25,000 $30,000

10,000

12,000

11,000

12,500

12,000 18,000

18,000 20,000

16,000 19,000

If Satellite classifies its investment in Davenport at fair value through profit or loss, what amount will be reported for the investment at September 30, 2025? A) $1,000 B) $18,000 C) $19,000 D) $20,000 Answer: C Explanation: C) Fair value amount Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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20) Satellite Corporation has the following investments at December 31, 2025:

Shares of ABC Bonds of Brooke (purchased at par value) Shares of CooksTown (Satellite holds 35% of the outstanding voting shares of CooksTown) Shares of Davenport

Historical cost $25,000

Fair value Sept. 30, 2024 $15,000

Fair value Fair value Sept. 30, 2025 Dec. 31, 2025 $25,000 $30,000

10,000

12,000

11,000

12,500

12,000 18,000

18,000 20,000

16,000 19,000

If Satellite irrevocably elected to classify its investment in Davenport at fair value through OCI, what amount will be reported for the investment at September 30, 2025? A) $1,000 B) $18,000 C) $19,000 D) $20,000 Answer: C Explanation: C) Fair value amount Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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21) Amacon Corporation has the following investments at December 31, 2025:

Shares of DEF Bonds of Brooke (purchased at par value) Shares of CooksTown Shares of Daisy

Historical cost $25,000

Fair value Sept. 30, 2024 $15,000

Fair value Sept. 30, 2025 $25,000

Fair value Dec. 31, 2025 $30,000

10,000 12,000 18,000

12,000 18,000 16,500

11,000 16,000 19,500

12,500 16,000 20,500

Amacon, whose year-end is September 30, purchased the share of Daisy on January 1, 2024. If Amacon irrevocably elected to classify its investment in Daisy at fair value through OCI, what amount will be reported in other comprehensive income at September 30, 2025? A) $1,500 gain. B) $2,500 gain. C) $3,000 gain. D) $19,500 Answer: C Explanation: A) $19,500 - $18,000 = $1,500 gain Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

22) Amacon Corporation has the following investments at December 31, 2025:

Shares of DEF Bonds of Brooke (purchased at par value) Shares of CooksTown Shares of Daisy

Historical cost $25,000

Fair value Sept. 30, 2024 $15,000

Fair value Sept. 30, 2025 $25,000

Fair value Dec. 31, 2025 $30,000

10,000 12,000 18,000

12,000 18,000 16,500

11,000 16,000 19,500

12,500 16,000 20,500

If Amacon classifies its investment in DEF at fair value through OCI, what amount will be reported in other comprehensive income at December 31, 2025? A) $3,000 loss. B) $3,000 gain. C) $5,000 gain. D) $30,000 Answer: C Explanation: C) $30,000 - $25,000 = $5,000 gain Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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23) Amacon Corporation has the following investments at December 31, 2025:

Shares of DEF Bonds of Brooke (purchased at par value) Shares of CooksTown Shares of Daisy

Historical cost $25,000

Fair value Sept. 30, 2024 $15,000

Fair value Sept. 30, 2025 $25,000

Fair value Dec. 31, 2025 $30,000

10,000 12,000 18,000

12,000 18,000 16,500

11,000 16,000 19,500

12,500 16,000 20,500

If Amacon classifies its investment in DEF at fair value through profit or loss, what amount will be reported in other comprehensive income at December 31, 2025? A) $0 B) $3,000 loss. C) $3,000 gain. D) $5,000 gain. Answer: A Explanation: A) OCI not applicable for at fair value through profit or loss classification Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

24) McGyer Limited invests its excess cash in short-term investments. The following information is available about its investments at December 31, 2025:

Investment 1 Investment 2 Investment 3

Cost $40,000 30,000 80,000

Market $36,000 26,000 84,000

If McGyer accounts for these at fair value through profit or loss investments, what is the amount of gain/loss to be recorded in fiscal 2025? A) A loss of $4,000. B) A gain of $4,000. C) A loss of $8,000. D) A gain of $8,000. Answer: A Explanation: A) ($40,000 + $30,000 + $80,000 - $36,000 - $26,000 - $84,000) = $4,000 loss Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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25) Nevill Corp invests in short-term investments. The following information is available about its investments at December 31, 2025:

Investment 1 Investment 2 Investment 3

Cost $40,000 30,000 80,000

Market $36,000 26,000 84,000

If Nevill accounts for these at fair value through OCI investments, what is the amount of gain/loss to be recorded in fiscal 2025 comprehensive income? A) A loss of $4,000. B) A gain of $4,000. C) A loss of $8,000. D) A gain of $8,000. Answer: A Explanation: A) ($40,000 + $30,000 + $80,000 - $36,000 - $26,000 - $84,000) = $4,000 loss booked to OCI (not net income) Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

26) Marvish Limited invests in short-term investments. The following information is available about its investments at December 31, 2025:

Investment 1 Investment 2

Cost $40,000 30,000

Market $36,000 26,000

If Marvish accounts for these at fair value through OCI investments, what entry is necessary for fiscal 2025? A) A loss of $8,000 to net income. B) A gain of $8,000 to net income. C) A loss of $8,000 to OCI. D) A gain of $8,000 to OCI. Answer: C Explanation: C) ($40,000 + $30,000 - $36,000 - $26,000) = $8,000 loss booked to OCI Diff: 3 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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27) Quick Investment Company (QIC) began operations on January 1, 2025. It acquired the following investments:

Type Bonds Shares Shares

Category Amortized cost At fair value through profit or loss At fair value through OCI

Fair Value at Cost Year End $195,000 $198,000 55,000

75,000

60,000

70,000

QIC earned interest of $12,000 during 2025. Dividends of $16,000 were declared on the FVPL shares it owned during 2025. Of that amount, $9,000 was received in December 2025 and $7,000 was received in January 2026 (note that the ex-dividend date for these shares was prior to the end of the year). How much would QIC's total income from its investments be on the profit or loss portion of its statement of comprehensive income for the year ended December 31, 2025? A) $21,000 B) $28,000 C) $48,000 D) $58,000 Answer: C Explanation: D) ($75,000 - $55,000) + $12,000 + $16,000 = $48,000 Diff: 3 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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28) Investment Company (IC) began operations on January 1, 2025. It acquired the following investments:

Type Bonds Shares Shares

Category Amortized cost At fair value through profit or loss At fair value through OCI

Cost $195,000

Fair Value at Year End $198,000

55,000

75,000

60,000

70,000

IC earned interest of $12,000 during 2025. Dividends of $16,000 were declared on the shares it owned during 2025. Of that amount, $9,000 was received in December 2025 and $7,000 was received in January 2026 (note that the ex-dividend date for these shares was prior to the end of the year). How much would be recorded as accumulated other comprehensive income on IC's balance sheet at December 31, 2025? A) $10,000 gain. B) $10,000 loss. C) $30,000 gain. D) $30,000 loss. Answer: A Explanation: A) $70,000 - $60,000 = $10,000 gain Diff: 3 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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29) Safe Investment Company (SIC) began operations on January 1, 2025. It acquired the following investments:

Type Bonds Shares Shares

Category Amortized cost At fair value through profit or loss At fair value through OCI

Fair Value at Cost Year End $195,000 $198,000 55,000

75,000

60,000

70,000

SIC earned interest of $12,000 during 2025. Dividends of $16,000 were declared on the shares it owned during 2025. Of that amount, $9,000 was received in December 2025 and $7,000 was received in January 2026 (note that the ex-dividend date for these shares was prior to the end of the year). At what value would SIC's bonds (which were purchased at par) be recorded at in the balance sheet on December 31, 2025? A) $183,000 B) $195,000 C) $198,000 D) $207,000 Answer: B Explanation: B) instrument is recorded at amortized cost (par) — no fair value change recorded Diff: 3 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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30) Sheila Investment Company (SIC) began operations on January 1, 2025. It acquired the following investments:

Type Bonds Shares Shares

Category Amortized cost At fair value through profit or loss At fair value through OCI

Cost $195,000

Fair Value at Year End $198,000

55,000

75,000

60,000

70,000

SIC earned interest of $12,000 during 2025. Dividends of $16,000 were declared on the shares it owned during 2025. Of that amount, $9,000 was received in December 2025 and $7,000 was received in January 2026 (note that the ex-dividend date for these shares was prior to the end of the year). At what value would SIC's investment in shares be recorded at in the balance sheet on December 31, 2025? A) $145,000 B) $136,000 C) $129,000 D) $115,000 Answer: A Explanation: A) At fair value = $75,000 + $70,000 = $145,000 Diff: 3 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

31) Other comprehensive income includes which of the following? A) Unrealized holding losses on at fair value through OCI investments. B) Unrealized holding losses on at amortized cost investments. C) Unrealized holding gains on at fair value through profit or loss investments. D) Only realized gains and losses on investments. Answer: A Diff: 1 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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32) ACE Inc has the following investments at December 31, 2025:

Shares of DEF Bonds of Brooke (purchased at par value) Shares of CooksTown Shares of Daisy

Fair value Fair value Fair value Historical cost Sept. 30, 2024 Sept. 30, 2025 Dec. 31, 2025 $25,000 $15,000 $27,000 $30,000 10,000 12,000 18,000

12,000 18,000 16,500

11,000 16,000 19,500

12,500 16,000 20,500

If ACE classifies its investment in DEF at fair value through profit or loss, what amount will be reported in income for the three months ended December 31, 2025, pertaining to this investment? A) $0 B) $3,000 loss. C) $3,000 gain. D) $5,000 gain. Answer: C Explanation: C) $30,000 - $27,000 = $3,000 gain Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

33) Amacon Corporation has the following investments at December 31, 2025:

Shares of DEF Bonds of Brooke (purchased at par value) Shares of CooksTown Shares of Daisy

Fair value Fair value Historical cost Sept. 30, 2024 Sept. 30, 2025 $25,000 $15,000 $27,000 10,000 12,000 18,000

12,000 18,000 16,500

11,000 16,000 19,500

Fair value Dec. 31, 2025 $30,000 12,500 16,000 20,500

If Amacon irrevocably elected to classify its investment in DEF at fair value through OCI, what amount will be reported in income for the three months ended December 31, 2025, pertaining to this investment? A) $0 B) $3,000 loss. C) $3,000 gain. D) $5,000 gain. Answer: A Explanation: A) Unrealized gain/loss recorded to OCI, not income Diff: 2 Type: MC Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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34) Explain the nature of and the impact on the balance sheet and the income statement of investments subsequently measured at amortized cost. Answer: Amortized cost investments are non-strategic investments for which the business model is one in which the enterprise intends to hold the investment for the purpose of collecting contractual cash flows of principal and interest. These investments require the application of the effective interest method to determine amortized cost for the balance sheet and the amount of interest income to recognize on the income statement. Diff: 2 Type: ES Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

35) Explain the nature of and the appropriate accounting treatment for at fair value through profit or loss securities and at fair value through OCI securities. Answer: At fair value through profit or loss financial assets are non-strategic investments for which the business model is one in which the enterprise intends to trade with the expectation of a profit. Investments in derivatives are also classified at FVPL. Lastly, FVPL is the default category for any financial assets not classified into one of the other categories. At fair value through OCI financial assets are those for which the business model is one in which the enterprise intends to profit from changes in value and to collect cash flows to which it is entitled. Enterprises should report FVPL and FVOCI investments at their fair value on the balance sheet. Unrealized gains and losses on FVPL investments flow through profit or loss while unrealized gains and losses on FVOCI investments flow through OCI. Diff: 2 Type: ES Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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36) Tingalo Inc. purchased three equity investments during the year ended December 31, 2025.

Balance sheet value, Dec. 31, 2025 Dividends received Dividend income Total income (loss) recognized on the investment Accumulated OCI on unrealized gains/losses

Investment A $420,000 10,000 0

Investment B $28,000 4,000 4,000

Investment C $131,000 9,000 9,000

30,000

4,000

(5,000)

8,000 credit

Required: a. Based on the available information, how did Tingalo classify each financial asset? b. Determine the cost of each of the three investments. If it is not possible to do so with the available information, indicate what additional information would be needed. Answer: Investment A Investment B Investment C Requirement a. Accounting classification Associate FVOCI FVPL Clues for classification Dividend received Dividends received Dividends received not reported as reported as dividend reported as dividend income income; unrealized gain income; no OCL in cumulative OCL Requirement b. Cost (unknown) Add equity income Less dividends received Add (subtract) unrealized gain (loss) on change in fair value Balance sheet value reported

$400,000 30,000 (10,000)

$20,000 -

$145,000 -

8,000

(14,000)*

$420,000

$28,000

$131,000

* The total income (loss) on this investment is ($5,000), which includes $9,000 of dividend income. Therefore, there was a loss due to decrease in fair value of $14,000. Diff: 2 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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37) On January 1, 2025, CC Company acquired 60,000 shares of RR Limited at $5 per share, representing 20% of RR's outstanding voting shares. On July 31, 2025, RR declared and paid a dividend of $1 per share. RR's net income for 2025 was $2,800,000. On December 31, 2025, the shares of RR were trading on the Toronto Stock Exchange at $16 per share. Required: Provide the journal entries on CC's books relating to its investment in RR, assuming that CC classifies RR as an associate. Answer: January 1, 2025 — Purchase date Dr. Investment in RR shares 300,000 Cr. Cash 300,000 60,000 × $5.00/share = $300,000 July 31, 2025 — dividends received Dr. Cash 60,000 Cr. Investment in RR shares 60,000 60,000 × $1.00/share =$60,000 December 31, 2025 — Recording share of RR's net income Dr. Investment in RR shares 560,000 Cr. Income from associate 560,000 $2,800,000 × 20% = $560,000 NOTE: no entry required to adjust to fair value at Dec 31 Diff: 2 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

38) Explain the nature of and the appropriate accounting treatment for investments subsequently measured at amortized cost. Answer: An amortized cost financial asset is one in which the intent of the business model is to hold the investment for the purpose of collecting contractual cash flows of principal and interest. Amortized cost investments are reported at amortized cost with interest revenue realized using the effective interest method. Diff: 2 Type: ES Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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39) Explain the nature of and the impact on the balance sheet and the income statement of at fair value through profit or loss securities and at fair value through OCI securities. Answer: At fair value through profit or loss financial assets are non-strategic investments for which the business model is one in which the enterprise intends to sell the investment with the expectation of a profit. Investments in derivatives are also classified at FVPL. Lastly, FVPL is the default category for any financial assets not classified into one of the other categories. FVPL investments are reported at fair value on the balance sheet. Unrealized gains and losses flow through profit or loss. Interest and dividend income is recognized in profit or loss. At fair value through other comprehensive income investments are non-strategic investments for which the business model is one in which the enterprise intends to collect contractual cash flows to which it is entitled and profit from the change in value. FVOCI investments are reported at fair value on the balance sheet. Unrealized gains and losses flow through OCI. Interest income is recognized in profit or loss using the effective interest method. Diff: 2 Type: ES Skill: Conceptual Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

40) On January 25, 2025, Harper Ltd. purchased 2,500 common shares of RBC (Royal Bank of Canada) for $10.00 each. During the remainder of 2025, Harper received $2.75 per share in dividends and RBC's earnings per share were $5.25. The closing price of the shares on the fiscal year-end date of December 31, 2025, was $14.00. Required: Assume that Harper classified the investment at fair value through profit or loss. a. At what value should the company report the RBC shares on its December 31, 2025, balance sheet? b. How much income should the company report in relation to these shares? c. How much other comprehensive income (OCl) should Harper report in relation to these shares? Answer: a. Harper should report the RBC shares at $14.00 per share for a total of $35,000 at December 31, 2025. b. Harper should report total income of $16,875 relating to these shares in 2025 (($2.75 + ($14.00 - $10.00) share) × 2,500). c. Harper should report other comprehensive income of $0 relating to these shares for 2025. OCI is not applicable for at fair value through profit or loss investments. Diff: 1 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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41) On January 25, 2025, Mulroney Ltd. purchased 100 common shares of RBC (Royal Bank of Canada) for $40.00 each. During the remainder of 2025, Mulroney received $2.10 per share in dividends and RBC's earnings per share were $5.50. The closing price of the shares on the fiscal year-end date of December 31, 2025 was $41.00. Required: Assume that Mulroney irrevocably elected to classify its investment at fair value through OCI. a. At what value should Mulroney report the RBC shares on its December 31, 2025, balance sheet? b. How much income should Mulroney report in 2025 in relation to these shares? c. How much other comprehensive income (OCI) should Mulroney report in 2025 in relation to these shares? Answer: a. Mulroney should report the RBC shares at $41.00 per share for a total of $4,100 at December 31, 2025. b. Mulroney should report income of $210 relating to these shares in 2025 ($2.10/share × 100). c. Mulroney should report OCI of $100 relating to these shares for 2025 [($41.00 - $40.00) × 100 shares]. Diff: 1 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

42) On January 1, 2024, Anny Marine Supplies purchased a Government of Canada bond at par for $12,000. The bond has an interest rate of 7% and matures in three years. By December 31, 2024, market interest rates had increased such that the fair value of the bond decreased to $11,600. The fair value of the bond decreased further to $11,200 on December 31, 2025 (two years after purchase). Required: Assume that Anny classifies the investment at amortized cost. a. At what value should Anny report the bond on its December 31, 2024, balance sheet? b. How much income or loss should Anny report in 2024 in relation to this bond? c. How much other comprehensive income (OCI) should Anny report in 2024 in relation to this bond? Answer: a. Anny should report the amortized cost bonds at $12,000 on its December 31, 2024, balance sheet [since purchased at par, no amortization of premium/discount is needed]. b. Anny should report $840 of income on its 2024 income statement from the bond held at amortized cost [$12,000 × 7% = $840 interest income]. c. Anny should report $0 of OCI for 2024 relating to the amortized cost bonds. OCI is not applicable for investments measured at amortized cost. Diff: 1 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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43) On January 1, 2024, Forrest Marine Supplies purchased a Government of Canada bond at par for $8,000. The bond has an interest rate of 5% and matures in three years. By December 31, 2024, market interest rates had increased such that the fair value of the bond decreased to $7,200. The fair value of the bond decreased further to $7,100 on December 31, 2025 (two years after purchase). Required: Assume that Forrest classifies the investment at fair value through OCI. a. At what value should Forrest report this bond on its December 31, 2024, balance sheet? b. How much income or loss should Forrest report in 2024 in relation to this bond? c. How much other comprehensive income (OCI) should Forrest report for 2024 in relation to this bond? d. How much OCI (loss) should Forrest report for 2025 in relation to this bond? e. How much is accumulated OCI on the balance sheet at December 31, 2025? Answer: a. Forrest should report the at fair value through OCI bond at $7,200 on its December 31, 2024, balance sheet (fair value). b. Forrest should report $400 of income on its 2024 income statement from the at fair value through OCI bond ($8,000 × 5% = $400 interest income). c. Forrest should report $(800) of OCI for 2024 in relation to this at fair value through OCI bond [$8,000 $7,200]. d. Forrest should report $(100) of OCI for 2025 in relation to this at fair value through OCI bond [$7,200 $7,100 = $100]. e. Accumulated OCI will amount to $(900) on the balance sheet at December 31, 2025 [$8,000 - $7,100 = $900 loss, or ($800) + ($100)]. Diff: 1 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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44) Willow Corp. is a real estate developer with its headquarters in Burlington, Ontario. As a result of recent increases in land prices, Willow has accumulated a substantial amount of excess cash. It is looking to invest in a building supply company but has not yet found a suitable company. To earn a reasonable return and to minimize risk, Willow invests its excess cash in common shares of large, stable corporations. 1. On January 1, 2024, Willow paid $1,080,000 to purchase 120,000 common shares of North Line. 2. On December 27, 2024, North Line declared and paid a dividend of $0.25 per common share. 3. On December 31, 2024, the market value of the common shares was $1,200,000. 4. On June 30, 2025, Willow sold the common shares for $1,620,000. Required: Using the following table, indicate the amounts to be reported in the balance sheet, through profit or loss, and through other comprehensive income for 2024 and 2025 under two scenarios: a. Willow irrevocably elected to designates the investment in common shares as an at fair value through OCI (FVOCI) investment. b. Willow designates the investment in common shares as an at fair value through profit or loss (FVPL) investment. FVOCI 2024

FVPL 2025

2024

2025

Balance sheet Amount through profit or loss Other comprehensive income

Answer: FVOCI 2024 2025 Balance sheet $1,200,000 $0 Amount through profit or loss $30,000 $540,000 ($0.25/share ($1,080,000×120,000 $1,620,000) shares)

Other comprehensive income

$120,000 ($1,080,000$1,200,000)

($120,000)

FVPL 2024 2025 $1,200,000 $0 $150,000 $420,000 ($0.25/share ($1,200,000×120,000 $1,620,000) shares) Plus ($1,080,000$1,200,000) -

Diff: 2 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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45) During 2024, Farrah Ltd. purchased 4,000 shares of Rose of Sharon Corp. for $41 per share ($164,000 total). The company designated half of the shares at fair value through profit or loss and irrevocably elected to classify the remaining half of its investment at fair value through OCI. Farrah held these shares until September 2026, when it sold them for $52 per share. During these three years, Rose of Sharon paid dividends of $1 per share on July 31 each year. On Farrah's fiscal year-end (December 31), shares of Rose of Sharon closed at $51, $36, and $56 in 2024, 2025, and 2026, respectively. Required: Determine the amounts to be reported on Farrah's balance sheet and statement of comprehensive income with respect to the company's investment in Rose of Sharon Corp for 2024, 2025, and 2026. Answer: 2,000 shares classified as at fair value through profit or loss 2024 2025 2026 Total Balance sheet Financial asset $102,000 $72,000 $ Accumulated OCI n/a n/a n/a Retained earnings due to gains or losses (cumulative) 20,000 (10,000) 15,000 Retained earnings from dividend income (cumulative) 2,000 4,000 6,000 Statement of comprehensive income Dividend income Gains (losses) recognized through income Gains (losses) recognized through OCI

$ 2,000

$ 6,000

20,000 n/a

(30,000) n/a

32,000 n/a

22,000

2,000 shares classified as at fair value through OCI Balance sheet

2024

2025

Financial asset

$102,000

$72,000

$ -

20,000 2,000

(10,000) 4,000

22,000 6,000

Accumulated OCI on FVOCI Retained earnings due to gains or losses Retained earnings from dividend income Statement of comprehensive income Dividend income Gains (losses) recognized through income Gains (losses) recognized through OCI

2,000 20,000

2,000 (20,000)

2026

Total

2,000 22,000 10,000

6,000 22,000

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46) On January 1, 2025, a company pays $100,000 to purchase 100 Government of Canada bonds that have a maturity date of December 31, 2029, and an interest rate of 5%. At December 31, 2025, the bonds had a quoted price of $1,022 per bond. Assume that 20 of these bonds are sold on June 30, 2026, for $1,100 per bond plus accrued interest. Determine the gain or loss that would be recorded in 2026 assuming: a. Classified at fair value through profit or loss. b. Classified at amortized cost. Answer: Gain/loss Proceeds including interest = ($1,100 × 20 bonds) + (5% × $100,000 × 20% sold × ½ yr) = $22,500 Proceeds excluding interest = $1,100 × 20 bonds = $22,000 FVPL Carrying value = $102,200 × 20% = $20,440 Proceeds excluding interest - carrying value = $22,000 - $20,440 = $1,560 gain At amortized cost Carrying value = $100,000 × 20% = $20,000 Proceeds excluding interest - carrying value = $22,000 - $20,000 = $2,000 gain Diff: 3 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

47) On January 1, 2025, a company pays $100,000 to purchase 100 Government of Canada bonds that have a maturity date of December 31, 2029, and an interest rate of 5%. At December 31, 2025, the bonds had a quoted price of $1,022 per bond. Assume that 45 of these bonds are sold on June 30, 2026, for $1,100 per bond plus accrued interest. Determine the gain or loss that would be recorded in 2026 assuming: a. Classified at fair value through profit or loss b. Classified at amortized cost Answer: Gain/loss Proceeds including interest = ($1,100 × 45 bonds) + (5% × $100,000 × 45% sold × ½ yr) = $50,625 Proceeds excluding interest = $1,100 × 45 bonds = $49,500 FVPL Carrying value = $102,200 × 45% = $45,990 Proceeds excluding interest - carrying value = $49,500 - $45,990 = $3,510 gain At amortized cost Carrying value = $100,000 × 45% = $45,000 Proceeds excluding interest - carrying value = $49,500 - $45,000 = $4,500 gain Diff: 3 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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48) On January 1, 2025, a company paid $100,000 to purchase 100 Government of Canada bonds that mature on December 31, 2029, and pay interest at 5%. At December 31, 2025, the bonds had a quoted price of $1,022 per bond. Fill in the attached table assuming a. Classified at fair value through profit or loss b. Classified at fair value through other comprehensive income c. Classified at amortized cost a

Financial asset category for the balance sheet Accounting method that should be used Dec. 31, 2025, balance sheet value for the financial asset Interest income for 2025 Unrealized gain or loss on the income statement Total recognized in the income statement Unrealized gain or loss in OCI Total recognized in comprehensive income

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Answer: a Financial asset category for the balance sheet Accounting method that should be used

Additional info Dec. 31, 2025, balance sheet value for the financial asset Interest income for 2025 Unrealized gain or loss on the income statement Total recognized in the income statement Unrealized gain or loss in OCI Total recognized in comprehensive income

At fair value through At fair value through profit or loss OCI Amortized cost Fair value through profit or loss Fair value through OCI Amortized cost It would report the It would report the bonds bonds on its balance on its balance sheet at fair sheet at fair value of value of $102,200, the $102,200 (100 bonds × same as for the FVPL $1,022/bond). category. However, it Its balance sheet On its income would not report an would report the statement, the unrealized gain of $2,200 amortized cost of company would on the income statement. the bonds at report an unrealized Rather, the company $100,000 as the gain of $2,200 would report the bonds were sold at ($102,200 - $100,000). unrealized gain in other par. The income The interest income is comprehensive income. statement would $5,000, so the net effect The $5,000 interest income report interest is $7,200. would be reported in the income of $5,000. income statement.

$102,200

$100,000

$5,000

2,200

7,200

5,000

2,200

$7,200

$5,000

Diff: 3 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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49) On January 1, 2025, a company paid $100,000 to purchase 100 Government of Canada bonds that mature on December 31, 2029, and pay interest rate of 6%. At December 31, 2025, the bonds had a quoted price of $1,015 per bond. Fill in the attached table assuming a. Classified at fair value through other comprehensive income b. Classified at amortized cost a

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Answer: a Financial asset category At fair value through for the balance sheet OCI Accounting method that should be used Fair value through OCI

b Amortized cost

Amortized cost Its balance sheet It would report the bonds would report the on its balance sheet at fair amortized cost of the value of $101,500 (100 bonds at $100,000. bonds × $1,015/bond). The The income unrealized gain of $1,500 statement would is reported in OCI, rather report interest than income. The $6,000 income of $6,000 as interest income is the bonds were sold reported on the income at par. statement.

$101,500 $6,000

$100,000 $6,000

6,000

1.500

$7,500

$6,000

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50) On January 1, 2025, a company paid $100,000 to purchase 100 Government of Canada bonds that have a maturity date of December 31, 2029, and pay interest at 4%. At December 31, 2025, the bonds had a quoted price of $1,050 per bond. Fill in the attached table assuming a. Classified at fair value through profit or loss b. Classified at fair value through other comprehensive income a

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Answer: a b Financial asset category At fair value through for the balance sheet profit or loss At fair value through OCI Accounting method that Fair value through profit or should be used loss Fair value through OCI It would report the bonds It would report the bonds on its balance sheet at fair on its balance sheet at fair value of $105,000, the same value of $105,000 (100 as for the FVPL. However, bonds × $1,050/bond). it would not report an On its income statement, unrealized gain of $5,000 the company would report on the income statement. an unrealized gain of Rather, the company $5,000 ($105,000 would report the $100,000). unrealized gain in other The interest income is comprehensive income. $4,000, so the net effect is The $4,000 interest income $9,000. would be reported in the Additional info income statement. Dec. 31, 2025, balance sheet value for the financial asset $105,000 $105,000 Interest income for 2025 $4,000 $4,000 Unrealized gain or loss on the income statement 5,000 0 Total recognized in the income statement 9.000 4,000 Unrealized gain or loss in OCI 0 5,000 Total recognized in comprehensive income $9,000 $9,000 Diff: 2 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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51) On January 1, 2025, a company paid $100,000 to purchase 100 Government of Canada bonds that mature on December 31, 2029, and pay interest at 5%. At December 31, 2025, the bonds had a quoted price of $998 per bond. Fill in the attached table assuming a. Classified at fair value through profit or loss b. Classified at amortized cost a

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Answer: a b Financial asset category At fair value through for the balance sheet profit or loss Amortized cost Accounting method that Fair value through profit or should be used loss Amortized cost It would report the bonds on its balance sheet at fair value of $99,800 (100 bonds × $998/bond). Its balance sheet would On its income statement, report the amortized cost the company would report of the bonds at $100,000. an unrealized loss of $200 The income statement ($99,800 - $100,000). would report interest The interest income is income of $7,000 as the $7,000, so the net effect is bonds were purchased at $6,800. par. Additional info Dec. 31, 2025, balance sheet value for the financial asset $99,800 $100,000 Interest income for 2025 $7,000 $7,000 Unrealized gain or loss on the income statement (200) 0 Total recognized in the income statement 6,800 7,000 Unrealized gain or loss in OCI 0 0 Total recognized in comprehensive income $6,800 $7,000 Diff: 2 Type: ES Skill: Computational Objective: 7.4 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition subsequent to purchase for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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Learning Objective 5 1) Which statement is correct about non-strategic investments? A) IFRS carries FVOCI investments at fair value with only unrealized gains going to OCI. B) ASPE carries FVOCI investments at fair value with only unrealized gains going to OCI. C) ASPE carries FVOCI investments at fair value with unrealized gains and losses going to OCI. D) IFRS carries FVOCI investments at fair value with unrealized gains and losses going to OCI. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

2) Which statement is correct about non-strategic investments? A) IFRS carries FVOCI investments at fair value with only unrealized losses going to net income. B) ASPE carries FVOCI investments at fair value with only unrealized losses going to net income. C) IFRS carries FVOCI investments at fair value with unrealized gains and losses going to OCI. D) ASPE carries FVOCI investments at fair value with unrealized gains and losses going to OCI. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

3) Which statement is NOT correct about non-strategic investments? A) IFRS carries FVOCI investments at fair value. B) IFRS records unrealized gains and losses on FVOCI investments to OCI. C) ASPE records unrealized gains and losses on FVPL investments to OCI. D) ASPE does not have an accounting treatment for FVOCI investments. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

4) Which statement is correct about non-strategic financial assets? A) ASPE refers to the underlying business model when categorizing these investments. B) IFRS classifies these investments in accordance with the underlying business model. C) IFRS classifies these investments in accordance with their nature. D) The accounting is the same under ASPE and IFRS for these investments. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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5) Which statement is correct about non-strategic financial assets? A) ASPE refers to the underlying business model when categorizing these investments. B) IFRS classifies these investments in accordance with legal substance. C) ASPE classifies these investments in accordance with their nature. D) The accounting is the same under ASPE and IFRS for these investments. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

6) Fish Corp. purchases a $100,000 face value bond which matures in one year. The coupon rate is 6% and the market rate is 6%. What is the premium or discount? A) $0 B) $5,660 C) $6,000 D) $94,340 Answer: A Explanation: A) Issued at par Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

7) Fiesta Corp. purchases a $500,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 7%. How much premium or discount will be amortized in the first year? A) $4,367.24 B) $9,039.40 C) $30,000.00 D) $34,367.24 Answer: A Explanation: A) $490,960.60 × 7% = $34,367.24; $34,367.24 - $30,000.00 = $4,367.24 (discount amortized) Value of coupon

$30,000 × PVF(7%, 2 = $30,000 × 1.80802 years) Value of principal $500,000 × PVFA(7%, 2) = $500,000 × 0.87344 Total

$54,240.60 436,720.00 $490,960.60

Diff: 3 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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8) Simply purchases a $200,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 5%. How much premium or discount will be amortized in the first year, if any? A) $1,814.05 B) $3,718.92 C) $10,000.00 D) $12,000.00 Answer: A Explanation: A) $203,718.92 × 5% = $10,185.95; $12,000.00 – $10,185.95 = $1,814.05 (premium amortized) Value of coupon

$12,000 × PVF(5%, 2 = $12,000 × 1.85941 years) Value of principal $200,000 × PVFA(5%, 2) = $200,000 × 0.90703 Total

$22,312.92 181,406.00 $203,718.92

Diff: 3 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

9) Fish Corp. purchases a $500,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 7%. What is the premium or discount? A) $0 premium/discount. B) $9,039.40 discount. C) $9,039.40 premium. D) $500,000 discount. Answer: B Explanation: B) $500,000.00 – $490,960.60 = $9,039.40 discount Value of coupon

$30,000 × PVF(7%, 2 = $30,000 × 1.80802 years) Value of principal $500,000 × PVFA(7%, 2) = $500,000 × 0.87344 Total

$54,240.60 436,720.00 $490,960.60

Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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10) Fish Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 7%. What is the premium or discount (rounded)? A) $0 B) $1,808 C) $98,192 D) $100,000 Answer: B Explanation: B) $100,000 – $98,192 = $1,808 discount Value of coupon

$6,000 × PVF(7%, 2 = $6,000 × 1.80802 years) Value of principal $100,000 × PVFA(7%, 2) = $100,000 × 0.87344 Total

$10,848 87,344 $98,192

Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

11) Fiesta Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 7%. How much premium or discount will be amortized in the first year? A) $873.44 B) $1,808.00 C) $6,000.00 D) $6,873.44 Answer: A Explanation: A) $98,192.00 × 7% = $6,873.44; $6,873.44 - $6,000.00 = $873.44 (discount amortized) Value of coupon

$6,000 × PVF(7%, 2 = $6,000 × 1.80802 years) Value of principal $100,000 × PVFA(7%, 2) = $100,000 × 0.87344 Total

$10,848 87,344 $98,192

Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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12) Simply purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 5%. How much premium or discount will be amortized in the first year, if any? A) $0.00 B) $907.05 C) $5,092.95 D) $1,859.00 Answer: B Explanation: B) $101,859.00 × 5% = $5,092.95; $6,000.00 – $5,092.95 = $907.05 (premium amortized) Value of coupon

$6,000 × PVF(5%, 2 = $6,000 × 1.85941 years) Value of principal $100,000 × PVFA(5%, 2) = $100,000 × 0.90703 Total

$11,156 90,703 $101,859

Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

13) A bond has a maturity value of $500,000 payable in 3 years. These bonds have a 5% coupon rate payable annually, and the market yield was 2% when the bonds were purchased. How much will be recorded for the bond purchase (rounded)? A) $43,257 B) $543,257 C) $500,000 D) $500,001 Answer: B Explanation: B) Value of principal $750,000 × PVF(2%, 3) = $500,000 × 0.94232 $471,160 Value of coupons $25,000 × PVFA(2%, 3) = $25,000 × 2.88388 72,097 Total $543,257 Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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14) A bond has a maturity value of $300,000 payable in 4 years. These bonds have a 7% coupon rate payable semi-annually, and the market yield was 4% when the bonds were purchased. How much premium or discount will be recorded upon purchase (rounded)? A) $32,668 premium. B) $32,668 discount. C) $32,965 discount. D) $32,965 premium. Answer: D Explanation: D) Value of principal $300,000 × PVF(2%, 8) = $300,000 × 0.85349 $256,047 Value of coupons $10,500 × PVFA(2%, 8) = $10,500 × 7.32548 76,918 Total $332,965 Diff: 3 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

15) Star Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 5%. At what amount will the bond be recorded (rounded)? A) $5,093 B) $100,000 C) $100,100 D) $101,859 Answer: D Explanation: D) Value of coupon $6,000 × PVF(5%, 2 = $6,000 × 1.85941 $11,156 years) Value of principal $100,000 × PVFA(5%, 2) = $100,000 × 0.90703 90,703 Total $101,859 Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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16) Star Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 7%. At what amount will the bond be recorded (rounded)? A) $5,093 B) $98,192 C) $100,000 D) $101,703 Answer: B Explanation: B) Value of coupon $6,000 × PVF(7%, 2 = $6,000 × 1.80802 $10,848 years) Value of principal $100,000 × PVFA(7%, 2) = $100,000 × 0.87344 87,344 Total $98,192 Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

17) Star Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 5%. How much is the premium or discount (rounded)? A) $1,859 premium. B) $1,850 discount. C) $100,000 D) $101,859 Answer: A Explanation: A) $101,859 - $100,000 = $1,859 premium Value of coupon

$6,000 × PVF(5%, 2 = $6,000 × 1.85941 years) Value of principal $100,000 × PVFA(5%, 2) = $100,000 × 0.90703 Total

$11,156 90,703 $101,859

Diff: 2 Type: MC Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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18) Explain the meaning of the "effective interest method." Answer: • A method that uses a discount rate that results in a present value equal to the purchase price of a financial asset. • A method that calculates the amortized cost of a financial asset at each reporting date as the present value of the asset's cash flows discounted at the effective yield. Diff: 2 Type: ES Skill: Conceptual Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

19) A bond has a maturity value of $750,000 payable in 3 years. These bonds have a 5% coupon rate payable annually, and the market yield was 2% when the bonds were purchased. Required: a. Is this a discount bond or a premium bond? b. Compute the amount required to purchase this bond at the beginning of the 3-year period Answer: a. This is a premium bond because the coupon rate is greater than the market rate. b. The amount required to purchase bonds is $814,885.50 Value of principal Value of coupons Total

$750,000 × PVF(2%, 3) = $750,000 × 0.94232 $37,500 × PVFA(2%, 3) = $37,500 × 2.88388

$706,740.00 108,145.50 $814,885.50

Diff: 1 Type: ES Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

20) A bond has a maturity value of $50,000 payable in 4 years. These bonds have a 7% coupon rate payable semi-annually, and the market yield was 4% when the bonds were purchased. Required: a. Is this a discount bond or a premium bond? b. Calculate the amount required to purchase this bond at the beginning of the 4-year period. Answer: a. This is a premium bond because the coupon rate is greater than the market rate. b. Amount required to purchase bonds is $55,494.09 Value of principal Value of coupons Total

$50,000 × PVF(2%, 8) $1,750 × PVFA(2%, 8)

= $50,000 × 0.85349 = $1,750 × 7.32548

$42,674.50 12,819.59 $55,494.09

Diff: 1 Type: ES Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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21) Copi Corp. purchased a bond with a maturity value of $60,000 payable in five years. These bonds have a 7% coupon rate payable annually. Copi paid $65,195 for these bonds, giving a yield of 5%. Required: Prepare an amortization schedule that shows the amortized cost of this bond at the end of each of five years and the amount of interest income for each of those five years.

Year 1 2 3 4 5

Beginning Amortized cost Interest income

Coupon payment

Ending amortized cost

Beginning Amortized cost Interest income $65,195 $3,260 64,255 3,213 62,268 3,162 62,231 3,112 61,143 3,057

Coupon Ending payment amortized cost $4,200 $64,255 4,200 62,268 4,200 62,231 4,200 61,143 4,200 60,000

Answer: Year 1 2 3 4 5

Diff: 2 Type: ES Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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22) On January 1, 2024, Cadance Company purchased bonds with a maturity value of $100,000 for $80,747. These bonds have a 12% coupon rate payable semi-annually on June 30 and December 31. The bond matures on December 31, 2028. On January 1, 2024, the market yield for bonds of equivalent risk and maturity was 18%. Required: Prepare an amortization schedule that shows the amortized cost of this bond at the end of each of five years and the amount of interest income for each of those five years.

Year

Beginning Amortized cost Interest income

Coupon payment

Ending amortized cost

Answer: Year 1 - June 30 1 - Dec. 31 2 - June 30 2 - Dec. 31 3 - June 30 3 - Dec. 31 4 - June 30 4 - Dec. 31 5 - June 30 5 - Dec. 31

Beginning Amortized cost Interest income $80,747 $7,267 82,014 7,381 83,395 7,506 84,901 7,641 86,542 7,789 88,331 7,950 90,281 8,125 91,406 8,317 94,723 8,525 97,248 8,752

Coupon Ending payment amortized cost $6,000 $82,014 6,000 83,395 6,000 84,901 6,000 86,542 6,000 88,331 6,000 90,281 6,000 91,406 6,000 94,723 6,000 97,248 6,000 100,000

Diff: 2 Type: ES Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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23) On January 1, 2024, Polka Dot Company acquired a $20 million face value bond that has an 11% coupon rate (paying interest annually on December 31). The bond matures on December 31, 2029. On January 1, 2024, the market yield for bonds of equivalent risk and maturity was 9%. Required: a. How much did Polka Dot pay for this bond on January 1, 2024? b. On December 31, 2024, the market yield for bonds of equivalent risk and maturity is 10%. What would be the market value of this bond on December 31, 2024, immediately after the coupon payment? c. On December 31, 2025, the market yield for bonds of equivalent risk and maturity is 11%. What would be the market value of this bond on December 31, 2025, immediately after the coupon payment? d. Assume each of three scenarios: the bond is classified as (i) amortized cost, (ii) at fair value through other comprehensive income, or (iii) at fair value through profit or loss: • How much would the balance sheet value of this bond be on December 31, 2024, and December 31, 2025? • How much income would be reported in 2024 and 2025 for this bond? • How much would other comprehensive income (OCI) and accumulated OCI be for fiscal years 2024 and 2025?

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Answer: a. Amount required to purchase bonds $21,794,424 Value of principal Value of coupons Total

$20 million × PVF(9%, 6) = $20 mill × 0.59627 $2.2 million × PVFA(9%, 6) = 2.2 mill × 4.48592

$11,925,400 9,869,024 $21,794,424

b. Market value of bonds on Dec. 31, 2024 $20,758,157 c. Market value of bonds on Dec. 31, 2025 $20,000,000 d. Year Dec. 2024 Dec. 2025

Beginning Amortized cost Interest income $21,794,424 $1,961,493 21,555,861 1,940,027

Coupon Ending payment amortized cost $2,200,000 $21,555,861 2,200,000 21,295,888

Amortized Cost $21,555,861 21,295,888

FVOCI $20,758,157 20,000,000

FVPL $20,758,157 20,000,000

2024 Interest income

$1,961,493

$2,200,000

2024 Unrealized gains (losses) 2024 Total investment income 2025 Interest income

$1,961,493 $1,940,027

(1,036,211) $1,163,789 $2,200,000

2025 Unrealized gains (losses) 2025 Total investment income

$1,940,027

(758,157) $1,441,843

$(794,704) (794,704) (498,184) $(1,441,843)

Balance sheet, Dec. 31, 2024 Balance sheet, Dec. 31, 2025

Other comprehensive income (OCI), 2024 Accumulated OCI, Dec. 31, 2024 Other comprehensive income, 2025 Accumulated OCI, Dec. 31, 2025

The total of the two years of FVPL income is $1,163,789 + $1,441,843 = $2,605,632, and the comparative FVOCI calculation to reconcile is $1,961,493 + $1,940,027 - $1,295,888 = $2,605,632. Diff: 3 Type: ES Skill: Computational Objective: 7.5 Apply present value techniques to account for investments in debt instruments.

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Comprehensive Learning Objectives 1) Super Control Group has the following investments:

Transactions • Purchased all of the outstanding shares on March 31 for $1,500,000. XYZ Corp

VWX Inc.

ABC Inc

• Purchased 80% for $1,000,000 Acquired joint control over the strategic, operating and investing decisions on January 1. • Purchased 25% of the outstanding shares on June 30 for $300,000. • Super Control can appoint one member to the Board of Directors.

Net income of Investee for Fair value calendar 2024 at Dec. 31, 2024

$1,000,000

$1,150,000

200,000

175,000

50,000

320,000

a) Explain how these investments will be classified and accounted for. b) How much income will be recorded in 2024 by Super Group for its investment in VWX? c) How much income will be recorded in 2024 by Super Group for its investment in ABC? Answer: a) • Super controls XYZ • Consolidation would be used to account for XYZ Corp Subsidiary this investment • Super has joint control over the economic activities VWX Inc. Joint venture • Proportionate consolidation would be used • Super has significant influence • Super participates in the financial and operating decisions, but does not control ABC ABC Inc Associate • Use the equity method of accounting b) Super will record 80% of the investee's net income since acquisition date $200,000 × 80% = $160,000 c) Super will record 25% of the investee's net income since acquisition date of June 30 $50,000 × 25% × (6/12) = $6,250 Diff: 3 Type: ES Skill: Computational Objective: 7.1/ 7.2/ 7.3/ 7.4/ 7.5 Explain what financial assets are, how they differ from other types of assets, and why there is a variety of measurement standards for different categories of financial assets./Evaluate the nature of a financial asset to classify it into one of seven categories: subsidiaries, joint ventures, associates, fair value through profit or loss, fair value through OCI, and amortized cost./Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches./Analyze historical cost and fair value information to determine the appropriate post-purchase balance sheet measurement and income recognition for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost./Apply present value techniques to account for investments in debt instruments.

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2) On January 1, 2024, CC Company acquired 60,000 shares, representing 20% of the outstanding shares of VV Limited, at $25 per share. On July 31, 2024, VV declared and paid a dividend of $3 per share. VV's net income for 2024 was $1,000,000. On December 31, 2024, the shares of VV were trading on the Toronto Stock Exchange at $31 per share. Required: CC is not sure how to report its investment in VV shares. Using the format provided, indicate the amounts that would appear on the balance sheet and the statement of comprehensive income for 2024 if the investment is considered to be (a) at fair value through OCI, (b) at fair value through profit or loss, or (c) an associate. Answer: FVOCI FVPL Associate Balance sheet Investment in VV shares $1,860,000 $1,860,000 $1,520,000 Statement of comprehensive income Dividend income Other income - Unrealized gain - Income from associate Sub-total (= effect on net income) Other comprehensive income Total (= effect on comprehensive income)

180,000

540,000

360,000

360,000 $

180,000

540,000

200,000 200,000 -

200,000

Diff: 2 Type: ES Skill: Computational Objective: 7.3/ 7.4 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches./Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost.

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3) Koala had the following transactions relating to its investments during 2025. Koala uses the effective interest method of amortization of premiums or discounts when applicable. a. On July 1, 2025, Koala acquired a $400,000, 16%, 8-year government bond with interest paid semi-annually on January 1 and July 1. Because the market rate of interest was 12% on that date, Koala paid $480,847 for the bond. The bonds were classified as at amortized cost by Koala and had a fair value of $440,000 plus accrued interest on December 31, 2025. b. On July 1, 2025, Koala acquired 10,000 shares of Gorilla at a price of $41 per share. On December 31, 2025, the ex-dividend date, dividends of $2.00 per share were declared with an expected date of payment of January 15, 2026. On December 31, 2025, the fair value of the Gorilla shares had increased to $42 per share. Management irrevocably elects to classify the investment at fair value through OCI. c. On July 1, 2025, Koala acquired 45,000 shares (20%) of the outstanding shares of Black Bear at a price of $15 per share, giving it significant influence over Black Bear. Black Bear had net income of $600,000 for the six months ended December 31, 2025, and declared and paid total dividends of $10,000 to its shareholders on December 31, 2025. On December 31, 2025, Black Bear's shares had a fair value of $19 per share. Required: Provide all journal entries required relating to these investments on July 1, 2025, and December 31, 2025, including any journal entries required relating to the change in fair value for the year.

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Answer: a. Amortized cost investment in government bonds. July 1, 2025 Dr. Investment in government bonds Cr. Cash

480,847 480,847

December 31, 2025 Dr. Interest receivable ($400,000 × 16% × ½) Cr. Interest revenue ($480,847 × 12% × ½) Cr. Investment in government bonds (There is no entry for the change in fair value as bonds are classified at amortized cost.)

32,000 28,851 3,149

b. At fair value through OCI investment July 1, 2025 Dr. Investment in shares of Gorilla Cr. Cash

410,000

December 31, 2025 Dr. Dividends receivable Cr. Dividend revenue

20,000

Dr. Investment in shares of Gorilla ($10,000 × ($42.00 -$41.00) Cr. Other comprehensive income

10,000

410,000

20,000

10,000

c. Investment with significant influence (associate). July 1, 2025 Dr. Investment in Black Bear Cr. Cash

675,000

December 31, 2025 Dr. Investment in Black Bear Cr. Investment income (20% × $600,000)

120,000

675,000

120,000

Dr. Cash 2,000 Cr. Investment in Black Bear (20% × $10,000) (There is no entry for the change in fair value as the equity method is used for investment under significant influence.)

2,000

Diff: 2 Type: ES Skill: Computational Objective: 7.3/ 7.5 Identify the measurement approach appropriate to the seven categories of financial assets and explain the general nature of the various measurement approaches./Apply present value techniques to account for investments in debt instruments.

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4) On January 1, 2025, The Freedom Company purchased a $5 million face value bond that pays interest at 7% when the market yield for bonds of equivalent risk and maturity was 5%. Interest is payable annually on December 31. The bond matures on December 31, 2030. Required: a. How much did The Freedom Company pay for this bond on January 1, 2025? b. On December 31, 2025, the market yield for bonds of equivalent risk and maturity is 6%. What would be the market value of this bond on December 31, immediately after the coupon payment on that date? c. On December 31, 2026, the market yield for bonds of equivalent risk and maturity is 7%. What would be the market value of this bond on December 31, immediately after the coupon payment on that date? d. For each of three scenarios: (i) amortized cost, (ii) FVOCI, and (iii) FVPL: i What would be the balance sheet value of this bond be on December 31, 2025? ii How much income would be reported in profit or loss in 2025 for this bond? iii How much other comprehensive income would be reported in 2025 for this bond? iv How much comprehensive income would be reported in 2025 for this bond?

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Answer: a. FV = 5,000,000; N = 6; PMT = $5,000,000 × 7% = 350,000; I = 5; CPT PV = -$5,507,569 b. FV = 5,000,000; N = 5; PMT = $5,000,000 × 7% = 350,000; I = 6; CPT PV = -$5,210,618 c. FV = 5,000,000; N = 4; PMT = $5,000,000 × 7% = 350,000; I = 7; CPT PV = -$5,000,000 (The market value exactly equals the face value since the market yield is the same as the coupon rate on this date) d. & e. Bond amortization schedule Amortized cost opening balance Year January 1 + Interest @5% 2025 $5,507,569 $275,378

Balance sheet, 2025 Dec. 31

– coupon payment $350,000

Amortized cost $5,432,947

= Amortized cost closing balance December 31 $5,432,947

FVOCI $5,210,618*

FVPL $5,210,618*

2025 Interest income 2025 Unrealized gains (losses) 2025 Total investment income

$275,378 – 275,378

$350,000** (296,951)*** 53,049

Other comprehensive income (OCI), 2025 Comprehensive income

0 $275,378

(222,329)**** $53,049

0 $53,049

* The fair value of $5,210,618 was calculated in part b. ** Record interest revenue at the cash received or receivable. *** Unrealized gains (losses) = fair value – carrying value 2025 unrealized gains (losses) = $5,210,618 – $5,507,569 = ($296,9510 **** Unrealized gains (losses) = fair value – carrying value at amortized cost 2025 unrealized gains (losses) = $5,210,618 – $5,432,947 = ($222,329) Diff: 2 Type: ES Skill: Computational Objective: 7.4/ 7.5 Analyze historical cost and fair value information to determine the appropriate balance sheet measurement and income recognition for three categories of financial assets: fair value through profit or loss, fair value through OCI, and amortized cost./Apply present value techniques to account for investments in debt instruments.

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 8 Property, Plant, and Equipment Learning Objective 1 1) Which of the following is a NOT characteristic of property, plant and equipment (PPE)? A) PPE are tangible items. B) PPE benefit more than one year. C) PPE are held for use in the ordinary course of business. D) PPE have fixed and determinable future cash flows. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

2) Under IFRS, what is the acceptable treatment for borrowing costs on a self constructed property, plant and equipment? A) Capitalize costs that would have been avoided if the expenditure had not been made. B) Capitalize costs of any internal debt incurred within the corporation. C) Capitalize all indirectly attributable borrowing costs and expense the directly attributable costs. D) A company can make a policy choice on the treatment of borrowing costs. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

3) Explain why earnings manipulation of property, plant and equipment can have long-lasting impact on the financial statements. Answer: The long-lived nature of PPE means that earnings manipulation can have long-lasting impact on the statements and ratios. Capitalizing costs to PPE essentially defers the expense recognition from today to several future periods over the asset's economic life. Such manipulation may not be readily apparent in the statements and may only be revealed in later years as depreciation estimates are revised or impairment tests reveal that the category is overstated. For land, such deferral is infinite until the eventual disposal of the land. Additionally, the subjective nature of the estimates involved further increases the potential for earnings manipulation. As such, there is high incentive to manage earnings using this asset category. Diff: 2 Type: ES Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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4) What is the IFRS treatment for replacements versus repairs? A) Betterments are expensed because they do not extend the life of the asset. B) Replacement of significant asset components are capitalized. C) Repairs are capitalized because they do occur on a recurring basis. D) A company can make a policy choice on the treatment of these expenditures. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

5) Under ASPE, what is the acceptable treatment for borrowing costs on a self constructed property, plant and equipment? A) Must capitalize costs that would have been avoided if the expenditure had not been made. B) Must capitalize costs of any debt incurred for the inventory needs of the corporation. C) Must expense the directly attributable borrowing costs on qualifying assets. D) A company can make a policy choice on the treatment of borrowing costs. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

6) Which of the following is a concern on the initial recognition of property, plant and equipment? A) Whether a gain or loss to be recorded in the income statement. B) How much should be recorded on the balance sheet at the acquisition date. C) What amount should be recorded on the balance sheet at the reporting date. D) What expenditures should be capitalized on the balance sheet. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

7) Which question must be considered at the initial recognition of property, plant and equipment? A) How the costs that have been capitalized should be categorized or classified in the balance sheet? B) Whether the historical cost or fair value model should be used? C) Whether the straight-line or double-declining balance method should be used? D) How the property, plant and equipment should be tested for impairment? Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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8) What costs should be capitalized to "land"? A) Construction permits. B) Engineering surveys. C) Property transfer tax. D) Interest during construction. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

9) Which of the following is NOT a characteristic of property, plant and equipment (PPE)? A) PPE are held for sale in the ordinary course of business. B) PPE are held for administrative purposes of the business. C) PPE are held for use in the ordinary course of business. D) PPE are held for rental to others by the business. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

10) What is the accounting treatment recommended under IFRS for interest capitalization for property, plant and equipment (PPE)? A) Capitalize cost of debt directly attributable to construction of the PPE. B) Capitalize cost of internal funds directly attributable to construction of the PPE. C) Expense cost of debt directly attributable to construction of the PPE. D) IFRS does not provide any specific guidance for interest capitalization. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

11) Which of the following is NOT a characteristic of a property, plant and equipment (PPE)? A) No physical substance. B) Identifiable. C) Non-monetary. D) Provides future cash flows. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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12) On January 1, 2024, BigBen purchased a machine, incurring the expenditures listed below. The machine had an estimated useful life of 10 years, and BigBen uses straight-line depreciation for its equipment. Invoice cost of machine Shipping costs paid Preparing concrete platform to support machine Testing of machine prior to general use

$100,000 15,000 10,000 30,000

What amount should be capitalized as the cost of the machinery for 2024? A) $100,000 B) $110,000 C) $115,000 D) $155,000 Answer: D Explanation: D) $100,000 + $15,000 + $10,000 + $30,000 = $155,000 Diff: 2 Type: MC Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

13) What costs should NOT be capitalized to "building"? A) Construction permits. B) Engineering surveys. C) Property transfer tax. D) Interest during construction. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

14) What costs should NOT be capitalized to "building"? A) Demolition of old structures. B) Engineering surveys. C) Interest during construction. D) Construction permits. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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15) What costs should NOT be capitalized to "equipment"? A) Non-refundable sales tax. B) Refundable sales tax. C) Interest during construction of equipment. D) Transportation and delivery. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

16) What costs should NOT be capitalized to "equipment"? A) Non-refundable sales tax. B) Equipment purchase cost. C) General training. D) Transportation and delivery. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

17) What costs should NOT be capitalized to "equipment"? A) Non-refundable sales tax. B) Equipment purchase cost. C) Abnormal waste in testing. D) Equipment specific training. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

18) How should $45,000 spent to obtain greater productive efficiency for a machine with a carrying value of $80,000 be accounted for? A) Capitalized, then depreciated during current and subsequent periods. B) Expensed in the period in which the cost occurs. C) Charged to accumulated depreciation with no change in the depreciation rate. D) Charged to retained earnings. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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19) In December 2026, Ami, the owner of Elm, paid for a parcel of land along with a warehouse on behalf of Elm, the registered owner of the property, for a total cost of $700,000. Ami also paid a real estate commission of $35,000 and legal fees of $5,000 in connection with this purchase, plus $25,000 for the demolition of the warehouse. Elm will reimburse Ami for these costs in January 2026 and will begin construction of an office building on this land. Prior to the purchase, the land and warehouse were appraised at $500,000 and $200,000, respectively. How much should be capitalized to the value of the land in 2026? A) $0 B) $505,000 C) $730,000 D) $765,000 Answer: D Explanation: D) $700,000 + $35,000 + $5,000 + $25,000 = $765,000 Diff: 3 Type: MC Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

20) In December 2026, Ami, the owner of Elm, paid for a parcel of land along with a warehouse on behalf of Elm, the registered owner of the property, for a total cost of $700,000. Ami also paid a real estate commission of $35,000 and legal fees of $5,000 in connection with this purchase, plus $25,000 for the demolition of the warehouse. Elm will reimburse Ami for these costs in January 2026 and will begin construction of an office building on this land. Prior to the purchase, the land and warehouse were appraised at $500,000 and $200,000, respectively. How much should be capitalized to the value of the building in 2026? A) $0 B) $35,000 C) $235,000 D) $270,000 Answer: A Explanation: A) All capitalized to land Diff: 2 Type: MC Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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21) On March 1, 2024, Pear Company (PC) had been renting its office building for several years and decided to have a new office building constructed. On April 1, 2024, it acquired land with an abandoned warehouse on it for $100,000. Other costs included: Demolition of warehouse Legal fees for purchase of land Construction costs of new building Proceeds from salvage of warehouse materials Installation of wiring and plumbing fixtures Architectural fees

$20,000 2,400 400,000 4,000 16,000 24,000

How much will be capitalized to "land" in fiscal 2024? A) $100,000 B) $102,400 C) $118,400 D) $124,000 Answer: C Explanation: C) $100,000 + $20,000 - $4,000 + $2,400 = $118,400 Diff: 2 Type: MC Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

22) On March 1, 2024, Penguin Company (PC) had been renting its office building for several years and decided to have a new office building constructed. On April 1, 2024, it acquired land with an abandoned warehouse on it for $100,000. Other costs included: Demolition of warehouse Legal fees for purchase of land Construction costs of new building Proceeds from salvage of warehouse materials Installation of wiring and plumbing fixtures Architectural fees

$20,000 2,400 400,000 4,000 16,000 24,000

How much will be capitalized to "building" in fiscal 2024? A) $380,000 B) $400,000 C) $420,000 D) $440,000 Answer: D Explanation: D) $400,000 + $16,000 + $24,000 = $440,000 Diff: 2 Type: MC Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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23) Explain what costs should be capitalized to property, plant and equipment. Include a discussion of costs incurred for acquired assets, self constructed assets and repairs. Answer: • Enterprises should capitalize as PPE those expenditures for tangible, long-lived assets that give rise to future benefits for the entity and for which the costs are reasonably measurable. • Enterprises should capitalize all costs incurred for the acquisition or construction of PPE, including materials, labour, overhead, borrowing costs, and future costs for demolition and site restoration. Capitalization ends when the asset is ready for its intended use. • Enterprises should capitalize replacements of PPE components but expense repairs. Diff: 1 Type: ES Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

24) Explain why it is necessary to separate property, plant and equipment (PPE) items into separate components. Answer: • In order to capitalize costs in PPE, it is necessary to define the unit of measurement—when are two or more items separate assets and when are they merely components of a single asset? • There are no clear-cut answers for all situations, and IFRS allows firms latitude to apply professional judgment according to the circumstances. • The issue is important to the extent that finer, more detailed classifications can accommodate more specific estimates of useful lives and depreciation patterns. • Therefore, related items with similar useful lives and usage patterns can be classified as a single asset; otherwise, they should be classified as separate assets. • To the extent that capitalizing costs into different types of assets affects future depreciation, a useful way to categorize expenditures is according to their expected useful life and pattern of depreciation. Diff: 2 Type: ES Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

25) Using the conceptual framework, explain why there is a difference between IFRS and ASPE in accounting for interest capitalization for property, plant and equipment. Answer: This variation in standards illustrates the significant differences in position that can be taken by different standard-setting bodies. The requirements and prohibitions against interest capitalization in IFRS and U.S. GAAP reflect a higher priority for comparability among reporting entities. The greater flexibility allowed by ASPE reflects a greater trust that enterprises will choose the policy that best reflects their circumstances and that disclosure of interest capitalization policies will sufficiently inform users—focus is on relevance/reliability/providing most decision-useful information. Diff: 3 Type: ES Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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26) Daniel Manufacturing Limited (DML) purchased a large lathe. The invoice cost of the lathe was $6,200,000 but DML was able to get the price reduced to $5,800,000. The seller provided terms whereby if the entire amount was paid within 30 days a further discount of 3% was available. DML paid on the 25th day. Transportation of the machine cost DML $70,000. Insurance while in transit was $30,000. To encourage DML to purchase another machine, the manufacturer gave DML a $50,000 discount voucher on its next purchase of a similar machine. Workers were paid $45,000 to install the machine. Start-up and testing costs were $45,000. Unfortunately, during the installation, one of the workers accidentally damaged the machine, and it cost $15,000 to repair the damage. Non-refundable sales taxes paid were $700,000, however, later a sales tax rebate of $80,000 was received relating to this transaction. During installation, part of the plant had to be shut down; lost profit from the shutdown was $100,000. Required: For each expenditure, identify whether it should be included in the cost of the lathe or expensed. Briefly justify each of your responses. Answer: Include in Item cost of lathe Expense Justification Lathe $5,800,000 Record amount paid as actual amount. Choice; could deduct from cost of machine or record as contra expense or revenue on income 3% discount (174,000) statement. Freight in 70,000 Cost essential to put machine in working order. Insurance 30,000 Cost essential to put machine in working order. Ignore. Reduce cost of next machine if/when Voucher acquired. Installation 45,000 Cost essential to put machine in working order. Testing 45,000 Cost essential to put machine in working order. Expense as has no future benefit. Only restores Damages $15,000 asset to original working condition. 700,000 Cost essential to put machine in working order. Sales Tax (80,000) Subtract rebate as part of same event. Shutdown Ignore opportunity costs. Total cost $6,436,000 $15,000 Diff: 1 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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27) Zach Co. Ltd. was incorporated on January 2, 2026, but was unable to begin its manufacturing operations immediately. The new factory facilities became available for use on July 1, 2026. During the start-up period, the company provisionally used a "Land and Factory Building" account to record the following transactions, in chronological order: Jan. 31 Feb. 19 Mar. 15 Mar. 15 Mar. 15 Apr. 1 June 3 June 20 July 3 Dec. 31 Dec. 31 Dec. 31

Purchase of land and building Cost of removing existing building Proceeds from sale of scrap material from demolition Partial payment on new construction Legal fees paid (see note (i) below) Second payment on new construction Insurance premium (ii) Special tax assessment (iii) General expenses (iv) Final payment on new construction Asset write-up (v) Subtotal Less depreciation for 2026 (vi) Account Balance

$410,000 7,000 (1,500) 80,000 3,200 80,000 4,200 5,000 38,000 65,000 23,000 713,900 (17,500) $696,400

Additional info i. Legal fees of $3,200 covered the following: Cost of incorporating the company Examination of title covering purchase of land Legal work in connection with construction contract

$ 600 1,100 1,500

ii. Insurance covered the building for a one-year term beginning April 1, 2026. iii. The special tax assessment covered repaving the street in front of the building. iv. General expenses covered the following for the period January 2, 2026, to June 30, 2026. President's salary Plant superintendent covering supervision of new building

$34,000 4,000

v. The board of directors increased the value of the building by $23,000, believing that such an increase was justified to reflect the current market at the time the building was completed; Retained Earnings was credited for this amount. vi. Engineers estimate the useful life of the building to be 40 years. The company believes that the declining balance method at a 5% rate is appropriate. The company's policy for new PPE is to depreciate the assets according to the time available for use in the fiscal year, rounded to the closest month. Required: Prepare entries to reflect correct land, factory building, and accumulated depreciation accounts at December 31, 2026. Round values to the nearest dollar, if necessary.

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Answer: Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr.

Dr.

Debit 231,550 416,600 5,000 600 1,050 2,100 34,000 23,000

Building Land Land improvements Organization costs Prepaid insurance Insurance expense Salaries expense Retained earnings Cr. Depreciation expense (reversal) Cr. Land and factory building

Credit

17,500 696,400

Depreciation expense Cr. Accumulated depreciation

5,789 5,789

Diff: 2 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

28) Every three years a major component (part #45) in a machine must be replaced. By doing this regular but expensive repair the machine can be used for 15 years. If Part #45 were not replaced, the machine could be used only for a maximum of six years. When the machine was originally purchased for $5,000,000 it was set up as one asset and depreciated over its estimated useful life of 15 years. Recently this repair was completed at a cost of $700,000 for Part #45. The earlier Part #45 cost $550,000 when it was installed three years ago. Neither the old nor the new Part #45 has any residual value. Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen treatment. Answer: Dr. Maintenance expense 700,000 Cr. Cash 700,000 This expenditure should be treated as an expense because this cost is anticipated and expected as the asset is being depreciated. Diff: 2 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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29) Every three years a major component (part #45) in a machine must be replaced. By doing this regular but expensive repair the machine can be used for 15 years. If Part #45 were not replaced, the machine could be used only for a maximum of six years. When the machine was originally purchased for $5,000,000 it was set up as two components: the machine was depreciated over its estimated useful life of 15 years and Part #45 was recognized as a separate PPE asset and depreciated over three years. Recently this repair was completed at a cost of $700,000 for Part #45. The earlier Part #45 cost $550,000 when it was installed three years ago. Neither the old nor the new Part #45 has any residual value. Prepare the necessary journal entries to record the transaction. Provide a short justification for your chosen treatment. Answer: A new Part #45 may be capitalized and the older part removed from the accounts. This expenditure would qualify as a replacement as it provides future benefits in terms of improved operation of the machine. To derecognize old part Dr. Accumulated depreciation — Part #45 Cr. PPE — Part #45

550,000 550,000

To capitalize new part Dr. PPE — Part #45 Cash

700,000 700,000

30) An important piece of equipment requires major maintenance. Management has decided to upgrade the machine, by installing a new component which will extend the useful life of the machine from the three remaining years to five more years. The regular part could have been purchased for $75,000 but a more reliable part cost $225,000. The replaced part was not set up as a separate asset when the machine was purchased. Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen treatment. Answer: Dr. PPE – new part 150,000 Dr. Maintenance expense 75,000 Cr. Cash 225,000 Only the portion of the expenditure that increases the service potential of the PPE can be capitalized because the first $75,000 is recurring maintenance. Diff: 2 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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31) A large piece of earth-moving equipment was upgraded at a cost of $440,000 so that it could self-unload. After the upgrade was completed, management estimated that this feature would save the company $40,000 a year for the next six years. Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen treatment. Answer: Dr. PPE – unloader for earth mover ($40,000 × 6) 240,000 Dr. Maintenance expense 200,000 Cr. Cash 440,000 The portion of the expenditure spent over and above the amount that provides future benefits in terms of saving the company money should be expensed because the value of the asset cannot exceed the amount of this future benefit. Diff: 2 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

32) A truck has a new engine installed for $155,000 which will increase gas mileage by 25% and reduce pollution. Originally, the truck and engine were not set up as separate assets. Management confidently estimates that the cost of the engine is one-third of the overall cost of the truck. The truck's original cost was $420,000 and it is 40% depreciated. Prepare the necessary journal entries to record the transaction. Answer: To derecognize old engine Dr. Loss on engine disposal 84,000 Dr. Accumulated depreciation - truck (engine) 56,000 ($140,000 × 0.4) Cr. PPE - truck (engine) $420,000 × 1/3 140,000 To capitalize new engine cost Dr. Truck engine Cr. Cash

155,000 155,000

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33) A car rental company has a fleet of 32,000 cars. Every three months all the cars are given scheduled oil changes, rotation, and replacement of small components. The cost per car is $210, ($70 in parts and $140 for the wages of the in-house mechanics), $6,720,000 in total. As well, for half of the cars a satellite radio receiver was installed at a cost of $150 each (total $2,400,000). The gadget allows the car to receive satellite radio. The company will provide this service free and promote it heavily to increase rentals. This advertising campaign will cost $1,500,000. After the original free use of the satellite feature, the company will charge later users a fee for the use of satellite radio. Prepare the necessary journal entry to record the above transactions. Provide a short justification for your chosen treatment. Answer: Dr. PPE — satellite radio 2,400,000 Dr. Maintenance expense 6,720,000 Dr. Advertising expense 1,500,000 Cr. Cash 10,620,000 The oil change and tire rotation are expensed because they are considered regular repairs and maintenance. The satellite receiver can be classified as an asset because it is expected to generate additional rentals of the vehicle. The advertising to promote the satellite feature should be expensed because it is a normal operating cost. Diff: 2 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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34) Steep Mountain Ski Resort has been granted a 20-year permit to develop and operate a snow skiing operation in a national park. After 20 years the site must be returned to its original condition. The roads may remain, as they can be used for fire prevention purposes. In the spring and summer before the ski hill opened, the following transactions and events occurred: i. Installed three ski lifts for a total cost of $120,000,000. ii. Built a ski chalet for $60,000,000. iii. Removed trees and cleared the area for ski runs at a cost of $20,000,000. iv. Received $8,000,000 for the trees that were removed for the ski runs. v. Put in roads for a cost of $68,000,000. vi. Paved an area at the base of the mountain for a parking lot at a cost of $11,000,000. vii. Estimated that it would cost $36,000,000 to dismantle the ski lifts in 20 years but that these lifts could be sold as scrap steel for $2,000,000. The chalet could be removed for $24,000,000. Reforesting the site would cost $7,000,000. Removing the parking lot will cost $3,800,000. Required: a. Prepare journal entries to record transactions i. to vi. b. Prepare a journal entry to record transaction vii. Assume all these costs will be set up in a single account called "site restoration cost." Assume a 6% discount rate. Round to the nearest dollar. c. Record all year-end journal entries for the above items for the first year of operations. The company uses straight-line depreciation for all assets. Round to the nearest dollar. Answer: a. Journal entries for transactions i. to vi. Dr. Ski lift Cr. Cash Dr. Ski chalet Cr. Cash Dr. Land improvement (site clearance: $20,000,000 $8,000,000) Cr. Cash Dr. Roads Cr. Cash Dr. Parking lot Cr. Cash

120,000,000 120,000,000 60,000,000 60,000,000 12,000,000 12,000,000 68,000,000 68,000,000 11,000,000 11,000,000

b. Journal entry for transaction vii. Dr. Site restoration cost Cr. Obligation for future site restoration

21,452,165 21,452,165

Total cost to restore site at the end of 20 years = $36,000,000 – $2,000,000 + $24,000,000 + $7,000,000 + $3,800,000 = $68,800,000. Present value of $68,800,000 due in 20 years at 6% = $68,800,000 / 1.06 20 = $21,452,165. Note that it is also possible to treat the scrap metal value of the lifts as the residual value of the lifts rather than as an offset to the site restoration costs:

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c. Year-end journal entries for first year of operations: Assets depreciated over 20 years which is the shorter of their useful life and the lease term. Dr. Depreciation expense ($120,000,000/20) Cr. Accumulated depreciation — ski lifts Dr. Depreciation expense ($60,000,000/20) Cr. Accumulated depreciation — ski chalet Dr. Depreciation expense ($12,000,000/20) Cr. Accumulated depreciation — land improvement Dr. Depreciation expense ($6,800,000/20) Cr. Accumulated depreciation — roads Dr. Depreciation expense ($11,000,000/20) Cr. Accumulated depreciation — parking lot Dr. Depreciation expense ($21,452,165 /20) Cr. Accumulated depreciation — site restoration Dr. Interest expense ($21,452,165 × 6%) Cr. Obligation for future site restoration

6,000,000 6,000,000 3,000,000 3,000,000 600,000 600,000 3,400,000 3,400,000 550,000 550,000 1,072,608 1,072,608 1,287,130 1,287,130

Diff: 3 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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35) Forest Company paid $38,000,000 for a warehouse and related assets from a company that was in bankruptcy. The warehouse includes land, building, moving equipment, and heating/ventilation/air conditioning (HVAC) system. An independent appraiser valued these items individually as follows: PPE category Land Building Moving equipment HVAC system Total

Appraised value $10,400,000 23,400,000 3,900,000 14,300,000 $52,000,000

Required: Allocate the purchase price among the assets acquired. Answer: Fraction of total PPE category Appraised value appraised value × Total price = Allocated price Land $10,400,000 10.4/52 $38,000,000 $7,600,000 Building 23,400,000 23.4/52 38,000,000 17,100,000 Moving equipment 3,900,000 3.9/52 38,000,000 2,850,000 HVAC system 14,300,000 14.3/52 38,000,000 10,450,000 Total $52,000,000 $38,000,000 Diff: 1 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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36) Office Plus Company bought an office building for $9,000,000 so it could consolidate its entire senior management staff in one location. An independent appraiser valued these items individually as follows: PPE category Land Building Computer network system Elevator system Landscaping and site improvements Total

Appraised value $3,000,000 4,000,000 1,200,000 1,800,000 800,000 $10,800,000

Prior to completing the purchase, Office Plus' management decided that it will remove the computer network system and replace it with fiber-optic cables and related technologies. Required: Allocate the purchase price among the assets acquired. Answer: Since the company has no intention of using the existing computer network system, it will be ignored in the price allocation process.

PPE category Land Building Elevator system Landscaping and site improvements Total

Fraction of total Appraised value appraised value × Total price = Allocated price $3,000,000 3/9.6 $9,000,000 $2,812,500 4,000,000 4/9.6 9,000,000 3,750,000 1,800,000

1.8/9.6

9,000,000

1,687,500

800,000 $9,600,000

0.8/9.6

9,000,000

750,000 $9,000,000

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37) Celtic Company bought three used machines located in Toronto for $20,000,000. The arrangement with the seller is to move all the equipment to Celtic's factory in Edmonton. It is understood that some of the equipment will be sold as scrap or disassembled and used as spare parts. A careful inventory of all the equipment is shown below. Celtic's plans are to maximize the value of each item by using it in its most beneficial manner.

Machine A Machine B Machine C Total

Value if installed and operated $5,050,000 3,990,000 10,610,000 $19,650,000

Value as spare parts $3,950,000 4,040,000 10,410,000 $18,400,000

Value as scrap $4,250,000 740,000 11,110,000 $16,100,000

Required: Allocate the purchase price among the assets acquired. Answer: Appraised Fraction of value in total appraised PPE category Intended use optimal use value Total price Machine A Operate $5,050,000 5.05/20.2 $20,000,000 Machine B Spare 4,040,000 4.04/20.2 20,000,000 Machine C Scrap 11,110,000 11.11/20.2 20,000,000 Total $20,200,000

Allocated price $5,000,000 4,000,000 11,000,000 $20,000,000

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38) Praguian Company built two similar buildings. Each building took one year to build and required $30,000,000 in construction costs. The Company had limited internal financial resources, so it could fund only Building A internally and financed Building B by borrowing the $30,000,000 evenly over the year (i.e. zero at the beginning and increasing to $30 million by the end of the year). The interest rate on the loan is 10%. Both projects were finished on December 31, 2026, and were ready for occupancy immediately. The buildings are estimated to have a useful life of 20 years and no residual value. The Company uses the straight-line method for depreciation. Required: a. How much interest cost can be capitalized on Building B? b. What will be the annual depreciation expense for each of the two buildings? c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which treatment of interest costs is conceptually more correct? Explain your conclusion. d. Why can interest costs not continue to be capitalized after the self-construction period is completed? Answer: a. ($30,000,000 / 2) × 10% = $1,500,000 b. Annual depreciation expense–Building A: $30,000,000 / 20 = $1,500,000 Annual depreciation expense–Building B: $31,500,000 / 20 = $1,575,000. c. Conceptually, the treatment of interest costs by IFRS is more correct. Interest cost is as much an essential cost of a self-constructed asset as the concrete and steel. Without the financing, the construction would not have occurred. The benefit of the interest expenditure on the debt used to finance the asset is realized over the period of time when the completed asset is used. Therefore, this cost should be added to the cost of the self-constructed asset and expensed via an increased depreciation expense. Further, if the construction of the asset were outsourced, the contractor would have included its cost of financing the project as part of the contracted price. Expensing immediately results in poor matching of expense with the realization of the benefit of the expenditure (which is the finished self-constructed asset). d. Interest costs may be capitalized only during the construction period because once construction is completed there is no logistical reason why the owner of the asset cannot start to generate revenues or cost savings from the use of the asset. While under construction it is impossible to generate a benefit from the asset, and this is the condition that permits capitalization. Once construction is completed there is no impediment to delay the matching of expense to revenues as the item is available for use. Therefore, after completion of the construction process, interest is a period cost, not a product cost. Diff: 2 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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39) Coffee-Bean Company built two similar buildings. Each building took one year to build and required $25 million in construction costs. Given the Company's limited internal financial resources, only Building Hazel could be internally financed; Building Cinnamon was financed by a $20 million loan evenly over the year (i.e. zero at the beginning and increasing to $20 million by the end of the year). The interest rate on the loan is 8%. Both projects were finished on December 31, 2024, and were ready for occupancy immediately. The Hazel building will have an estimated useful life of 30 years while the Cinnamon building will have an expected useful life of 40 years. Neither building will have a residual value. The Company uses the straight-line method for depreciation. Required: a. How much interest cost can be capitalized on Building Cinnamon? b. What will be the annual depreciation expense for each of the two buildings? c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which treatment of interest costs is conceptually more correct? Explain your conclusion. d. Why can interest costs not continue to be capitalized after the self-construction period is completed? Answer: a. ($20,000,000 / 2) × 8% = $800,000 b. Annual depreciation expense–Building Hazel: $25,000,000 / 30 = $833,333 Annual depreciation expense–Building Cinnamon: $25,800,000 / 40 = $645,000. c. Conceptually, the treatment of interest costs by IFRS is more correct. Interest cost is as much an essential cost of a self-constructed asset as the concrete and steel. Without the financing, the construction would not have occurred. The benefit of the interest expenditure on the debt used to finance the asset is realized over the period of time when the completed asset is used. Therefore, this cost should be added to the cost of the self-constructed asset and expensed via an increased depreciation expense. Further, if the construction of the asset were outsourced, the contractor would have included its cost of financing the project as part of the contracted price. Expensing immediately results in poor matching of expense with the realization of the benefit of the expenditure (which is the finished self-constructed asset). d. Interest costs may be capitalized only during the construction period because once construction is completed there is no logistical reason why the owner of the asset cannot start to generate revenues or cost savings from the use of the asset. While under construction it is impossible to generate a benefit from the asset, and this is the condition that permits capitalization. Once construction is completed there is no impediment to delay the matching of expense to revenues as the item is available for use. Therefore, after completion of the construction process, interest is a period cost, not a product cost. Diff: 3 Type: ES Skill: Computational Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

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40) Discuss how inappropriate capitalization of costs during the acquisition of PPE can manipulate earnings. Answer: The general principle is that companies should capitalize only those costs that are directly attributable to the purchase/construction of the PPE. Professional judgment must be used to determine whether a particular activity is directly connected to that purchase/construction. Over capitalization of employee cost or borrowing costs are some examples where significant judgment is required. Inappropriate capitalization of costs (which should have been expensed) would inflate current year earnings while causing future years' annual depreciation expenses to be incorrectly higher. Diff: 2 Type: ES Skill: Conceptual Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense.

Learning Objective 2 1) What is the meaning of "historical cost"? A) The cost required to replace the productive capacity of an asset. B) The value of an asset in an input market or output market on the date of measurement. C) The value expected from the sale of an asset, net of any costs of disposal. D) The actual cost of an asset at the time it was purchased. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

2) What issue does NOT relate to the subsequent measurement of property, plant and equipment? A) Which model to use to record depreciation. B) How impairment should be recorded. C) How to classify the expenditure. D) Whether to use the fair value model. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

3) What is the meaning of "depreciable amount"? A) The estimated amount that an entity would currently obtain from disposal of the asset, after deducting disposal costs, for an asset of similar age and condition expected at the end of its useful life. B) The total amount to be expensed through depreciation. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The estimated period of time over which an asset is expected to be available for use by an entity. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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4) What is the meaning of "straight-line method"? A) The systematic allocation of an asset's depreciable amount allocated in proportion to the productive capacity used. B) The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated useful life. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the asset's net carrying amount multiplied by a fixed percentage. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

5) Which factor will affect the estimated useful life of property, plant or equipment? A) Legal life of the asset. B) Technological obsolescence. C) Residual value. D) Salvage value. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

6) What is the meaning of "residual value"? A) The estimated amount that an entity would currently obtain from disposal of the asset, after deducting disposal costs, for an asset of similar age and condition expected at the end of its useful life. B) The total amount to be expensed through depreciation. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The estimated period of time over which an asset is expected to be available for use by an entity. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

7) What is the meaning of "useful life"? A) The estimated amount that an entity would currently obtain from disposal of the asset, after deducting disposal costs, for an asset of similar age and condition expected at the end of its useful life. B) The total amount to be expensed through depreciation. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The estimated period of time over which an asset is expected to be available for use by an entity. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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8) What is the meaning of "depreciation"? A) The estimated amount that an entity would currently obtain from disposal of the asset, after deducting disposal costs, for an asset of similar age and condition expected at the end of its useful life. B) The total amount to be expensed. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The estimated period of time over which an asset is expected to be available for use by an entity. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

9) What is the meaning of "declining balance method"? A) The systematic allocation of an asset's depreciable amount allocated in proportion to the productive capacity used. B) The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated useful life. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the asset's net carrying amount multiplied by a fixed percentage. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

10) What is the meaning of "units-of-production method"? A) The systematic allocation of an asset's depreciable amount allocated in proportion to the productive capacity used. B) The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated useful life. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the asset's net carrying amount multiplied by a fixed percentage. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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11) What is the meaning of "depreciation"? A) The systematic allocation of an asset's depreciable amount allocated in proportion to the productive capacity used. B) The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated useful life. C) The systematic allocation of an asset's depreciable amount over its estimated useful life. D) The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the asset's net carrying amount multiplied by a fixed percentage. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

12) What factor will NOT affect the estimated useful life of property, plant or equipment? A) Legal life of the asset. B) Technological obsolescence. C) Competitive pressures. D) Productive capacity. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

13) Hotel-R-Us owns a machine that it purchased on January 1, 2024, for $600,000. The machine had an estimated useful life of 5 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2026, for $140,000. What was the accumulated depreciation at December 31, 2026? A) $292,800 B) $180,000 C) $150,000 D) $76,800 Answer: A Explanation: A) 2024 depreciation = $600,000 × 20% = $120,000 2025 depreciation = ($600,000 - $120,000) × 20% = $96,000 2026 depreciation = ($600,000 - $120,000 - $96,000) × 20% = $76,800 Accumulated = $120,000 + $96,000 + $76,800 = $292,800 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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14) Seall-Test Ltd. owns a machine that it purchased on January 1, 2024, for $600,000. The machine had an estimated useful life of 10 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2026, for $140,000. What was the depreciation expense for 2025? A) $50,000 B) $60,000 C) $96,000 D) $120,000 Answer: C Explanation: C) 2024 depreciation = $600,000 × 20% = $120,000 2025 depreciation = ($600,000 - $120,000) × 20% = $96,000 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

15) What is the meaning of "current cost"? A) The cost of an equivalent asset at the measurement date. B) The value of an asset in an input market or output market on the date of measurement. C) The value expected from the sale of an asset, net of any costs of disposal. D) The actual cost of an asset at the time it was purchased. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

16) What is the meaning of "fair value"? A) The cost required to replace the productive capacity of an asset. B) The value of an asset in an input market or output market on the date of measurement. C) The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. D) The actual cost of an asset at the time it was purchased. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

17) What is the meaning of "current value"? A) The cost required to replace the productive capacity of an asset. B) The value of an asset in an input market or output market on the date of measurement. C) The value expected from the sale of an asset, net of any costs of disposal. D) The actual cost of an asset at the time it was purchased. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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18) What is the meaning of "net realizable value"? A) The cost required to replace the productive capacity of an asset. B) The value of an asset in an input market or output market on the date of measurement. C) The value expected from the sale of an asset, net of any costs of disposal. D) The actual cost of an asset at the time it was purchased. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

19) What is the meaning of "value in use"? A) The cost required to replace the productive capacity of an asset. B) The value of an asset in an input market or output market on the date of measurement. C) The value expected from the sale of an asset, net of any costs of disposal. D) The discounted value of cash flows expected from using an asset for its intended purpose. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

20) Ontario Ltd. owns a machine that it purchased on January 1, 2024, for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2027, for $200,000. What was the annual depreciation expense? A) $10,000 B) $140,000 C) $150,000 D) $560,000 Answer: B Explanation: B) ($750,000 - $50,000) / 5 years = $140,000 / year Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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21) Seneca Valley owns a machine that it purchased on January 1, 2024, for $600,000. The machine had an estimated useful life of 5 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 40%. The machine was sold on December 31, 2026, for $140,000. What was the depreciation expense for 2024? A) $100,000 B) $120,000 C) $200,000 D) $240,000 Answer: D Explanation: D) $600,000 × 40% = $240,000 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

22) Centennial owns a machine that it purchased on January 1, 2024, for $400,000. The machine had an estimated useful life of 10 years with a production capacity for 80,000 units and was expected to have no residual value. The company uses the units-of-production method to record depreciation. The machine produced 15,000 units in 2024, 18,000 units in 2025, and 25,000 units in 2026. The machine was sold on December 30, 2026, for $350,000. What was the accumulated depreciation at December 31, 2024? A) $39,000 B) $40,000 C) $75,000 D) $90,000 Answer: C Explanation: C) $400,000 / $80,000 = $5.00/unit 2024 = $5.00 × 15,000 units = $75,000 = Accumulated depreciation Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

23) Francisco Ltd. owns a machine that it purchased on July 1, 2024, for $600,000. The machine had an estimated useful life of 8 years and an estimated residual value of $10,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2029, for $350,000. What was the depreciation expense for 2024? A) $30,729 B) $36,875 C) $73,750 D) $75,000 Answer: B Explanation: B) ($600,000 - $10,000) / 8 years × 6/12 = $36,875 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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24) Oregona Ltd. owns a machine that it purchased on January 1, 2024, for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2027, for $200,000. What is the accumulated depreciation at December 31, 2027? A) $600,000 B) $560,000 C) $150,000 D) $140,000 Answer: B Explanation: B) 4 years × ((Cost – Residual value) / 5) 4 × (($750,000 - $50,000) / 5) = $560,000 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

25) Scandsia Ltd. owns a machine that it purchased on January 1, 2024, for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2027, for $200,000. What is the carrying value (net book value) at the date of sale? A) $10,000 B) $150,000 C) $190,000 D) $560,000 Answer: C Explanation: C) [Cost – (4 years × (Cost – Residual value) / 5)] [($750,000 – (4 × ($750,000 - $50,000) / 5)] $750,000 – $560,000 = $190,000 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

26) Easter Corp. owns a machine that it purchased on January 1, 2024, for $600,000. The machine had an estimated useful life of 10 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2026, for $140,000. What was the accumulated depreciation at December 31, 2025? A) $100,000 B) $120,000 C) $180,000 D) $216,000 Answer: D Explanation: D) 2024 depreciation = $600,000 × 20% = $120,000 2025 depreciation = ($600,000 - $120,000) × 20% = $96,000 Accumulated = $120,000 + $96,000 = $216,000 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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27) Base-Forward owns a machine that it purchased on January 1, 2024, for $600,000. The machine had an estimated useful life of 5 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2026, for $140,000. What was the depreciation expense for 2026? A) $292,800 B) $76,800 C) $60,000 D) $50,000 Answer: B Explanation: B) 2024 depreciation = $600,000 × 20% = $120,000 2025 depreciation = ($600,000 - $120,000) × 20% = $96,000 2026 depreciation = ($600,000 – $120,000 - $96,000) × 20% = $76,800 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

28) CeeMore owns a machine that it purchased on January 1, 2024, for $400,000. The machine had an estimated useful life of 10 years and a production capacity of 80,000 units and was expected to have no residual value. The company uses the units-of-production method to record depreciation. The machine produced 15,000 units in 2024, 18,000 units in 2025, and 25,000 units in 2026. The machine was sold on December 31, 2026, for $350,000. What was the accumulated depreciation at the end of 2025? A) $75,000 B) $80,000 C) $90,000 D) $165,000 Answer: D Explanation: D) $400,000 / 80,000 = $5.00 / unit 2024 and 2025 = $5.00 × (15,000 + 18,000) = $165,000 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

29) Castle Rock owns a machine that it purchased on January 1, 2024, for $400,000. The machine had an estimated useful life of 10 years with a production capacity for 80,000 units and was expected to have no residual value. The company uses the units-of-production method to record depreciation. The machine produced 15,000 units in 2024, 18,000 units in 2025, and 25,000 units in 2026. The machine was sold on December 31, 2026, for $350,000. What was the depreciation expense for 2026? A) $39,000 B) $40,000 C) $90,000 D) $125,000 Answer: D Explanation: D) $400,000 / 80,000 = $5.00 / unit 2026 = $5.00 × 25,000 = $125,000 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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30) Seneca Valley owns a machine that it purchased on January 1, 2024, for $600,000. The machine had an estimated useful life of 10 years and an estimated residual value of $100,000. The company uses the double-declining balance method. The machine was sold on December 31, 2026, for $140,000. What is the depreciation rate for 2024? A) 10% B) 20% C) 40% D) Any of the above can be used. Answer: B Explanation: B) Straight-line rate = 1/10 = 10%; Double declining rate = 2 × straight line rate = 20% OR 2/useful life = 2/10 = 20% Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

31) Seally Corp. owns a machine that it purchased on January 1, 2024, for $600,000. The machine had an estimated useful life of 10 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2026, for $140,000. What was the depreciation expense for 2025? A) $50,000 B) $60,000 C) $80,000 D) $96,000 Answer: D Explanation: D) 2024 depreciation = $600,000 × 20% = $120,000 2025 depreciation = ($600,000 - $120,000) × 20% = $96,000 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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32) Plastic Moulds purchased equipment on January 1, 2024, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Additional information: Year 2024 2025 2026 2027 2028

Units of Output 2,100 2,000 1,700 2,300 1,900

Assuming the company uses the units-of-production depreciation method, what is the depreciation rate per unit for 2024? A) $25.00 B) $27.50 C) $57,750 D) $52,500 Answer: A Explanation: A) ($275,000 - $25,000) / 10,000 = $25.00 per unit Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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33) Billu Limited purchased equipment on January 1, 2024, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Additional information: Year 2024 2025 2026 2027 2028

Units of Output 2,100 2,000 1,700 2,300 1,900

Assuming the company uses the units-of-production depreciation method, calculate the depreciation expense for 2027. A) $25.00 B) $57,500 C) $63,250 D) $202,500 Answer: B Explanation: B) ($275,000 - $25,000) / 10,000 = $25.00 per unit 2,300 units × $25.00 = $57,500 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

34) Ceila Manufacturing purchased equipment on January 1, 2026, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Assuming the company uses the double-declining-balance depreciation method, what is the depreciation expense for 2026? A) $50,000 B) $55,000 C) $100,000 D) $110,000 Answer: D Explanation: D) 1/5 × 2 = 2/5; 2/5 × $275,000 = $110,000 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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35) FeelGood Corp. purchased equipment on January 1, 2025, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Assuming the double-declining-balance depreciation method is used, what is the net book value (carrying value) of the asset on December 31, 2026? A) $66,000 B) $99,000 C) $110,000 D) $165,000 Answer: B Explanation: B) DDB rate 2/5 = 40% 2025 deprec. $275,000 × 40% = $110,000 2026 deprec. ($275,000 – $110,000) × 40% = $66,000 NBV @ December 31, 2026 = $275,000 – $110,000 – $66,000 = $99,000 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

36) Historic Pieces Inc. purchased equipment on January 1, 2026, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Assuming the company uses straight-line depreciation, what is the depreciation expense for 2026? A) $27,500 B) $50,000 C) $55,000 D) $60,000 Answer: B Explanation: B) $2750000 - $25,000 = $250,000; $250,000 / 5 years = $50,000 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

37) Bountiful Limited purchased equipment on January 1, 2024, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Assuming the company uses straight-line depreciation, what is the net book value of the asset on December 31, 2027? A) $125,000 B) $75,000 C) $55,000 D) $50,000 Answer: B Explanation: B) [($275,000 - $25,000)/5] × 4 years) = $200,000 acc. depr; NBV - $275,000 - $200,000 = $75,000 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

38) Fantasmic Moulds purchased equipment on January 1, 2024, for $275,000. It was estimated that the

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equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Additional Information Year 2024 2025 2026 2027 2028

Units of Output 2,100 2,000 1,700 2,300 1,900

Assuming the company uses the units-of-production depreciation method, what is the depreciation expense for 2024? A) $25.00 B) $27.50 C) $52,500 D) $57,750 Answer: C Explanation: C) ($275,000 - $250,000) / 10,000 = $25.00 per unit $25.00 × 2,100 = $52,500 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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39) Fantasy Limited purchased equipment on January 1, 2024, for $275,000. The asset's useful life was estimated at 5 years or 10,000 units of output, with no residual value. The company has a December 31 year-end. Additional Information Year 2024 2025 2026 2027 2028

Units of Output 2,100 2,000 1,700 2,300 1,900

Assuming the company uses the units-of-production depreciation method, what is the depreciation expense for 2024? A) $25.00 B) $27.50 C) $52,500 D) $57,750 Answer: D Explanation: D) $275,000 / 10,000 = $27.50 per unit $27.50 × 2,100 = $57,750 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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40) AccountingPro purchased equipment on January 1, 2024, for $275,000. The asset's useful life was estimated at 5 years or 10,000 units of output, with no residual value. The company has a December 31 year-end. Additional Information Year 2024 2025 2026 2027 2028

Units of Output 2,100 2,000 1,700 2,300 1,900

Assuming the company uses the units-of-production depreciation method, what is the depreciation rate per unit for 2028? A) $25.00 B) $27.50 C) $47,500 D) $52,250 Answer: B Explanation: B) $275,000 / 10,000 = $27.50 per unit Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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41) Billu Limited purchased equipment on January 1, 2024, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Additional Information Year 2024 2025 2026 2027 2028

Units of Output 2,100 2,000 1,700 2,300 1,900

Assuming the company uses the units-of-production depreciation method, calculate the accumulated depreciation at the end of 2027. A) $57,500 B) $63,250 C) $202,500 D) $222,750 Answer: C Explanation: C) ($275,000 - $25,000) = $250,000; $250,000 / 10,000 = $25.00 per unit (2,100 + 2,000 + 1,700 + 2,300) × $25.00 = $202,500 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

42) Ceila Manufacturing purchased equipment on January 1, 2025, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Assuming the company uses the double-declining-balance depreciation method, what is the depreciation expense for 2026? A) $66,000 B) $99,000 C) $110,000 D) $165,000 Answer: A Explanation: A) 1/5 × 2 = 2/5; 2/5 × $275,000 = $110,000 (deprec for 2025) ($275,000 – $110,000) × 2/5 = $66,000 Diff: 2 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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43) ReelGood Corp. purchased equipment on January 1, 2026, for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year-end. Assuming the double-declining-balance depreciation method is used, what is the net book value (carrying value) of the asset on December 31, 2026? A) $66,000 B) $99,000 C) $110,000 D) $165,000 Answer: D Explanation: D) 1/5 × 2 = 2/5 × $275,000 = $110,000 (deprec for 2026) $275,000 – $110,000 = $165,000 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

44) Welcome Corporation purchased equipment for $267,000. The equipment is estimated to have a useful life of 10 years and a residual value of $27,000. Welcome uses straight-line depreciation and has a December 31 year-end. On January 1, 2028, the net book value of the equipment is $211,000. What is the date of purchase of the equipment? A) January 1, 2024 B) September 1, 2024 C) September 30, 2024 D) September 1, 2025 Answer: D Explanation: D) $267,000 – $27,000 = $240,000; $240,000 / 10 = $24,000; $24,000 / 12 = $2,000 per month $267,000 – $211,000 = $56,000; $56,000 / $2,000 = 28 months accumulated depreciation Purchase date is September 1, 2025 Diff: 3 Type: MC Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

45) What is the effect of overstating 2026 depreciation expense? A) Accumulated depreciation will be understated for 2026. B) Net income for 2026 will be overstated. C) Ending retained earnings for 2026 will be understated. D) Ending retained earnings for 2026 will be overstated. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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46) Explain how the depreciation method should be selected for property, plant, and equipment. Answer: • Enterprises should choose the depreciation method that best reflects the pattern of benefits consumed; however, IFRS does not specify the methods that should be used. • Common methods include straight-line, declining (diminishing) balance, and units-of-production. • In addition to the depreciation method, enterprises need to estimate two other parameters: residual value and useful life (or depreciation rate, in the case of the declining balance method). Diff: 1 Type: ES Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

47) Explain the accounting purpose of "depreciation." Does depreciation represent the decline in value of an asset? Answer: Depreciation is a systematic (yet arbitrary) process of cost allocation that apportions the cost of PPE over its economic useful life. The non-accounting use of the term "depreciation" refers to the decline in the value of assets. However, the objective of accounting depreciation is not asset valuation, so the depreciated value of an asset need not correspond to its current value. In particular, some PPE can increase in value but such assets would still need to be depreciated. Diff: 2 Type: ES Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

48) At December 31, 2026, the following data were available for a building owned by Omega Company: Building cost Accumulated depreciation - building Estimated residual value at end of the useful life Estimated remaining useful life

$700,000 525,000 25,000 15

A small room was built on the back of the building at a cost of $45,000. The room was completed on June 30, 2027, and was used as office space commencing July 2, 2027. The company uses straight-line depreciation, and accounts for partial years using the number of months the asset is available for use. Required: How much is the impact of this expenditure on income before taxes for 2027? Answer: The office should be depreciated for six months ($45,000 / 14.5 years × 6/12). Income before taxes for 2027 would decrease by $1,552. Diff: 1 Type: ES Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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49) Listed below are several long-lived assets owned by X Corp. The company uses straight-line depreciation. Assume in all cases that the asset's first and last years are full years, and that all assumptions and estimates used to derive depreciation remain unchanged throughout the assets' useful lives.

Item Lathe Building Earth-moving truck Electric turbine Stamping machine

Cost Estimated useful life $4,500,000 20 years 35,000,000 10 years 450,000 10 years 6,000,000 6 years 25,000,000 6 years

Estimated residual value $150,000 800,000 15,000 420,000 4,000,000

Required: For each asset, calculate the depreciation expense for the last year of the assets' useful lives. Show your calculations. Answer: Item Annual depreciation Calculation Lathe $217,500 ($4,500,000 - $150,000) / 20 Building 3,420,000 ($35,000,000 - $800,000) / 10 Earth-moving truck 43,500 ($450,000 - $15,000) / 10 Electric turbine 930,000 ($6,000,000 - $420,000) / 6 Stamping machine 3,500,000 ($25,000,000 - $4,000,000) / 6 Diff: 1 Type: ES Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

50) On April 1, 2024, Omega Company paid $15,000 for office furniture. The furniture is expected to last 10 years with no residual value. Omega uses the double declining balance method of depreciation and fractional-year depreciation based on the number of months. Required: What is the depreciation expense for the year ended December 31, 2024? Answer: DDB rate is 2/10 = 20% Depre = $15,000 × 20% × 9/12 = $2,250 Diff: 1 Type: ES Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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51) On January 1, 2026, Pheta Company purchased a machine for $114,000. It has an estimated four-year life and a residual value of $45,000. The machine is expected to be used for a total of 4,600 hours over the four years. During 2026, it was used for 1,900 hours. Required: How much is the depreciation expense for 2026 under the units-of-production method? Answer: Machine cost $114,000 Residual value 45,000 Depreciable amount 69,000 Estimated total hours ÷ 4,600 hours Depreciation per hour $15/hour Hours used in 2026 ×1,900 hours Depreciation for 2026 $28,500 Diff: 1 Type: ES Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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52) A machine was acquired on January 1, 2026, for $4,000,000. At that time it was estimated the machine would last eight years and have a residual value of $560,000. Due to reduced levels of activity during 2028, management revised the estimate of useful life to 10 more years (i.e., the machine was to be operational until December 31, 2037, 12 years in total) and its residual value would be $410,000. The company has a December 31 year-end. Required: Case A: Prepare the journal entries to record depreciation for 2026 and 2028. The company uses straight-line depreciation. Case B: Same as Case A except the company uses the double-declining balance method. The rate used will be 25% for the first two years and then 20% thereafter. Prepare the journal entries to record depreciation for 2026 and 2028. Answer: Case A: 2026 Dec. 31 Dr. Depreciation expense 430,000 Cr. Accumulated depreciation 430,000 ($4,000,000 - $560,000) / 8 2028 Dec. 31

Case B: 2026 Dec. 31

2028 Dec. 31

Dr. Depreciation expense Cr. Accumulated depreciation ($4,000,000 - ($430,000 × 2) - $410,000) / 10

Dr. Depreciation expense Cr. Accumulated depreciation $4,000,000 × 25% Dr. Depreciation expense Cr. Accumulated depreciation 2027 Dep : ($ 4,000,000 - $ 1,000,000) x 25% = $ 750,000 ($4,000,000 - $1,000,000 - $750,000) × 20% OR $4,000,000 × 0.752 × 20%

273,000 273,000

1,000,000 1,000,000

450,000 450,000

Diff: 2 Type: ES Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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53) A building costing $7,000,000 was purchased on January 1, 2025. Based on management's best estimates, the useful life of the building was estimated to be 40 years, with no residual value. During 2031 it was discovered that the local government had plans to build a freeway where the building stands. This project would require significant engineering and regulatory approval, so the site would be expropriated by January 1, 2037. The government agreed to pay $320,000 compensation for the building. The company has a December 31 year-end. Required: Case A: Prepare the journal entries to record depreciation for 2025 and 2031. The company uses straight-line depreciation. Case B: Same as Case A except the company uses the double-declining balance method. The rate will be 5% until 2031 and 2/6 or 33.33% thereafter. Prepare the journal entries to record depreciation for 2025 and 2031. Answer: Case A: Straight-line method with change during 2031 2025 Dec. 31 Dr. Depreciation expense 175,000 Cr. Accumulated depreciation 175,000 $7,000,000 / 40 2031 Dec. 31

Dr. Depreciation expense Cr. Accumulated depreciation ($7,000,000 - ($175,000 × 6) - $320,000) / 6

Case B: Declining balance with change during 2031 2025 Dec. 31 Dr. Depreciation expense Cr. Accumulated depreciation $7,000,000 × 5% 2031 Dec. 31

Dr. Depreciation expense Cr. Accumulated depreciation $7,000,000 × 0.956 × 2 / 6

938,333 938,333

350,000 350,000

1,715,214 1,715,214

Diff: 2 Type: ES Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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54) A large lathe was bought on January 1, 2024, for $15,000,000. It was expected to last for 12 years and have a residual value of $300,000. The company uses straight-line depreciation. At the beginning of 2029, the remaining useful life of the lathe was revised to be four more years (for nine years in total). Management also felt that all equipment should now be depreciated using the declining balance method at a 25% rate. The company has a December 31 year-end. Required: Prepare the entries to record depreciation for 2024 and 2029. Answer: Straight-line with shortened useful life and change to declining balance 2024 Dec. 31

2029 Dec. 31

Dr. Depreciation expense Cr. Accumulated depreciation ($15,000,000 - $300,000) / 12

1,225,000

Dr. Depreciation expense Cr. Accumulated depreciation [($15,000,000 - ($1,225,000 × 5)] × 25%

2,218,750

1,225,000

2,218,750

Diff: 2 Type: ES Skill: Computational Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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55) Discuss how a company can manipulate earnings through estimates used in depreciation. Answer: A significant amount of judgment must be exercised in the estimates and choices to calculate depreciation expense: depreciable amount, useful life, pattern of use/depreciation. -The residual amount will affect the depreciable that is being depreciated and that amount is difficult to forecast upfront. -The useful life involves forecasts for the future that can be difficult to establish upfront and can be inherently biased. -The depreciation method determines the actual expense for the year. A company could inappropriately justify a change in the depreciation method as a "change in estimate" (versus change in policy). A company could increase its estimate of residual value, decrease its estimated life or determine the double declining method is more appropriate for matching revenues and expenses than the straight-line method—such changes could be explained as a change in estimate to manipulate income. Having management commit to a depreciation schedule that covers the asset's useful life reduces opportunities for manipulation. A policy on deprecation for partial year acquisitions can be another avenue for manipulation. Be wary of companies that change this policy without justification. It should also be noted that when PPE is used to produce inventory, the depreciation charge actually flows though different line items in the income statement (CGS) and affects ratios differently. Diff: 3 Type: ES Skill: Conceptual Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations.

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Learning Objective 3 1) When is property, plant, and equipment (PPE) NOT derecognized? A) When PPE is sold. B) When PPE is scrapped. C) When PPE is idle. D) When PPE is destroyed in a flood. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

2) Which question arises at the time property, plant, and equipment is derecognized? A) Should the transaction be recorded at fair value or book value? B) When should the asset be removed from the balance sheet? C) When should the impairment be recorded in the income statement? D) Have the criteria for commercial substance been met? Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

3) The following entry was recorded by Woodrow Inc.: Cash Accumulated depreciation Loss on disposal of property, plant, and equipment (PPE) PPE

57,000 33,000 10,000 100,000

What is the effect on Woodrow's financial statements? A) Current assets increased by $67,000. B) Net assets increased by $57,000. C) The carrying value of property, plant, and equipment (PPE) decreased by $67,000. D) Retained earnings decreased by $57,000. Answer: C Explanation: C) $100,000 - $33,000 = $67,000 Diff: 2 Type: MC Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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4) The following entry was recorded by Williams Inc.: Cash Accumulated depreciation Loss on disposal of property, plant, and equipment (PPE) PPE

57,000 33,000 10,000 100,000

What is the effect of this entry on the financial statements? A) Current assets increased by $57,000. B) Net assets increased by $10,000. C) Income decreased by $33,000. D) Long-term assets increased by $100,000. Answer: A Diff: 3 Type: MC Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

5) The following entry was recorded by Alex Corp.: Cash Accumulated depreciation Loss on disposal of property, plant, and equipment (PPE) PPE

80,000 50,000 20,000 150,000

What is the effect of this entry on the financial statements? A) Current assets decreased by $80,000. B) Net assets decreased by $20,000. C) Net PPE decreased by $130,000. D) Income decreased by $30,000. Answer: B Explanation: B) $80,000 - ($150,000 - $50,000) Diff: 3 Type: MC Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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6) Ontario Ltd. purchased a machine on January 1, 2024, for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2027, for $200,000. What was the gain/loss on disposal of the machine? A) $10,000 loss. B) $10,000 gain. C) $50,000 loss. D) $50,000 gain. Answer: B Explanation: B) Proceeds – NBV = Gain/loss Proceeds – [Cost – (4 years × (Cost – Residual value) / 5)] = $200,000 – [($750,000 – (4 × ($750,000 - $50,000) /5)] = $200,000 – [$750,000 - $560,000] = $200,000 – $190,000 = $10,000 gain Diff: 2 Type: MC Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

7) Francisco Ltd. purchased a machine on January 1, 2024, for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2027, for $140,000. What was the gain/loss on disposal of the machine? A) $10,000 gain. B) $10,000 loss. C) $50,000 gain. D) $50,000 loss. Answer: D Explanation: D) Proceeds – (NBV) = Gain/loss Proceeds – [Cost – (4 years × (Cost – Residual value) / 5)] = $140,000 – [($750,000 – (4 × ($750,000 - $50,000) / 5)] = $140,000 – [$750,000 - $560,000] = $140,000 – $190,000 = $50,000 loss Diff: 3 Type: MC Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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8) Francisco Ltd. purchased a machine on January 1, 2024, for $600,000. The machine had an estimated useful life of 10 years and an estimated residual value of $10,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2026, for $350,000. What was the gain/loss on disposal of the machine? A) $70,000 loss. B) $70,000 gain. C) $73,000 loss. D) $73,000 gain. Answer: C Explanation: C) Proceeds – (NBV) = Gain/loss Proceeds – [Cost – (3 years × (Cost – Residual value) / 10)] = $350,000 – [($600,000 – (3 × ($600,000 - $10,000) / 10)] = $350,000 – ($600,000 - $177,000) = $350,000 – $423,000 = $73,000 loss Diff: 3 Type: MC Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

9) Francisco Ltd. purchased a machine on January 1, 2024, for $600,000. The machine had an estimated useful life of 10 years and an estimated residual value of $10,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2029, for $350,000. What was the gain/loss on disposal of the machine? A) $104,000 loss. B) $104,000 gain. C) $110,000 gain. D) $110,000 loss. Answer: B Explanation: B) Proceeds – (NBV) = Gain/loss Proceeds – [Cost – (6 years × (Cost – Residual value) / 10)] = $350,000 – [($600,000 – (6 × ($600,000 - $10,000) / 10)] = $350,000 – ($600,000 - $354,000) = $350,000 – $246,000 = $104,000 gain Diff: 2 Type: MC Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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10) A machine was purchased during 2024 for $3,750,000. At the time of purchase it was estimated that the machine would have a useful life of 10 years and a residual value of $750,000. During 2030 the machine was sold for $1,850,000. The company uses straight-line depreciation but does not record depreciation expense in the year of acquisition or disposal. Required: a. Prepare the journal entry to record the derecognition of the asset in 2030. b. Assume that rather than using the straight-line method, the company uses the declining balance method of depreciation at a 20% rate. Prepare the journal entry to record the derecognition of the asset in 2030. Answer: a. Derecognition of the asset in 2030—straight-line depreciation. Dr. Cash Dr Accum Depreciation [($3,750,000 - $750,000) /10] × 5 Dr. Loss on disposal Cr. PPE - machine

1,850,000 1,500,000 400,000 3,750,000

b. Derecognition of the asset in 2030—declining balance depreciation. Dr. Cash Dr. Accum depreciation $3,750,000 - [$3,750,000 × (1-0.2)5]

1,850,000 2,521,200

Cr. PPE - machine Cr. Gain on disposal

3,750,000 621,200

Diff: 2 Type: ES Skill: Computational Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

11) Explain derecognition of property, plant or equipment. Answer: When an item of PPE is sold, dismantled, or otherwise disposed of, the enterprise should remove the item from the accounts along with the related accumulated depreciation, and recognize any gain or loss through income. Diff: 1 Type: ES Skill: Conceptual Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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12) What does a "gain on disposal of property, plant and equipment" mean? Does a gain suggest good or excellent management and a loss on disposal indicate poor management? Explain your conclusion. Answer: A gain on disposal tells us that prior years' net income should have been higher as depreciation expense was too high, so by the time of disposal the carrying value in the books was lower than the proceeds of sale, creating a gain on disposal. A loss on disposal tells us that prior years' net incomes were too high as depreciation expense was too low, so by the time of disposal the carrying value in the books was higher than the proceeds of sale, creating a loss on disposal. What such gains and losses definitely do NOT tell us is anything about the ability of management in the year the gain or loss was recorded. Diff: 2 Type: ES Skill: Conceptual Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

13) Will the method of depreciation affect the net cash outflow associated with the purchase and subsequent sale of property, plant and equipment? Answer: The net cash flows will be identical. Is this a coincidence? No, it is by design. The logic/nature of the accrual process is such that the cumulative consequence of the income statement adjustments equals the net cash outflow associated with the asset. It is the purpose and goal of the allocation process to spread the consequences of transactions over multiple periods. The overall effect will be the net cash flow of the complete transaction cycle. Estimates are required, especially as to the useful life and residual value of the depreciable asset at the start of the depreciation allocation process. These estimates will cause the carrying amount to over- or understate the asset value relative to its resale price, but the accounting gain or loss upon disposal settles up this difference. Diff: 2 Type: ES Skill: Conceptual Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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Learning Objective 4 1) What is a monetary item? A) An asset that has a fixed or determinable cash flow. B) Assets such as land and buildings. C) An asset arising from contractual agreements on future cash flows. D) An asset that does not have a fixed or determinable cash flow. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

2) Mathew Corp exchanged similar assets with Simone Company in a transaction with commercial substance. Mathew gave up equipment that had a net book value of $47,000 (fair value $49,000) and Simone exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which Mathew should record the new equipment? A) $35,000 B) $36,000 C) $47,000 D) $49,000 Answer: D Explanation: D) Fair value of asset being given up Diff: 2 Type: MC Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

3) Rene exchanged similar assets with Simone Company in a transaction with commercial substance. Rene gave up equipment that had a net book value of $47,000 (fair value $49,000) and Simone exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which Simone should record the new equipment? A) $35,000 B) $36,000 C) $47,000 D) $49,000 Answer: A Explanation: A) Fair value of asset being given up Diff: 2 Type: MC Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

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4) Peter exchanged similar assets with Sunshine Company in a transaction WITHOUT commercial substance. Peter gave up equipment that had a net book value of $47,000 (fair value $49,000) and Sunshine exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which Sunshine should record the new equipment? A) $35,000 B) $36,000 C) $47,000 D) $49,000 Answer: B Explanation: B) Carrying value of asset being given up Diff: 3 Type: MC Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

5) Ronald exchanged similar assets with Silver Company in a transaction WITHOUT commercial substance. Ronald gave up equipment that had a net book value of $47,000 (fair value $49,000) and Silver exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which Ronald should record the new equipment? A) $35,000 B) $36,000 C) $47,000 D) $49,000 Answer: C Explanation: C) Carrying value of asset being given up Diff: 3 Type: MC Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

6) Gigantic Corp acquired a machine from Miko Company in exchange for 10,000 Gigantic common shares, for which the quoted market price on the stock exchange was $20 per share. The machine was estimated by Gigantic to have a fair market value of $225,000. (Assume that the market price of the shares and the fair value of the machine are equally reliable.) The book value of the machine in Miko's records was $190,000. At what amount should Gigantic record the machine? A) $190,000 B) $200,000 C) $212,500 D) $225,000 Answer: B Explanation: B) Fair value of shares Diff: 3 Type: MC Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

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7) On January 1, 2025, a machine was purchased for $12,000. The machine was estimated to have a 10-year useful life and a residual value of $500. Straight-line depreciation is to be used. On January 1, 2027, the machine was then exchanged for computer equipment with a fair value of $10,000. Assuming that the exchange had commercial substance, how much would be recorded as a gain on disposal of the machine on January 1, 2027? A) $0 B) $300 C) $400 D) $500 Answer: B Explanation: B) $10,000 - [$12,000 - ($12,000 - $500) / 10 × 2] = $300 Diff: 2 Type: MC Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

8) Explain how non-monetary transactions are accounted for. Answer: • Enterprises should generally account for exchanges involving non-monetary assets using the fair values of those assets, except when the exchange does not have commercial substance or when fair values are not reliably measurable. • It is preferable to use the fair value of the asset given up in the exchange if both assets' fair values are reliably measured. • If the fair values of the assets exchanged are not reliably measurable, the reporting entity should use the carrying value on its books. Diff: 1 Type: ES Skill: Conceptual Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

9) What accounting issue arises for recognizing non-monetary transactions? A) Determining when the substantial risks and rewards of ownership are transferred. B) Determining the amount to be allocated to each performance obligation. C) Determining the costs incurred or still to be incurred to fulfill the performance obligation. D) Determining the amount at which to record the transaction. Answer: D Diff: 1 Type: MC Skill: Conceptual Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

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10) Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant, and equipment. In 2025, the company exchanged some of these assets with other companies. [Note: any depreciation expense prior to the following transaction has already been properly recorded.] PSR traded railway tracks running Vancouver-Calgary-Winnipeg to its competitor, High Land Railway, in exchange for the Vancouver-Edmonton-Winnipeg route. PSR received $15 million from High Land because the southern route was shorter. Aside from this $15 million differential, there are no other significant differences in the amount, risk, and timing of future benefits from these two sets of tracks. The tracks, originally laid down in the late 19th century, had a cost of $125 million, accumulated depreciation of $90 million, and a fair value of $100 million. The Vancouver-Edmonton-Winnipeg tracks were recorded on High Land's books at a cost of $105 million and accumulated depreciation of $70 million. Required: Record the journal entry for the above transaction on PSR's books. State your reason(s) for the chosen accounting method. Answer: No commercial substance—use carrying values (no gains or losses) Dr. Cash Dr. Accumulated depreciation Dr. Railroad tracks—new Cr. Railroad track—old

15,000,000 90,000,000 20,000,000 125,000,000

Diff: 2 Type: ES Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

11) Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant, and equipment. In 2025, the company exchanged some of these assets with other companies. [Note: any depreciation expense prior to the following transaction has already been properly recorded.] PSR is trying to expand its business in transportation beyond rail, so the company traded some railcars in return for several trucks. On PSR's books, the railcars had a cost of $12 million, accumulated depreciation of $9 million, and fair value of $6 million. The trucks had a fair value of $5.9 million and were recorded on the seller's books at a cost of $4 million and accumulated depreciation of $1 million. No cash was involved in this exchange. Required: Record the journal entry for the above transaction on PSR's books. State your reason(s) for the chosen accounting method. Answer: With commercial substance—use fair value Dr. Accumulated depreciation Dr. Trucks [at fair value of railcars given up] Cr. Railcars

9,000,000 6,000,000 12,000,000

Cr. Gain on sale of railcars

3,000,000

Diff: 2 Type: ES Skill: Computational

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Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

12) Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant, and equipment. In 2025, the company exchanged some of these assets with other companies. [Note: any depreciation expense prior to the following transaction has already been properly recorded.] PSR transported some luxury automobiles from the port in Vancouver to Winnipeg "for free." The company does not usually transport cars on this route, so a fair value was not determinable. However, there were negligible incremental costs because doing this involved simply attaching a few extra railcars to an existing train bound for Winnipeg. For doing this, PSR received two luxury cars, which the company awarded to executives as perquisites (perks). These cars had a retail value totaling $450,000. Required: Record the journal entry for the above transaction on PSR's books. State your reason(s) for the chosen accounting method. Answer: This transaction involves an exchange of services for goods (a barter transaction), which are then given to employees. We separate the transaction into two parts: the exchange, and the employee compensation. Dr. Cars (inventory) Cr. Transportation revenue Dr. Compensation expense Cr. Cars

450,000 450,000 450,000 450,000

Diff: 2 Type: ES Skill: Computational Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

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Comprehensive Learning Objectives 1) Growth Industries incurred the following costs in fiscal 2025: Land and building Land purchase Dismantling of old building Proceeds from selling parts of old building Building materials, labour for construction of new building Roof of new building Heating and air conditioning system for new building Directly attributable overhead during construction of new building General and administrative costs incurred during construction of new building Insurance during construction Insurance after construction Interest during construction period Post-construction interest charges Landscaping, parking lot, and fencing Machinery and equipment Equipment purchase Sales taxes Delivery charges Installation Testing Abnormal waste during testing

$3,000,000 50,000 10,000 2,000,000 750,000 500,000 100,000 80,000 10,000 5,000 20,000 20,000 35,000

$1,500,000 15,000 25,000 10,000 20,000 5,000

Additional information: • Growth Industries estimates that future site restoration of $1 million will be required in 20 years at an interest rate of 8%. • While the equipment has a useful life of 10 years, the engine in the equipment will require replacement in 3 years. The engine has a fair value of $150,000. • The landscaping, parking lot, and fences will need to be replaced every 4 years. • The useful life of the building and roof will be 20 years. The heating and air conditioning system will have a useful life of only 10 years. Required: a) Determine how much should be capitalized to property, plant, and equipment. b) Provide the journal entries required to record all of these transactions. c) Provide all the adjusting journal entries required at year end for fiscal 2025. d) Assume that the building is painted in fiscal 2026 at a cost of $45,000. Prepare the required journal entry. e) Assume that the engine for the machine requires replacing after 2 years at a cost of 125,000. Prepare the required journal entries. Round all values to the nearest dollar, if necessary. Answer:

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a) Determine how much should be capitalized to property, plant, and equipment. Land and building

Land purchase Dismantling of old building Proceeds from selling parts of old building

Capitalize to Do NOT PPE account to PPE capitalize to use for journal PPE entry $3,000,000 Land 50,000 Land (10,000) Land $3,040,000

Building materials, labour for construction of new building Directly attributable overhead during construction of new building Insurance during construction Interest during construction period

$2,000,000

Bldg

100,000

Bldg

10,000 20,000 $2,130,000

Bldg Bldg

Roof of new building Heating and air conditioning system for new building General and administrative costs incurred during construction of new building Insurance after construction Post-construction interest charges Landscaping, parking lot, and fencing

$750,000 $500,000

Machinery and equipment Equipment purchase Sales taxes Delivery charges Installation Testing subtotal

Roof Heating $80,000

5,000 20,000 $35,000

Land Improvements

$1,500,000 15,000 25,000 10,000 20,000 1,570,000 (150,000) $1,420,000

Abnormal waste during testing

Engine Machine 5,000

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b) Provide the journal entries required to record all of these transactions. Dr. Land Cr. Cash or A/P

3,040,000

Dr. Building Dr. Roof Dr. Heating and air conditioning system Cr. Cash or A/P

2,130,000 750,000 500,000

Dr. Machine Dr. Engine Cr. Cash or A/P

1,420,000 150,000

3,040,000

3,380,000

1,570,000

Dr. Land improvements Cr. Cash or A/P

35,000

Dr. General and administrative costs Dr. Insurance expense or prepaid insurance Dr. Interest expenses Dr. Abnormal waste (operating expense) Cr. Cash or A/P

80,000 5,000 20,000 5,000

Dr. PPE- site restoration Cr. Obligation for site restoration (PV of 1 million @ 8% over 20 years $1,000,000 × PF factor of 0.21455) OR $1,000,000 /1.08 20 = $215,548

214,550

35,000

110,000

214,550

c) Provide all the adjusting journal entries required at year-end for fiscal 2025. Dr. Depreciation expense Cr. A/D — Building — $2,130,000 / 20 yrs Cr. A/D — Roof — $750,000 / 20 yrs Cr. A/D — Heating and air cond. system — $500,000 / 10 years Cr. A/D — Machine — $1,420,000 / 10 yrs Cr. A/D — Engine — $150,000 / 3 yrs

394,750 106,500 37,500 50,000 142,000 50,000

Cr. A/D — Land improvements — $35,000 / 4 yrs

8,750

Dr. Depreciation expense — site restoration Cr. A/D — site restoration — $214,550 / 20 yrs

10,728

Dr. Interest expense

17,164

10,728

Cr. Obligation for site restoration — $214,550 × 8%

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17,164

d) Assume that the building is painted in fiscal 2026 at a cost of $45,000. Prepare the required journal entry. Dr. Maintenance/ operating expense Cr. Cash or A/P

45,000 45,000

Do not capitalize since it is not a major replacement/improvement, but regular maintenance. e) Assume that the engine for the machine requires replacing after 2 years at a cost of 125,000. Prepare the required journal entries. Dr. A/D - engine - $50,000/yr × 2 yrs Dr. Loss on replacement Cr. Engine

100,000 50,000

Dr. Engine Cr. Cash or A/P

125,000

150,000

125,000

Diff: 3 Type: ES Skill: Computational Objective: 8.1/ 8.2/ 8.3 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense./Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations./Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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2) Grape Company (GC) had been renting an office building for several years. On January 1, 2024, GC decided to have a new office building constructed. On that date, it acquired land with an abandoned warehouse on it for $350,000. Other costs included the following: Demolition of warehouse Legal fees for purchase of land Construction costs of new building Proceeds from salvage of warehouse materials Installation of wiring and plumbing fixtures Architectural fees

$18,000 3,300 686,000 6,000 13,000 21,000

Required: a. Calculate at what amount GC should record the (i) land and (ii) building. b. Assume that the building was completed and occupied on December 31, 2024. It has an estimated useful life of 40 years, with residual value of $140,000. Calculate depreciation for 2025 using (i) the straight-line method and (ii) the double declining balance method. c. Assume that management decided to use straight-line depreciation for the building. By 2028 GC had grown considerably and needed to relocate for more space; it sold the land and building to Macaw Company on July 1, 2028, for $1,350,000. Assume depreciation expense has already been recorded for the first six months of the year (January 1, 2028, to June 30, 2028). Prepare all journal entries required relating to the land and building accounts on July 1, 2028.

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Answer: a. Land $350,000 18,000 3,300

Land cost Demolition of warehouse Legal fees for purchase of land Construction costs of new building Proceeds from salvage of warehouse materials Installation of wiring and plumbing fixtures Architectural fees Total

Building

$686,000 (6,000)

$365,300

b. Straight-line depreciation: Building cost Residual value Depreciable amount Estimated service life Depreciation per year

$720,000 140,000 580,000 40 years $ 14,500

Double declining balance depreciation: Building cost Depreciation rate (2/40) Depreciation

$720,000 5% $ 36,000

c. Dr. Cash Dr. Accumulated depreciation ($14,500 × 3.5 years) Cr. Building Cr. Land Cr. Gain on disposal

13,000 21,000 $720,000

1,350,000 50,750 720,000 365,300 315,450

Diff: 2 Type: ES Skill: Computational Objective: 8.1/ 8.2/ 8.3 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense./Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations./Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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3) In December 2024, Bea, the owner of Walnut Corp, paid for a parcel of land along with a warehouse on behalf of Walnut, the registered owner of the property, for a total cost of $1,500,000. Bea also paid a real estate commission of $40,000 and legal fees of $10,000 in connection with this purchase, plus $30,000 for the demolition of the warehouse. Walnut will reimburse Bea for these costs in January 2025 and will begin construction of an office building on this land. Prior to the purchase, the land and warehouse were appraised at $900,000 and $600,000, respectively. On December 31, 2024, Walnut Corp and Teak Corp. exchanged equipment. The exchange met the test for commercial substance for accounting purposes. Details of the carrying values and fair values of the equipment on the date of the exchange were as follows:

Cost Accumulated depreciation Fair value

Walnut equipment $800,000 400,000 460,000

Teak equipment $915,000 490,000 Not determinable

On October 1, 2024, Walnut purchased some land by signing a three-year non-interest-bearing note payable for $500,000. Walnut pays interest at the rate of 12% on other loans and was pleased to get a non-interest-bearing note payable on this deal. Required: Prepare the required journal entries for these transactions, as well as any related year-end adjustments. Ignore income taxes. Round all values to the nearest dollar, if necessary. Answer: a.

Dr. Land ($1,500,000 + $40,000 +$10,000 + $30,000) Cr. Due to shareholder

1,580,000 1,580,000

Dr. PPE — new equipment [at fair value] Dr. Accumulated depreciation Cr. PPE — old equipment Cr. Gain on sale of equipment

460,000 400,000

Dr. Land PV of 500,000 = $500,000 / 1.12 3 Cr. Note payable Dr. Interest expense ($355,890 × 12% × 3/12) Cr. Note payable

355,890

800,000 60,000

355,890 10,677 10,677

Diff: 2 Type: ES Skill: Computational Objective: 8.1/ 8.2 / 8.4 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense./Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations./Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions.

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4) On March 31, 2024, a machine costing $3,000,000 was acquired. The company estimates that the asset will have an estimated useful life of five years and a residual value of $450,000. On April 1, 2029, the asset is sold for $550,000. The company uses straight-line depreciation. The company has a December 31 year-end, and records partial depreciation in the year of acquisition or disposal based on the number of months the asset is available for use in the year. Required: Prepare the entries to record depreciation expense for 2024 and 2025, and all entries required for 2029 as they relate to this asset. Answer: 2024 Dec. 31 Dr. Depreciation expense 382,500 Cr. Accumulated depreciation 382,500 ($3,000,000 - $450,000) / 5 × 9/12 2025 Dec. 31

2029 Apr. 1

Dr. Depreciation expense Cr. Accumulated depreciation ($3,000,000 -$450,000) / 5

510,000

Dr. Depreciation expense Cr. Accumulated depreciation ($3,000,000 - $450,000) / 5 × 3/12

127,500

Dr. Cash Dr. Accumulated depreciation (5 × $510,000) Cr. Machine Cr. Gain on disposal

510,000

127,500

550,000 2,550,000 3,000,000 100,000

Diff: 1 Type: ES Skill: Computational Objective: 8.2/ 8.3 Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations./Apply the standards for derecognition of property, plant, and equipment and understand the meaning of gains and losses arising from derecognition.

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5) On March 31, 2024, a machine costing $3,000,000 was acquired. The company estimates that the asset will have an estimated useful life of five years and a residual value of $450,000. On April 1, 2029, the asset is sold for $550,000. The company uses the declining balance method at a rate of 40%. The company has a December 31 year-end. The company records partial depreciation in the year of acquisition or disposal based on the number of months the asset is available for use in the year. Prepare the entries to record depreciation expense for 2024 and 2025, and all entries required for 2029 as they relate to this asset. Answer: Declining balance depreciation 2024 Dec. 31

2025 Dec. 31

2029 Apr. 1

Dr. Depreciation expense Cr. Accumulated depreciation $3,000,000 × 40% × 9/12

900,000

Dr. Depreciation expense Cr. Accumulated depreciation ($3,000,000 - $900,000) × 40%

840,000

900,000

840,000

No depreciation Machine would have been depreciated down to residual value by 2028. Dr. Cash Dr. Accumulated depreciation Cr. Machine Cr. Gain on disposal

550,000 2,550,000 3,000,000 100,000

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6) Aye Corp. acquired land and a building on June 1, 2024, for $13,000,000. An expert in real estate appraisal estimates that the land is worth 40% of the total purchase price. The building is estimated to have a useful life of 25 years and a residual value of $450,000. On September 1, 2034, Aye moved and sold the property for $17,000,000. The buyer and seller agreed that 50% of the proceeds should be allocated to land. Aye depreciates buildings using the straight-line method, and has a December 31 year-end. Aye records partial depreciation in the year of acquisition or disposal based on the number of months the asset is available for use in the year. Prepare the entry to record the purchase on June 1, 2024, depreciation expense for 2024 and 2025, and all entries required to record the disposal of the property on September 1, 2034. Answer: 2024 June 1 Dr. Land ($13 mil × 40%) 5,200,000 Dr. Building 7,800,000 Cr. Cash 13,000,000 2024 Dec. 31

2025 Dec. 31

2034 Sept. 1

Dr. Depreciation expense Cr. Accumulated depreciation ($7,800,000 - $450,000) / 25 × 7/12

171,500

Dr. Depreciation expense Cr. Accumulated depreciation ($7,800,000 - $450,000) / 25

294,000

Dr. Depreciation expense Cr. Accumulated depreciation ($7,800,000 - $450,000) / 25 × 8/12

196,000

171,500

294,000

196,000

Cash (50% × $17,000,000) Land Gain on disposal of land

8,500,000

Dr. Cash (50% × $17,000,000) Dr. Accumulated depreciation (9 × $294,000 + $171,500 + $196,000) Cr. Building Cr. Gain on disposal of building

8,500,000 3,013,500

5,200,000 3,300,000

7,800,000 3,713,500

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 9 Intangible Assets, Goodwill, Mineral Resources, and Government Grants Learning Objective 1 1) Which of the following is NOT a characteristic of intangible assets? A) Intangibles do not have physical substance. B) Intangibles benefit more than one year. C) Intangibles have fixed determinable cash flows. D) Intangibles are held for use in the ordinary course of business. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

2) Explain how goodwill arises in a business. Give an example in your response. Answer: Accounting goodwill represents the difference between the purchase cost of a business and the fair value of its net identifiable assets. Fair values on the date of acquisition will differ than the carrying amount in the financial statements such as: - accounts receivable may have a lower fair value due to uncollectible accounts - additionally accounts receivable do not reflect the time value of money in the financial statements. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

3) Assume that a company has spent $1 million during the year and is deciding whether these costs should be expensed as research costs or capitalized as development costs. Explain the impact of undercapitalization of development costs on the financial statements. Answer: The criteria to permit capitalization of development costs is understandably strict. This strictness is aimed at preventing overcapitalization of assets on the balance sheet. Undercapitalization, however, is important to consider too. Undercapitalization of such assets is quite possible since the company only needs to demonstrate that any one of the development criteria for capitalization are not satisfied. This would lead to the understatement of assets on the balance sheet and earnings on the income statement. Starting to capitalize costs that had previously been expensed could create the appearance of improved company performance. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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4) Which of the following is a difference between intangible assets and property, plant and equipment (PPE)? A) Intangibles lack physical substance. B) PPE benefit more than one year. C) Intangibles are held for use in the ordinary course of business. D) Intangible assets are generally identifiable. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

5) Which of the following is NOT a difference between intangible assets and property, plant and equipment (PPE)? A) Intangibles do not have physical substance. B) PPE and intangibles benefit for more than one year. C) Intangibles are not held for use in the ordinary course of business. D) PPE are held for use in the ordinary course of business. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

6) Which of the following is a difference between intangible assets and property, plant, and equipment (PPE)? A) Held for use in the ordinary course of business. B) Benefit more than one year. C) Physical substance. D) Lack of identifiability. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

7) Which of the following is NOT a characteristic of an intangible asset? A) It has no physical substance. B) Its useful life may exceed its legal life. C) It may be amortized using the straight-line method. D) It may be impaired and written off. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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8) SuperIdeas Corp., a publicly accountable entity, incurred the following costs in its research and development division:

Materials Labour costs Directly attributable overhead

Jan. 1–July 31, 2026 $10,000 15,000 8,000

Aug 1.–Dec. 31, 2026 $12,000 32,000 15,000

At August 1, 2026, SuperIdeas determined that the project was technically feasible but not commercially viable. How much, if any, of the costs can be capitalized for fiscal 2026? A) $0 B) $44,000 C) $59,000 D) $92,000 Answer: A Explanation: A) Capitalization criteria for development costs are not fulfilled. Diff: 2 Type: MC Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

9) Research Corp., a publicly accountable entity, incurred the following costs in its research and development division:

Materials Labour costs Directly attributable overhead

Jan. 1–July 31, 2026 $10,000 15,000 8,000

Aug. 1–Dec. 31, 2026 $12,000 32,000 15,000

At July 31, 2026, Research Corp. determined that the project was technically feasible and commercially viable. Research Corp. had sufficient resources and intentions to complete the project and was confident that there was demand in the marketplace for the product. How much, if any, of the costs can be capitalized for fiscal 2026? A) $0 B) $44,000 C) $59,000 D) $92,000 Answer: C Explanation: C) ($12,000 + $32,000 + $15,000 = $59,000) Diff: 2 Type: MC Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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10) New Ventures Corp., a publicly accountable entity, incurred the following costs in its research and development division:

Materials Labour costs Directly attributable overhead Indirect overhead

Jan. 1–April 30, 2026 $10,000 15,000 8,000 5,000

May 1–Dec. 31, 2026 $12,000 32,000 15,000 7,000

At April 30, 2026, New Ventures determined that the project was technically feasible and commercially viable. New Ventures had sufficient resources and intentions to complete the project and was confident that there was demand in the marketplace for the product. How much, if any, of the costs can be capitalized for fiscal 2026? A) $0 B) $59,000 C) $66,000 D) $92,000 Answer: B Explanation: B) ($12,000 + $32,000 + $15,000 = $59,000). Indirect overhead may not be capitalized. Diff: 2 Type: MC Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

11) Patent Corp., a publicly accountable entity, purchased the following assets: Patents Trademarks Equipment Training on using equipment

$18,000 12,000 32,000 15,000

How much, if any, of the costs can be capitalized as intangible assets? A) $0 B) $30,000 C) $62,000 D) $77,000 Answer: B Explanation: B) ($18,000 + $12,000 = $30,000) Diff: 2 Type: MC Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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12) Patent Corp., a publicly accountable entity, incurred the following costs: Purchase of patents Development of economic goodwill Legal costs to successfully defend trademark Lawsuit to successfully defend product brand

$18,000 12,000 32,000 15,000

How much of the costs can be capitalized as intangible assets? A) $18,000 B) $50,000 C) $65,000 D) $77,000 Answer: B Explanation: B) ($18,000 + $32,000 = $50,000) Diff: 2 Type: MC Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

13) Which statement is NOT correct? A) Goodwill represents the difference between the purchase price and the fair value of net assets acquired. B) Fair value is the after-tax amount at which an item could be sold in an arm's length transaction. C) Economic goodwill differs from accounting goodwill and can be created by branding. D) Fair value is the amount which could be exchanged in an arm's length transaction. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

14) Which statement is NOT correct? A) Goodwill equals the purchase price less the fair value of net assets acquired. B) Intangible assets can be purchased or internally created. C) Economic goodwill equals accounting goodwill and can be created by branding. D) Intangible assets are identifiable assets without physical substance. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

15) Which statement is correct? A) Research is original or planned investigation to gather new knowledge or understanding. B) Under IFRS all research costs can be either capitalized or expensed. C) Research activities must be technically feasible as well as commercially viable. D) Research is application of findings or knowledge towards new plans, designs or products. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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16) Which statement is correct? A) Under IFRS, research costs must fulfill six specific criteria. B) Under IFRS, all research costs must be expensed as incurred. C) Development activities must be technically feasible. D) Adequate financial resources must exist to complete research activities. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

17) Which statement is correct? A) Costs can continue to be capitalized in the post development phase. B) The project must meet IAS 38 criteria before development costs can be capitalized. C) The development phase includes generating new ideas or searching for new materials. D) The research phase includes designing, constructing or testing a prototype. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

18) Which statement is correct? A) Capitalization of costs ceases when the post development phase begins. B) The development phase includes generating new ideas or searching for new materials. C) The project must meet IAS 38 criteria before research costs can be capitalized. D) The post development phase includes designing, constructing or testing a prototype. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

19) Which criteria under IAS 38 would be met if the "project plan outlines the feasibility and timeline of the project"? A) Measurement reliability. B) Ability to use or sell. C) Technical feasibility. D) Management intention. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

20) Which criteria under IAS 38 would be met if the "project has a dedicated group of qualified staff"? A) Technical feasibility. B) Marketability of usefulness. C) Resource adequacy. D) Ability to use or sell. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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21) Which criteria under IAS 38 would be met if there is a "project budget that outlines the specific costs, so the costs of the project are likely to be measured with sufficient reliability"? A) Measurement reliability. B) Management intention. C) Technical feasibility. D) Resource adequacy. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

22) Explain the accounting requirements for externally purchased intangibles and internally developed intangibles. Answer: • Enterprises should capitalize the cost of acquired intangible assets and goodwill resulting from the purchase of another enterprise. • Costs of internally developed intangibles should be expensed unless they are development costs that satisfy six criteria requiring the enterprise to demonstrate the existence of future benefits, the ability and intention of the enterprise to exploit the expected benefits, and reliable cost measurement. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

23) Explain four differences in the recognition of externally acquired intangibles versus internally developed intangibles. Answer: • Ultimately, whether and how an enterprise satisfies the recognition criteria depends on the way it obtains the intangible asset: whether it acquires it externally or develops the intangible asset internally. • Acquired intangibles readily satisfy the recognition and measurement criteria: IFRS presumes that (i) intangibles acquired from arm's-length parties meet the criterion of having probable future benefits, and that (ii) such benefits can be measured reliably. • Internally developed intangibles must meet more stringent criteria. IAS 38 identifies two distinct stages for internally developed intangibles: a research phase and a development phase. The costs incurred in the research phase must be expensed because the activities do not relate to an identifiable product or process. Development activities are further advanced than research in terms of commercially viable products or processes. Therefore, it is possible to satisfy the criterion of probable future benefits. However, not all costs incurred in the development phase qualify for capitalization. IAS 38 provides a further list of six criteria for the capitalization of development costs. • The difference is due to the lower reliability of measuring the benefits of internally developed intangibles, and the greater possibility of management bias in developing the estimates of those benefits. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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24) Explain the accounting for internally developed intangible assets. Answer: • IAS 38 identifies two distinct stages for internally developed intangibles: a research phase and a development phase. • The costs incurred in the research phase must be expensed because the activities do not relate to an identifiable product or process. • Development activities are further advanced than research in terms of commercially viable products or processes. • Therefore, it is possible to satisfy the criterion of probable future benefits. • However, not all costs incurred in the development phase qualify for capitalization. • IAS 38 provides a further list of six criteria for the capitalization of development costs. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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25) A professional sports team and related items (including a stadium) were bought by an exceedingly wealthy investor and sports fan. The negotiated price was $225,000,000. Details of what was purchased and the agreed fair values are as follows:

Stadium Land Cable TV broadcasting contract Player contracts Spectator leases on luxury viewing boxes Product licensing agreements Season ticker subscriber list Contacts and commitments for use of stadium The "team" imputed or residual value Total

Fair value in $ millions $70 20 9 31 9 17 18 27 24 $225

The team has been less than successful in its professional sports league and has been recording losses of $1,000,000 to $8,000,000 per year on its audited financial statements for the past five years. It was these losses that prompted the last owner to sell the team and related assets. Required: a. Of the $225 million purchase price, how much of it relates to tangible assets? What percentage of the purchase price relates to tangible assets? b. Describe the nature of the future economic benefits associated with each of the intangible assets acquired. For example, for the cablevision broadcasting contract, this would be the present value of the future payments expected from contracts for the broadcast of games on cablevision channels plus potential renewal contracts thereafter.

9 .

Answer: a. Assign the FV of each asset to either tangible or intangible asset columns. Then calculate the percentage.

Fair value in $ millions $70 20 9 31 9

Tangible asset $70 20

Intangible asset

$9 31 9

17 18 27

24 $225

24 $135 60%

$90 40%

b. Player contracts: The athletes have signed contracts to play for several years in the future. These legal commitments allow the team to sell these players to other teams. This is the estimated re-sale value of these contracts. Leases on luxury spectator boxes: This is the present value of these lease contracts, plus renewal of these leases. Product licensing agreements: Present value of existing licensing agreements plus renewal of these arrangements. Season ticket subscriber list: Present value of the potential renewal of ticket sales to likely customers. Contracts and commitments for use of stadium: As the buyer owns the stadium there are other uses for it during the off-season and vacant days during the season. This is the imputed present value of these contracts. The "team": The value of the franchise (privilege) to be a part of this professional sports league. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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26) Listed below are several transactions that occurred during the year. In each case, all the amounts were debited to an account called "R and D costs." At the end of the year the company wants this account closed out and the amounts either expensed or capitalized to an asset account called "Development costs." a. During the year $5,500,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer in mice. Evidence showed it materially reduced the effects of this cancer in the mice. b. During the year $12,000,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer for terminally ill cancer patients. The trials were successful in a limited number of cases but the results were mixed. c. During the year $44,000,000 was paid to staff to investigate whether a drug combination was effective in reducing a specific type of cancer. The drug was very successful in most cases. Market research shows a huge market for this drug. The Board has committed further resources to complete the development of this project and to market the drug. d. During the year $41,000,000 was paid to staff to investigate whether a drug combination was effective in reducing a specific type of cancer. The drug combination was very successful in most cases. Market research shows huge a market for this drug combination. The company is too small and does not have adequate funds to complete the balance of the drug testing, so it is looking for a large pharmaceutical firm to take it over and complete the process. Required: Prepare the journal entry required for each case. Explain your proposed treatment. Answer: a. Dr. Research expense 5,500,000 Cr. R&D costs 5,500,000 Testing on animals, even if successful, does not prove that it is effective on humans. Fails the technical feasibility criterion. b.

Dr. Research expense 12,000,000 Cr. R&D costs 12,000,000 Mixed test results do not prove the drug is effective on humans. Fails the technical feasibility criterion. c.

Dr. Development costs (asset) Cr. R&D costs Meets all six criteria for capitalization.

44,000,000 44,000,000

d. Dr. Research expense 41,000,000 Cr. R&D costs 41,000,000 Corp does not have resources to complete, so it must expense the costs. Diff: 2 Type: ES Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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27) Listed below are several transactions that occurred during the year. In each case, all the amounts were debited to an account called "R and D costs." At the end of the year the company wants this account closed out and the amounts either expensed or capitalized to an asset account called "Development costs." a. During the year $34,000,000 was paid to staff in the research division of a pharmaceutical firm. Supplies used totaled $3,000,000. Rent on the research building totaled $1,000,000. Utilities totaled $1,400,000. Head office allocated $1,500,000 in general overhead to the research division. The total spent on research was $40,900,000. The company is completing five different projects investigating whether five different drug combinations effectively reduce cancer in patients. One of the five drugs was very successful in most cases. Market research shows there is a huge market for this drug. The Board has committed resources to complete the project and market the drug; 10% of the total research staff is working on the successful drug combination. b. During the year $22,000,000 was paid to staff to investigate whether a drug combination was effective for reducing a specific type of cancer. The drug was very successful in most cases. Management is committed to continuing this project and has secured financial and technical resources to see if the drug will prove to be commercially viable. c. Last year $70,000,000 in costs were capitalized as all the development cost criteria were satisfied for a specific drug combination. During the current year a further $10,000,000 was spent that can be directly attributed to this drug's development. Near the end of the year a competitor surprisingly started selling a similar drug. The first-mover advantage of the competing drug seriously challenges the market usefulness and success of the drug this company is researching. Management and the Board are nonetheless financially and strategically committed to launching their drug in 18 months. Required: Prepare the journal entry required for each case. Explain your proposed treatment Answer: Dr. Research expense 37,500,000 Dr. Development costs (asset) 3,400,000 Cr. R&D costs 40,900,000 Only one of the five drugs meets all six criteria. Unless costs such as supplies, rent, and utilities can be reliably attributable to the successful drug, they should be expensed. Most likely difficult to assign, so should expense. Allocated head office overhead is not reliably attributable to the successful drug and must be expensed. 10% of the salaries could likely be assigned to the successful drug. a. Dr. Research expense 22,000,000 Cr. R&D costs 22,000,000 Corp has not established market and technical feasibility, therefore expense. b. Dr. Research expense 80,000,000 Cr. R&D costs 10 ,000,000 Cr. Development costs (asset) 70,000,000 Since the market usefulness and success of the drug has been challenged, the $10,000,000 spent in the current year in addition to the $70,000,000 in costs that c. were capitalized in the previous year should be expensed in the current year. Diff: 3 Type: ES Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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28) A professional sports team and related items (including a stadium) were bought by an exceedingly wealthy investor and sports fan. The negotiated price was $225,000,000. Details of what was purchased and the agreed fair values are as follows:

Fair value in $ millions $70 20 9 31 9 17 18 27 24 $225

The team has been less than successful in its professional sports league and has been recording losses of $1,000,000 to $8,000,000 per year on its audited financial statements for the past five years. It was these losses that prompted the last owner to sell the team and related assets. Required: a. There are several identifiable intangible assets noted on the list. Group these assets into three classes, being those that are (i) easily measurable and identifiable; (ii) reasonably measurable and identifiable; and (iii) very difficult to measure and identify. For each group, what common quality or feature of these items distinguishes their classification? b. While all the items can be assigned a value, would you capitalize all these amounts? Explain your conclusion.

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Answer: a. Easily measurable and identifiable: Cablevision broadcast contract, leases on luxury spectator boxes, product licensing agreements, contracts and commitments for use of stadium. The common feature is there is a contract or legal agreement to substantiate their existence and these contracts have specified methods to determine their cash flows and related value. Reasonably measurable and identifiable: Player contracts, season ticket subscriber list. The common feature of these items is that they are identifiable but there is no clearly stated method for determining their cash flows or market value. Further, they have niche markets that are unique and volatile. Very difficult to measure and identify: The "team." It is not clear what this is. There is no evidence this is economic goodwill given the team's net losses over the past few years. Therefore, this value must be based on non-financial considerations. The value may be psychological, being the fame and prestige that comes with ownership. Given the wealth of the buyer, this transaction may not have the traditional objective of earning income. b. I would capitalize all these amounts with the exception of the "team." Given that the team has no apparent economic goodwill it would not qualify as "accounting goodwill." This item is especially subjective and hard to quantify. I would conservatively and cautiously expense it. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

29) Why is it important to understand the difference between research costs and development costs? Answer: IFRS makes a distinction between research costs and development costs as they are in fact different in nature. Common usage incorrectly groups these expenditures together for convenience and glamour, but the objective and focus of these two activities are very different. Separating research from development activities and defining the two terms allows for subsequent differences in how amounts spent on these activities can be accounted for. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

30) What are the unique features that lead to the differing accounting treatment between research and development costs? Answer: First, research focuses on new knowledge and understanding, whereas development focuses on commercializing this knowledge into defined applications and processes. Second, whereas both research and development activities (as undertaken by for-profit enterprises) implicitly expect an eventual financial reward, the connection is not definable or identifiable for research costs. For development costs, including those not capitalized, the association between the cost and the application is clear and definable. Third, research activities precede development activities. The distinctions encourage clarity and precision of thought and analysis, and set up the case for the potential capitalization of some development costs. This deliberate rigour empowers professional judgment, as it provides guidelines and principles that the accounting professional can apply to a given circumstance and thereby avoids a rule-based methodology for resolving complex accounting issues. Diff: 2 Type: ES Skill: Conceptual Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

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31) What is economic profit as it would be defined in finance or economics? Why is accounting net income not the same as an economist's determination of earnings, as measured from a shareholder's perspective? Answer: Economic profit is the earnings of the firm that exceed its risk-adjusted required rate of return on equity. For example, suppose a company has owners' equity of $2 million and it should earn a rate of return on equity of 15% ($300,000) considering the company's risk, while the business actually earns a return on equity of 18% ($360,000). The economic profit would be $60,000 (3% × $2,000,000). In comparison, accounting net income would have been $360,000. Accounting net income does not include a charge for the implicit cost of equity financing (like the interest cost on debt financing). Accounting net income ignores the fact that owners reasonably expect a reward for their investment of funds. Accounting net income should be reduced by an imputed capital charge for the shareholders' equity investment in the firm. The economist would say that the company is profitable only if its rate of return on equity exceeds its cost of equity capital. In management accounting this has been called residual income or economic value added. In economics it is called abnormal earnings. Diff: 2 Type: ES Skill: Computational Objective: 9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

Learning Objective 2 1) Which of the following statements is correct about intangible assets that have an indefinite life span? A) This is an infinite lived asset. B) The asset is expected to continue providing economic benefits for the foreseeable future. C) Management does not know how long the asset is expected to provide economic benefits. D) The asset has fixed and determinable cash flows. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

2) Which of the following is NOT a "class" of intangible assets? A) Industrial designs. B) Raw materials. C) Patents. D) Computer software. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

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3) Explain how earnings can be manipulated through choices made in the estimated useful lives for intangible assets. Answer: The determination of the useful life of long-lived assets can be biased - this is even more pronounced an issue for intangible assets because of the inherent subjective nature of such assets. While some of these assets are subject to limitations of legal life, the actual benefits the legal protection will provide is subject to successfully defending via lawsuits. The economic life of such assets is uncertain - especially with the rapid advancement in technology. The issue of estimated useful life is less of a concern for internally developed intangible assets since the strict capitalization criteria include an assessment of useful life via economic benefits. Diff: 2 Type: ES Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

4) What factor will NOT affect the estimated useful life of a finite lived intangible asset? A) Legal life of the asset. B) Productive capacity. C) Competitive pressures. D) Technological obsolescence. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

5) What factor will NOT affect the estimated useful life of a finite lived intangible asset? A) Legal life of the asset. B) Technological obsolescence. C) Physical condition of the asset. D) Certainty of future cash flows. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

6) Which of the following is NOT a parameter of amortization? A) Amortizable amount. B) Salvage value. C) Residual value. D) Pattern of amortization. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

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7) Which statement is NOT correct? A) Assessing the useful life of an intangible asset requires professional judgment. B) The residual value of an intangible asset is the same as the asset's salvage value. C) The straight-line method of amortization is generally used for intangible assets. D) The straight-line method of amortization achieves an equal pattern of cost allocation. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

8) New Ventures Corp., a publicly accountable entity, capitalized the following costs:

Patents Copyrights

Jan. 1—April 30, 2026 May 1—Dec. 31, 2026 $10,000 $12,000 15,000 32,000

Which statement is correct? A) Both of these assets will have an indefinite useful life. B) Both of these assets will have a definite useful life that cannot be changed once defined. C) For both assets, the useful life is equal to the asset's legal life. D) For both assets, the useful life could be shorter than its legal life. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

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9) Patent Corp., a publicly accountable entity, purchased a company with the following assets and liabilities for $100,000: Carrying value Cash $10,000 Inventories 18,000 Property, plant, and equipment 12,000 Intangible assets 32,000 Accounts payable 15,000 Long-term liabilities 10,000 Equity 47,000

Fair value $10,000 17,000 10,000 40,000 15,000 15,000

How much goodwill should be recorded? A) $47,000 B) $53,000 C) $70,000 D) $100,000 Answer: B Explanation: B) $100,000 - ($10,000 + $17,000 + $10,000 + $40,000 - $15,000 - $15,000) = $53,000 Diff: 3 Type: MC Skill: Computational Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

10) Growth Corp., a publicly accountable entity, purchased a company with the following assets and liabilities for $100,000:

Inventories Equipment Intangible assets Accounts payable Long-term liabilities

Carrying value $18,000 12,000 32,000 15,000 10,000

Fair value $17,000 10,000 40,000 15,000 15,000

Which of the following is NOT correct about the difference between carrying value and fair value? A) Long-term liabilities could have a higher value due to lower interest rates. B) Inventories could have a lower fair value due to obsolescence. C) Equipment could have a lower fair value due to change in technology. D) Inventories could have a lower fair value due to accounting errors. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

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11) Growth Corp., a publicly accountable entity, purchased a company with the following assets and liabilities for $97,000:

Inventories Equipment Intangible assets Accounts payable Long-term liabilities

Carrying value $18,000 12,000 32,000 10,000 10,000

Fair value $17,000 10,000 40,000 15,000 15,000

Which of the following is NOT correct? A) Accounting goodwill of $55,000 will be recorded. B) Accounting goodwill of $60,000 will be recorded. C) The fair value of net tangible assets is $27,000. D) Equipment could have a lower fair value due to decreased productive capacity. Answer: A Explanation: B) Goodwill = $97,000 - ($17,000 + $10,000 + $40,000 - $15,000 - $15,000) = $60,000 Diff: 3 Type: MC Skill: Computational Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

12) Below are several intangible assets. For each case suggest whether the item should be amortized. If amortization is recommended, what is the useful life that it should be amortized over? Provide justification for your recommendation. a. Aye Corp purchased a brand name for $1,000,000. The firm has the exclusive right to use this name forever. b. Bee Corp has developed a strong corporate reputation and its products are highly sought-after in the luxury goods market. Last year, $40,000,000 was spent on advertising its brand in top-tier fashion magazines and at the top fashion shows around the world. c. Cee Corp paid $25,000,000 for the five-year exclusive privilege to have a famous celebrity endorse and use the company's sports equipment. This contract entitles Cee to renew the contract for a further two-year exclusive endorsement arrangement for a fixed fee of $10,000,000, due midway through the last year of the current contract. Answer: a. Do not amortize as the right is perpetual. Revisit this annually to see if there is impairment in value. b. Expense the $40,000,000 as this does not qualify as a development cost. This is an ongoing operating expense to maintain and enhance the brand. c. Amortize the $25,000,000 over the five-year term of the contract. If the renewal option is exercised later, amortize that fee over two years. It is not reasonable to amortize the entire amount of $25,000,000 over seven years as this is contingent on renewing the option, which is not reasonably certain to occur at this point in time. Diff: 2 Type: ES Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

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13) Calculate the missing amounts by completing the table below. ($000's) Cash Accounts receivable Inventories PPE, net Intangible assets Total assets Total liabilities Net assets Purchase price Accounting goodwill Answer: ($000's) Cash Accounts receivable Inventories PPE, net Intangible assets Total assets Total liabilities Net assets Purchase price Accounting goodwill

Carrying value $ (A) 30,000 55,000 175,000 100 322,100 116,000 $(B)

Fair value $62,000 28,000 52,000 148,000 25,000 (C) 202,000 (D) (E) $19,000

Carrying value $ 62,000 30,000 55,000 175,000 100 322,100 116,000 $206,100

Fair value $62,000 28,000 52,000 148,000 25,000 315,000 202,000 113,000 132,000 $19,000

Diff: 2 Type: ES Skill: Computational Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

14) Explain the difference between indefinite lived and finite lived intangible assets. Answer: • An intangible asset has an indefinite life if the enterprise expects that the asset will maintain its level of benefits for the foreseeable future. Such assets are not amortized. • Enterprises should amortize intangible assets with finite lives over their estimated useful lives. Generally, enterprises should assume nil residual values and use the straight-line method for amortization, unless they can provide reliable evidence to the contrary. Diff: 2 Type: ES Skill: Conceptual Objective: 9.2 Evaluate whether a recognized intangible asset has an indefinite life or a finite life, and in the latter case, determine the appropriate useful life for amortization.

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Learning Objective 3 1) Which statement does NOT describe the "successful efforts" method? A) A method of accounting that capitalizes costs of mineral exploration and evaluation only if the outcome is successful. B) A method of accounting that capitalizes costs of mineral exploration and evaluation only if the production is technically feasible. C) A method of accounting that capitalizes costs of mineral exploration and evaluation until the production is successful. D) A method of accounting that capitalizes costs of mineral exploration and evaluation only if the production is commercially viable. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

2) Which statement describes the "full cost" method? A) A method of accounting that capitalizes costs of mineral exploration and evaluation only if the outcome is successful. B) A method of accounting that capitalizes costs of mineral exploration and evaluation only if the production is technically feasible. C) A method of accounting that capitalizes costs of mineral exploration and evaluation costs without regard to outcome. D) A method of accounting that capitalizes costs of mineral exploration and evaluation only if the production is commercially viable. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

3) Which statement is NOT correct? A) The three phases in mining activities are: mineral exploration, development and extraction. B) The accounting for mineral exploration is conceptually similar to that for research activities. C) Mineral exploration costs can be capitalized because markets for mineral resources are well established. D) A mineral site entering the development phase would normally satisfy the six criteria required for capitalization. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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4) Which statement is NOT correct? A) In accounting for mineral resources, IFRS 6 applies for the exploration and evaluation phase. B) In accounting for mineral resources, IAS 38 applies for the development phase. C) A mineral site entering the development phase would normally satisfy the six criteria required for capitalization. D) In accounting for mineral resources, IAS 38 is not applicable for any phase. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

5) Which statement is NOT correct? A) Significant uncertainties exist during mineral exploration. B) Entities can choose to either capitalize or expense mineral exploration costs. C) IFRS 6 applies when the mineral resources enter the development phase. D) Under IFRS, all costs must be expensed if a mineral site is not worthy of further exploration. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

6) Which statement is NOT correct? A) Under the successful efforts method, costs of all projects remain capitalized. B) ASPE allows either the full cost or successful efforts method to be used. C) Under the successful efforts method, only costs of successful projects remain capitalized. D) Under IFRS, all costs must be expensed if a mineral site is not worthy of further exploration. Answer: A Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

7) Which statement is correct? A) In the exploration and evaluation phase, the mineral site is ready for mineral production. B) In the exploration and evaluation phase, the mineral site is prepared for resource extraction. C) In the exploration and evaluation phase, the mineral site is assessed for commercial viability. D) In the exploration and evaluation phase, the six criteria required for capitalization are met. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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8) Which statement is correct? A) In the extraction phase, the mineral site is ready for mineral production. B) In the extraction phase, the mineral site is prepared for resource extraction. C) In the extraction phase, the mineral site is assessed for technical viability. D) In the extraction phase, the six criteria required for capitalization are met. Answer: A Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

9) Which statement is correct? A) In the development phase, the mineral site is ready for mineral production. B) In the development phase, the mineral site is assessed for commercial viability. C) In the development phase, the mineral site is assessed for technical viability. D) In the development phase, the six criteria required for capitalization are met. Answer: D Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

10) Which statement is correct? A) In the exploration phase, the mineral site is ready for mineral production. B) In the extraction phase, the mineral site is assessed for commercial viability. C) In the extraction phase, the mineral site is assessed for technical viability. D) In the development phase, the mineral site is prepared for resource extraction. Answer: D Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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11) Soorya Resources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be capitalized as "intangible assets" under the successful efforts method? A) $300,000 B) $400,000 C) $500,000 D) $600,000 Answer: B Explanation: B) $300,000 + $100,000 = $400,000 Can capitalize exploration and evaluation costs only if the outcome is successful as evidenced by the project being in an active development phase or an extraction phase. Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

12) GoodResources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be capitalized as "property, plant, or equipment" under the successful efforts method? A) $100,000 B) $200,000 C) $300,000 D) $700,000 Answer: C Explanation: C) $100,000 + $200,000 = $300,000 Can capitalize only development costs Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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13) Soorya Resources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be capitalized as "intangible assets" under the full cost method? A) $300,000 B) $400,000 C) $500,000 D) $600,000 Answer: D Explanation: D) $300,000 + $100,000 + $200,000 = $600,000 Can capitalize all exploration and evaluation costs Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

14) GoodResources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be capitalized as "property, plant, or equipment" under the full cost method? A) $100,000 B) $200,000 C) $300,000 D) $700,000 Answer: C Explanation: C) $100,000 + $200,000 = $300,000 Can capitalize only development costs Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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15) Soorya Resources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be recorded as depletion expense under the successful efforts method? A) $5,000 B) $15,000 C) $30,000 D) $45,000 Answer: B Explanation: B) $300,000 × 5% = $15,000 Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

16) GoodResources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be recorded as depletion expense under the full cost method? A) $5,000 B) $15,000 C) $30,000 D) $45,000 Answer: C Explanation: C) ($300,000 + $100,000 + $200,000) × 5% = $30,000 Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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17) Soorya Resources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be recorded as depreciation expense under the successful efforts method? A) $5,000 B) $15,000 C) $30,000 D) $45,000 Answer: A Explanation: A) $100,000 × 5% = $5,000 Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

18) GoodResources incurred the following costs: Mine Site

Alpha

Costs incurred in exploration and evaluation $300,000

Beta Zeta

200,000 100,000

Costs incurred in development

Status at year-end

$100,000

Producing @ 5% of reserves Abandoned In development

200,000

How much would be recorded as depreciation expense under the full cost method? A) $5,000 B) $15,000 C) $30,000 D) $45,000 Answer: A Explanation: A) $100,000 × 5% = $5,000 Diff: 2 Type: MC Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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19) Explain the accounting for assets in the mineral resource exploration industry. Answer: • Enterprises engaged in mineral exploration that apply IFRS must use the successful efforts method of accounting for costs associated with the exploration and evaluation of mineral resources. ASPE allows a choice between the successful efforts or full cost methods. • The successful efforts method capitalizes only costs of mineral exploration and evaluation on projects where the enterprise has discovered mineral resources for which extraction is technically feasible and commercially viable. • The full cost method capitalizes all costs of mineral exploration and evaluation regardless of the success or failure of the project. • Development costs associated with mineral resources are generally capitalized. Diff: 2 Type: ES Skill: Conceptual Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

20) Kryan Corp. mines and produces aluminum. During 2026, the company explored two new sites and evaluated them for aluminum ore potential. By the December 31, 2026, year-end, both sites remained in the evaluation stage. During 2027, evaluation of site Apollo was completed and the site was deemed to have sufficient quantities of ore; consequently, development of the site began. However, site Braeden was determined to have ore concentrations too low to be commercially viable. The following is the cost of exploration and evaluation incurred on the two sites:

Apollo (A Site) Braeden (B Site)

2026 $1,569,000 550,000 $2,119,000

2027 $1,560,000 1,275,000 $2,835,000

Required: Record the journal entries in 2026 and 2027 relating to the exploration and evaluation costs using the successful efforts method. Assume that Kryan has a policy of capitalizing the costs of exploration and evaluation. Answer: 2026 Dr. Intangible assets — A site 1,569,000 Dr. Intangible assets — B site 550,000 Cr. Cash 2,119,000 2027

Dr. Intangible assets — A site Dr. Intangible assets — B site Cr. Cash

1,560,000 1,275,000

Dr. Exploration and evaluation expense — B site Cr. Intangible assets — B site

1,825,000

2,835,000

1,825,000

Diff: 1 Type: ES Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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21) Kryan Corp. mines and produces aluminum. During 2026, the company explored two new sites and evaluated them for aluminum ore potential. By the December 31, 2026, year-end, both sites remained in the evaluation stage. During 2027, evaluation of site Atlanta was completed and the site was deemed to have sufficient quantities of ore; consequently, development of the site began. However, site Blenty was determined to have ore concentrations too low to be commercially viable. The following is the cost of exploration and evaluation incurred on the two sites: 2026 $3,140,000 825,000 $3,965,000

Atlanta Blenty

2027 $957,000 1,550,000 $2,507,000

Required: Record the journal entries in 2026 and 2027 relating to the exploration and evaluation costs using the full cost method. Answer: 2026 Dr. Intangible assets—exploration and evaluation 3,965,000 Cr. Cash 3,965,000 2027

Dr. Intangible assets—exploration and evaluation Cr. Cash

2,507,000 2,507,000

Diff: 2 Type: ES Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

22) Xavier Corp capitalized exploration and evaluation costs of $470,000. A further $1,357,000 was spent on tangible property, plant, and equipment to develop an oil well. Reserves at the beginning of the year were 480,000 barrels. During the year, the Corp produced 57,600 barrels of oil. Calculate the amounts for depletion and depreciation. Answer: Production volume Divide by reserves — beginning of year Rate for depletion and depreciation Depletion $470,000 12% $ 56,400

Costs capitalized Rate for depletion and depreciation Amount of depletion or depreciation

57,600 480,000 12% Depreciation $1,357,000 12% $ 162,840

Diff: 2 Type: ES Skill: Computational Objective: 9.3 Apply the specialized standards for the initial recognition of assets relating to mineral resource exploration and evaluation.

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Learning Objective 4 1) How does IFRS require that government grants for property, plant and equipment (PPE) be recorded? A) The government grant should be recorded directly to equity. B) The government grant should be recorded indirectly to equity via income. C) The government grant should not be recorded directly to equity via income. D) The government grant should not be recorded directly to equity. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 9.4 Apply the standards for accounting for government grants.

2) What is the appropriate treatment for re-payment of government grants under IFRS? A) Accounted for prospectively. B) Accounted for retrospectively. C) Partial prospective treatment and partial retrospective treatment. D) Full prospective treatment and full retrospective treatment. Answer: C Explanation: C) Change in estimate but with a cumulative adjustment for additional past depreciation. Diff: 2 Type: MC Skill: Conceptual Objective: 9.4 Apply the standards for accounting for government grants.

3) What is the appropriate treatment for re-payment of government grants under ASPE? A) Accounted for prospectively. B) Accounted for retrospectively. C) Partial prospective treatment and partial retrospective treatment. D) Full prospective treatment and full retrospective treatment. Answer: A Explanation: C) Diff: 2 Type: MC Skill: Conceptual Objective: 9.4 Apply the standards for accounting for government grants.

4) Which of the following is correct with respect to the accounting for re-payment of government grants? A) Accounted for prospectively under IFRS. B) Accounted for retrospectively under ASPE. C) Partial prospective treatment and partial retrospective treatment under ASPE. D) Partial prospective treatment and partial retrospective treatment under IFRS. Answer: D Explanation: C) D) Change in estimate but with a cumulative adjustment for additional past depreciation. Diff: 3 Type: MC Skill: Conceptual Objective: 9.4 Apply the standards for accounting for government grants.

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5) Which of the following is correct with respect to the accounting for re-payment of government grants? A) Accounted for prospectively under IFRS. B) Accounted for retrospectively under ASPE. C) Accounted for prospectively under ASPE D) Accounted for retrospectively under IFRS. Answer: C Explanation: C) The normal prospective treatment applies, and the change does not involve a cumulative adjustment for past depreciation as would have been the case under IAS rules. Diff: 3 Type: MC Skill: Conceptual Objective: 9.4 Apply the standards for accounting for government grants.

6) In 2026, Waverly Corp. set up a new manufacturing facility in Nova Scotia. To encourage Waverly to set up its factory, the province provided equipment with a fair value of $250,000 and an estimated useful life of 15 years using straight-line depreciation. What journal entry would be required to record the equipment contribution in fiscal 2026, using the gross method? A) A credit to donation revenue of $250,000. B) A credit to other comprehensive income – donated assets of $250,000. C) A credit to deferred income of $250,000. D) A credit to property, plant, and equipment for $250,000. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 9.4 Apply the standards for accounting for government grants.

7) In 2026, New Wave Inc. (NW) set up a new manufacturing facility in Manitoba. To encourage NW to set up its factory, the province provided equipment with a fair value of $75,000 and an estimated useful life of 10 years using straight-line depreciation. What journal entry would be required to record the equipment contribution in fiscal 2026, using the net method? A) A credit to donation revenue of $75,000. B) A credit to other comprehensive income – donated assets of $75,000. C) A credit to deferred income of $75,000. D) A credit to property, plant, and equipment for $75,000. Answer: D Diff: 2 Type: MC Skill: Computational Objective: 9.4 Apply the standards for accounting for government grants.

8) In 2026, StartUp Inc. (SU) set up a new manufacturing facility in Manitoba. To encourage SU to set up its factory, the province provided equipment with a fair market value of $45,000 and an estimated useful life of 5 years using straight-line depreciation. What journal entry would be required in fiscal 2027, if the net method is used? A) No entry is required. B) A credit to other comprehensive income – donated assets of $9,000. C) A credit to deferred income of $9,000. D) A credit to accumulated depreciation for $9,000. Answer: A Diff: 2 Type: MC Skill: Computational Objective: 9.4 Apply the standards for accounting for government grants.

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9) How does IFRS require that government grants for property, plant, and equipment (PPE) be recorded? A) The government grant should be recorded using the income approach. B) The government grant should be recorded using the capital approach. C) The government grant should not be recorded using either the income or capital approach. D) IFRS do not provide any guidance for recording the government grant. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 9.4 Apply the standards for accounting for government grants.

10) In 2026, Waverly Corp. set up a new manufacturing facility in Nova Scotia. To encourage Waverly to set up its factory, the province provided equipment with a fair value of $250,000, and estimated residual value of $0, and an estimated useful life of 10 years using straight-line depreciation. What journal entry would be required in fiscal 2027, using the gross method? A) A credit to donation revenue of $25,000. B) A credit to other comprehensive income – donated assets of $25,000. C) A credit to other income - government grant of $25,000. D) A credit to depreciation expense for $25,000. Answer: C Diff: 2 Type: MC Skill: Computational Objective: 9.4 Apply the standards for accounting for government grants.

11) Explain how government grants are accounted for and presented in the financial statements. Answer: Enterprises reasonably assured of receiving government grants should recognize the grant's fair value through profit or loss over the periods matching the related costs. Enterprises may present such grants using the gross or net method. Diff: 1 Type: ES Skill: Conceptual Objective: 9.4 Apply the standards for accounting for government grants.

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12) Wind Town is a builder of wind turbines that are used in electricity generation. To encourage the installation of wind turbines and the development of wind power technology, the provincial government has several programs in place that support the industry. In 2026, Wind Town incurred the following costs that were potentially eligible for government subsidies: i. The company spent $10 million on research and development (R&D); these costs are eligible for a 25% tax credit. The $10 million had been previously expensed. ii. For each megawatt of wind power generating capacity installed, the government provides a subsidy of $100,000 to the customer. In 2026, Wind Town installed 17 megawatts for its customers (utility companies). iii. Wind Town is eligible for a full tax rebate on sales tax normally levied on materials used in the construction of its turbine factory. This sales tax amounted to 5% of the materials cost of $35 million. Required: a. Record the journal entries for the above transactions using the gross method for government grants. b. Record the journal entries for the above transactions using the net method for government grants. Answer: a. Gross method i.

Dr. Cash or government grant receivable Cr. Other income (government grant)

2,500,000 2,500,000

ii. No entry. Subsidy goes to buyers of turbines, not the seller. Of course, Wind Town also benefits as a result of higher demand for the turbines, which should result in higher sales volume or higher sale prices. iii. Dr. Cash or government grant receivable Cr. Deferred income $35,000,000 × .05

1,750,000 1,750,000

b. Net method i.

ii.

Dr. Cash or government grant receivable Cr. R&D expense

2,500,000 2,500,000

No entry.

—

iii. Dr. Cash or government grant receivable Cr. PPE (turbine factory)

1,750,000 1,750,000

Diff: 1 Type: ES Skill: Computational Objective: 9.4 Apply the standards for accounting for government grants.

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13) Lilly Limited is planning to enlarge its factory in an economically challenged area of Canada. The federal, provincial, and municipal governments are all keen to assist the firm in making this investment successful, and hopefully generate permanent and significant economic and social benefits for the region. Collaboratively the three levels of government and the company have made the following commitments: i. Lilly will build a factory that will cost $90 million. ii. The city will donate the land for the factory, which has a fair value of $6,000,000. Upon completing construction, the legal title of the land will be transferred to Lilly. iii. For the next five years, the city will reduce the property and municipal taxes the company has to pay on the new factory by 15%. It is estimated that these taxes would be $2,200,000 per year before the discount. iv. The federal government will provide a forgivable loan of $7,500,000 to assist in the financing of the factory. The loan will be forgiven over five years if the company employs at least 220 workers per year in the new factory. v. For the next five years, the provincial government will provide a training subsidy of $2,500,000 a year for the employment and skill development of local residents. vi. The federal government will give Lilly a $1,200,000 grant immediately for having had a factory in the region for the past 10 years. vii. The federal government will give Lilly $15,000,000 in five years if it maintains an average workforce of 920 workers employed at the new factory. During the first year an average of 235 workers were employed, as the factory was in the start-up stage. Required: a. Prepare journal entries to record each of the seven items described above for the first year. Assume all estimates and expectations for the first year are correct and the factory is built and operational in the first year. Lilly Limited uses the net method to record grants. No depreciation will be recorded in the first year. b. What will be the annual depreciation expense for the factory starting in year two? Lilly Limited uses the net method to record grants. The factory is expected to have useful life of 30 years (excluding the first year in the start-up phase) and no material residual value. The company uses straight-line depreciation. c. By how much was net income increased because of government assistance in the first year? For the second year, assume all continuing conditions to be eligible for the grants are met. How much was net income increased by in the second year? Ignore income taxes.

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Answer: a. Journal entries: i.

ii.

iii.

iv.

vi.

Dr. PPE Cr. Cash

90,000,000

Dr. Land Cr. Other income — government grant

6,000,000

Dr. Property taxes payable (15% × $2,200,000) Cr. Property tax expense

330,000

Dr. Cash Cr. PPE

7,500,000

Dr. Cash Cr. Compensation expense

2,500,000

Dr. Cash Cr. Other income — government grant

1,200,000

90,000,000

6,000,000

330,000

7,500,000

2,500,000

1,200,000

vii. It is not reasonable to provide for any of this amount, as its receipt in five years is contingent on meeting a standard that is challenging and potentially not attainable. Further, in the first year, the goal of employing 920 workers was not met. b. The annual depreciation will be ($90,000,000 - $7,500,000) / 30 years = $2,750,000/year. c. Effect of subsidies on income: Item Free land Property tax discount (15% × $2,200,000) Training subsidy Grant for past employment (one-time)

Year 1 $ 6,000,000 330,000 2,500,000 1,200,000

Forgivable loan on factory (decrease in depreciation) Total

0 $10,030,000

250,000 $ 3,080,000

Diff: 2 Type: ES Skill: Computational Objective: 9.4 Apply the standards for accounting for government grants.

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Year 2 330,000 2,500,000

Comprehensive Learning Objectives 1) The following transactions occurred in fiscal 2026: • Synthesize Inc. exchanged machinery with Energize Corp.

Cost Accumulated depreciation Fair value

Synthesize's machinery $500,000 200,000 350,000

Energize's machinery $620,000 500,000 Not known

• Synthesize Inc. purchased equipment by signing a 5-year non-interest-bearing note payable for $200,000. The implicit rate of interest was 5%. • Synthesize received a government grant of $10,000 to help purchase the equipment. Required: a) Assuming the machinery exchange has commercial substance, prepare the required journal entries for the exchange for both Synthesize and Energize. b) Assuming the machinery exchange does NOT have commercial substance, prepare the required journal entries for the exchange for both Synthesize and Energize. c) Prepare the required journal entry to record the purchase of the equipment purchased by the non-interest-bearing note. d) Prepare the required journal entries to record the government grant using both the gross method and the net method.

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Answer: a) Assuming the machinery exchange has commercial substance, prepare the required journal entries for the exchange for both Synthesize and Energize. For Synthesize Dr. PPE — new at fair value Dr. A/D — old PPE Cr. PPE — Old Cr. Gain on disposal

350,000 200,000 500,000 50,000

For Energize Dr. PPE — new at fair value Dr. A/D — old PPE Cr. PPE — Old Cr. Gain on disposal

350,000 500,000 620,000 230,000

b) Assuming the machinery exchange does NOT have commercial substance, prepare the required journal entries for the exchange for both Synthesize and Energize. For Synthesize Dr. PPE — new at book value Dr. A/D — old PPE Cr. PPE — Old

300,000 200,000

For Energize Dr. PPE — new at book value Dr. A/D — old PPE Cr. PPE — Old

120,000 500,000

500,000

620,000

c) Prepare the required journal entry to record the purchase of the equipment purchased by the non-interest-bearing note. Dr. Equipment Cr. Note payable

156,706 156,706

$200,000 × 0.78353 = $156,706 OR $200,000/1.05 5 = $156,705

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d) Prepare the required journal entries to record the government grant using both the gross method and the net method Gross Method Dr. Cash or government grant receivable Cr. Deferred income

10,000

Net method Dr. Cash or government grant receivable Cr. PPE - Equipment

10,000

Diff: 3 Type: ES Skill: Computational Objective: 8.1/ 8.2/ 8.4/ 9.4 Evaluate whether a cost should be included in property, plant, and equipment, and how much should be classified in each category of asset or expense./Apply different depreciation methods, including the effect of changes in estimates on depreciation calculations./Analyze transactions with non-monetary consideration and apply the accounting standards for non-monetary transactions./Apply the standards for accounting for government grants.

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Intermediate Accounting, Vol 1, 5e (Lo/Fisher) Chapter 10 Applications of Fair Value to Non-Current Assets Learning Objective 1 1) Which statement is correct? A) The revaluation model is required for non-current assets under IFRS. B) The revaluation model is required for non-current assets under ASPE. C) The revaluation model is optional for non-current assets under IFRS. D) The revaluation model is optional for non-current assets under ASPE. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

2) Which is correct with respect to the accounting treatment under the cost or revaluation model? A) Companies can choose to apply the revaluation model to each individual PPE or intangible asset under IFRS. B) Companies can choose to apply the revaluation model to each class of PPE or intangible asset under IFRS. C) Companies can choose to apply the revaluation model to each individual PPE or intangible asset under ASPE. D) Companies can choose to apply the revaluation model to each class PPE or intangible asset under ASPE. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

3) Which statement describes the "revaluation model"? A) A model which keeps the carrying value of an asset and adjusts for depreciation and impairment. B) A model which restates the value of an asset at each measurement date. C) A model which restates the carrying value of an asset to the asset's fair value on the date of revaluation. D) A model which values the asset based on its productive capacity. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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4) How should a revaluation entry generally NOT be booked? A) Using the "proportional method." B) Adjusting the difference between fair value and carrying value to profit and loss. C) Adjusting the carrying value and accumulated depreciation by the same percentage so that the carrying amount equals fair value after revaluation. D) Restating the gross carrying amount to fair value and removing the accumulated depreciation. Answer: B Diff: 1 Type: MC Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

5) Which statement describes the "historical cost model"? A) A model which keeps the carrying value of an asset and adjusts for depreciation and impairment. B) A model which restates the value of an asset at each measurement date. C) A model which restates the carrying value of an asset to the asset's fair value on the date of revaluation. D) A model which values the asset based on its productive capacity. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

6) How is revaluation of non-current assets accounted for? A) Revaluation surplus is always booked to profit and loss. B) Revaluation loss is booked to other comprehensive income. C) Cumulative revaluation loss is booked to profit and loss. D) Revaluation surplus is not recognized in other comprehensive income. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

7) How is a revaluation loss on non-current assets accounted for? A) Revaluation loss is booked to profit and loss. B) Revaluation loss is booked to other comprehensive income. C) Revaluation loss is booked to profit and loss or to other comprehensive income, depending on any pre-existing revaluation surplus. D) Revaluation loss is not recognized in other comprehensive income. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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8) Grover Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $100,000. What amount would be booked to the "accumulated depreciation" account if Grover chooses to use the proportional method to record the revaluation? A) $0 B) $10,000 debit. C) $10,000 credit. D) $20,000 credit. Answer: C Explanation: C) Amount of revaluation = ($100,000 - $80,000) / $80,000 = 25% revaluation gain/credit Proportional increase in accumulated depreciation = $40,000 × 25% = $10,000 credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

9) Smith Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $150,000. What amount would be booked to the "accumulated depreciation" account if Smith chooses to use the proportional method to record the revaluation? A) $0 B) $35,000 debit. C) $35,000 credit. D) $70,000 credit. Answer: C Explanation: C) Amount of revaluation = ($150,000 - $80,000) / $80,000 = 87.5% revaluation gain/credit Proportional increase in accumulated depreciation = $40,000 × 87.5% = $35,000 credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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10) Wallace Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $60,000. What amount would be booked to the "accumulated depreciation" account if Wallace chooses to use the proportional method to record the revaluation? A) $0 B) $10,000 debit. C) $10,000 credit. D) $20,000 debit. Answer: B Explanation: B) Amount of revaluation = ($60,000 - $80,000) / $80,000 = 25% revaluation loss/debit Proportional decrease in accumulated depreciation = $40,000 × 25% = $10,000 debit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

11) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $20,000. What amount would be booked to the "accumulated depreciation" account if Wilson chooses to use the proportional method to record the revaluation? A) $0 B) $30,000 debit. C) $30,000 credit. D) $60,000 debit. Answer: B Explanation: B) Amount of revaluation = ($20,000 - $80,000) / $80,000 = 75% revaluation loss/debit Proportional decrease in accumulated depreciation = $40,000 × 75% = $30,000 debit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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12) Grover Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $100,000. What amount would be booked to the "accumulated depreciation" account if Grover chooses to use the elimination method to record the revaluation? A) $20,000 credit. B) $40,000 debit. C) $40,000 credit. D) $80,000 debit. Answer: B Explanation: B) Accumulated depreciation is reset to ZERO. Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

13) Smith Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 60,000 $60,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $150,000. What amount would be booked to the "accumulated depreciation" account if Smith chooses to use the elimination method to record the revaluation? A) $60,000 debit. B) $60,000 credit. C) $90,000 credit. D) $150,000 debit. Answer: A Explanation: A) Accumulated depreciation is reset to ZERO. Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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14) Wallace Inc. wishes to use the revaluation model for this property: Before Revaluation $150,000 70,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $60,000. What amount would be booked to the "accumulated depreciation" account if Wallace chooses to use the elimination method to record the revaluation? A) $20,000 debit. B) $70,000 credit. C) $70,000 debit. D) $60,000 credit. Answer: C Explanation: C) Accumulated depreciation is reset to ZERO. Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

15) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $140,000. What amount would be booked to the "accumulated depreciation" account if Wilson chooses to use the elimination method to record the revaluation? A) $40,000 debit. B) $40,000 credit. C) $60,000 debit. D) $140,000 credit. Answer: A Explanation: A) Accumulated depreciation is reset to ZERO. Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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16) Grover Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $100,000. Assuming this is the first year of using the revaluation model, what amount would be booked to the "other comprehensive income" account if Grover chooses to use the proportional method to record the revaluation? A) $0 B) $10,000 debit. C) $10,000 credit. D) $20,000 credit. Answer: D Explanation: D) Amount of revaluation = ($100,000 - $80,000) = $20,000 revaluation credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

17) Smith Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $150,000. Assuming this is the first year of using the revaluation model, what amount would be booked to the "other comprehensive income" account if Smith chooses to use the proportional method to record the revaluation? A) $35,000 debit. B) $35,000 credit. C) $70,000 debit. D) $70,000 credit. Answer: D Explanation: D) Amount of revaluation = ($150,000 - $80,000) = $70,000 revaluation gain/credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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18) Wallace Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Other comprehensive income Net carrying value

The fair value for the property is $60,000. Assuming this is the first year of using the revaluation model, what amount would be booked to the "other comprehensive income" account if Wallace chooses to use the proportional method to record the revaluation? A) $0 B) $10,000 debit. C) $10,000 credit. D) $20,000 debit. Answer: A Explanation: A) Amount of revaluation = ($60,000 - $80,000) = $20,000 revaluation loss/debit, booked to profit and loss, not OCI Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

19) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $20,000. Assuming this is the first year of using the revaluation model, what amount would be booked to the "other comprehensive income" account if Wilson chooses to use the proportional method to record the revaluation? A) $0 B) $30,000 debit. C) $30,000 credit. D) $60,000 debit. Answer: A Explanation: A) Amount of revaluation = ($20,000 - $80,000) = $60,000 revaluation loss/debit, booked to profit and loss, not OCI Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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20) Grover Inc. wishes to use the revaluation model for this property: Before Revaluation $160,000 40,000 $120,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $140,000. Assuming this is the first year of using the revaluation model, what amount would be booked to profit and loss if Grover chooses to use the elimination method to record the revaluation? A) $0 B) $20,000 credit. C) $20,000 debit. D) $30,000 credit. Answer: A Explanation: A) $140,000 - $120,000 = $20,000 revaluation gain, booked to OCI, not profit and loss. Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

21) Smith Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 60,000 $60,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $150,000. Assuming this is the first year of using the revaluation model, what amount would be booked to profit and loss if Smith chooses to use the elimination method to record the revaluation? A) $0 B) $60,000 debit. C) $60,000 credit. D) $90,000 credit. Answer: A Explanation: A) $150,000 - $60,000 = $90,000 revaluation gain, booked to OCI, not profit and loss. Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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22) Wallace Inc. wishes to use the revaluation model for this property: Before Revaluation $150,000 70,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $60,000. Assuming this is the first year of using the revaluation model, what amount would be booked to profit and loss if Wallace chooses to use the elimination method to record the revaluation? A) $20,000 debit. B) $20,000 credit. C) $70,000 debit. D) $80,000 credit. Answer: A Explanation: A) $60,000 - $80,000 = $20,000 revaluation loss Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

23) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $40,000. Assuming this is the first year of using the revaluation model, which of the following amounts will be booked? A) $40,000 debit to profit and loss. B) $40,000 credit to profit and loss. C) $40,000 debit to OCI. D) $40,000 credit to OCI. Answer: A Explanation: A) $40,000 - $80,000 = $40,000 revaluation loss Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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24) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $140,000. Assuming this is the first year of using the revaluation model, which of the following amounts will be booked? A) $60,000 debit to profit and loss. B) $60,000 credit to profit and loss. C) $60,000 debit to OCI. D) $60,000 credit to OCI. Answer: D Explanation: D) $140,000 - $80,000 = $60,000 revaluation gain Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

25) Smith Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 60,000 $60,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $150,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much depreciation expense would be recorded in the year subsequent to the revaluation? A) $12,000 debit. B) $12,000 credit. C) $30,000 credit. D) $30,000 debit. Answer: D Explanation: D) $150,000 / 5 years = $30,000 debit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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26) Wallace Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $60,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much depreciation expense would be recorded in the year subsequent to the revaluation? A) $12,000 debit. B) $12,000 credit. C) $16,000 credit. D) $16,000 debit. Answer: A Explanation: A) $60,000 / 5 years = $12,000 debit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

27) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $40,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much depreciation expense would be recorded in the year subsequent to the revaluation? A) 8,000 credit. B) 8,000 debit. C) 16,000 credit. D) 16,000 debit. Answer: B Explanation: B) $40,000 / 5 years = $8,000 debit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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28) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $140,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much depreciation expense would be recorded in the year subsequent to the revaluation? A) $16,000 debit. B) $16,000 credit. C) $28,000 credit. D) $28,000 debit. Answer: D Explanation: D) $140,000 / 5 years = $28,000 debit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

29) Smith Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 60,000 $60,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $150,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much would be booked to accumulated depreciation in the year subsequent to the revaluation? A) $12,000 debit. B) $12,000 credit. C) $30,000 credit. D) $30,000 debit. Answer: C Explanation: C) $150,000 / 5 years = $30,000 credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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30) Wallace Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $60,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much would be booked to accumulated depreciation in the year subsequent to the revaluation? A) $12,000 debit. B) $12,000 credit. C) $16,000 credit. D) $16,000 debit. Answer: B Explanation: B) $60,000 / 5 years = $12,000 credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

31) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $40,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much would be booked to accumulated depreciation in the year subsequent to the revaluation? A) $8,000 credit. B) $8,000 debit. C) $16,000 credit. D) $16,000 debit. Answer: A Explanation: A) $40,000/ 5 years = $8,000 credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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32) Wilson Inc. wishes to use the revaluation model for this property: Before Revaluation $120,000 40,000 $80,000

Building Gross Value Building Accumulated Depreciation Net carrying value

The fair value for the property is $140,000. Using straight-line depreciation and assuming that the property has a remaining depreciable life of 5 years, how much would be booked to accumulated depreciation in the year subsequent to the revaluation? A) $16,000 debit. B) $16,000 credit. C) $28,000 credit. D) $28,000 debit. Answer: C Explanation: C) $140,000 / 5 years = $28,000 credit Diff: 2 Type: MC Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

33) Explain the accounting under the revaluation model available under IFRS. Answer: • IFRS allows enterprises to choose the revaluation model instead of the cost model to account for many non-current assets if those assets have fair values that are sufficiently reliable. • For assets that are depreciable, enterprises have the option of accounting for the effect of the revaluation on accumulated depreciation using either the proportional or elimination methods. Subsequent depreciation changes prospectively. • The effect of revaluation affects equity asymmetrically depending on whether cumulative revaluation adjustments are positive or negative for a particular asset. Positive cumulative adjustments go to the revaluation surplus component of equity, while negative cumulative adjustments go through profit or loss. Diff: 1 Type: ES Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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34) Compare the proportional method and the elimination method for recording the revaluation entry. Contrast the benefits and drawbacks of each method. Answer: • The result of the proportional method maintains the character of the original purchase cost since the ratio of accumulated depreciation to cost remains unchanged before and after the revaluation. The proportional method restates gross carrying amounts and accumulated depreciation as if different prices prevailed at the time of the initial purchase, but such prices are purely hypothetical. • The elimination method produces numbers that would result from a purchase at the revaluation date, since there would be no accumulated depreciation. The elimination method presents figures as if the asset had been newly purchased, but reduces the ability of financial statement readers to estimate the approximate age of assets. • Which of the two methods an enterprise adopts is a matter for professional judgment. Diff: 2 Type: ES Skill: Conceptual Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

35) Company Ten purchased land for $400,000 during the year. Fair value at the end of the year was $500,000. Prepare the journal entry to record the revaluation adjustment. Answer: Dr. Land Cr. Other comprehensive income — revaluation surplus

100,000

Diff: 1 Type: ES Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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100,000

36) Company One purchased land for $900,000 some years ago. Fair value was $450,000 at the beginning of this year and $340,000 at the end of this year. Prepare the journal entry to record this year's revaluation adjustment. Answer: Dr. Loss on land revaluation 110,000 Cr. Land 110,000 Diff: 1 Type: ES Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

37) Company Twelve purchased land for $900,000 some years ago. Fair value was $800,000 at the beginning of this year and $1,000,000 at the end of this year. Prepare the journal entry to record this year's revaluation adjustment. Answer: Dr. Land ($1,000,000 - $800,000) 200,000 Cr. Gain on land revaluation* 100,000 Cr. OCI — revaluation surplus* 100,000 * Gain of $100,000 recorded through profit and loss for the amount up to original cost. Amount above cost goes to other comprehensive income (OCI). Diff: 1 Type: ES Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

38) Company Nine purchased land for $600,000 some years ago. Fair value was $800,000 at the beginning of this year and $350,000 at the end of this year. Prepare the journal entry to record this year's revaluation adjustment. Answer: Dr. OCI — revaluation surplus 200,000 Dr. Loss on land revaluation 250,000 Cr. Land ($350,000 - $800,000) 450,000 * Loss of $200,000 recorded through OCI for amount down to the original cost. Amount below cost goes through profit and loss. Diff: 1 Type: ES Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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39) Wright Now Limited (WNL) was incorporated on January 1, 2025, when the sole shareholder invested $7,500,000. This is the only financing the firm needed. WNL used $1,200,000 of the funds to purchase land. WNL developed a single project from 2025–2028. Pertinent financial details of this project are set out below. At the end of 2028 the land was sold for its fair value. (in thousands) Revenue — all cash Expenses — all cash Fair value of land, end of year

2025 $3,100 2,900 1,550

2026 $ 3,500 2,900 1,150

2027 $ 2,600 2,200 1,400

2028 $ 2,400 2,300 1,500

Required: Complete the following table, assuming that WNL uses the historical cost basis of measurement Historical cost basis ($000s) Revenue Expenses Gain on disposal of land Net income (= comprehensive income) Opening retained earnings Closing retained earnings

2025 $3,100 2,900

Cash Land Total assets

$6,500 1,200 $7,700

Share capital Retained earnings Total shareholder's equity

$7,500

2026 $3,500 2,900

18 .

2027 $2,600 2,200

2028 $2,400 2,300

Answer: Historical cost basis ($000s) Revenue Expenses Gain on disposal of land Net income (= comprehensive income) Opening retained earnings Closing retained earnings

2025 $3,100 2,900

2026 $3,500 2,900

2027 $2,600 2,200

200

600

400

2028 $2,400 2,300 300 400

0 $ 200

200 $800

800 $1,200

1,200 $1,600

Cash

$6,500

$7,100

$7,500

$9,100

Land Total assets

1,200 $7,700

1,200 $8,300

1,200 $8,700

0 $9,100

Share capital Retained earnings Total shareholder's equity

$7,500 200 $7,700

$7,500 800 $8,300

$7,500 1,200 $8,700

$7,500 1,600 $9,100

Diff: 2 Type: ES Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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40) Sigma Company has a piece of equipment with an original cost of $1,440,000. The equipment's carrying value at the beginning of this year (net of accumulated depreciation) was $1,080,000. Sigma recorded $120,000 for depreciation for this year. The equipment's fair value at the end of the year was $1,056,000. This is the first year that the company has revalued this equipment. Required: a. Record the journal entry for the revaluation adjustment assuming that Sigma uses the elimination method. b. Record the journal entry for the revaluation adjustment assuming that Sigma uses the proportional method. Answer: a. Elimination method Dr. Accumulated depreciation* Cr. Equipment ($1,440,000 - $1,056,000)

480,000 384,000

Cr. OCI — revaluation surplus ($1,056,000 $960,000) **

96,000

* Elimination of accumulated depreciation. $360,000 is from prior years' depreciation and $120,000 is for current year's depreciation. ** Just prior to the year-end revaluation, the carrying value is $960,000. Take the original cost minus old carrying value to determine that accumulated depreciation was $360,000 and that carrying value was $1,080,000. Then subtract this year’s depreciation and come up with a carrying value of $960,000 and new accumulated depreciation of $480,000. b. Proportional method Dr. Equipment (+10% × $1,440,000) Cr. Accumulated depreciation (+10% × $480,000) Cr. OCI — revaluation surplus ($1,056 - $960) *

144,000 48,000 96,000

* Just prior to the year-end revaluation, the carrying value is $960,000. The fair value of $1,056,000 is a 10% increase. Therefore, under the proportional method, both the gross carrying amount and accumulated depreciation increase by 10%. Diff: 2 Type: ES Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

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41) Wright Now Limited (WNL) was incorporated on January 1, 2025, when the sole shareholder invested $7,500,000. This is the only financing the firm needed. WNL used $1,200,000 of the funds to purchase land. The company has a single project that it developed over four years. Below are details of the four years of operations. At the end of 2028 the land was sold for its fair value. (in thousands) Revenue — all cash Expenses — all cash Fair value of land, end of year

2025 $3,100 2,900 1,550

2026 $ 3,500 2,900 1,150

2027 $ 2,600 2,200 1,400

2028 $ 2,400 2,300 1,500

Required: Complete the following table, assuming that WNL uses the revaluation model of measurement. OCI refers to other comprehensive income. Revaluation ($000s) Revenue Expenses Revaluation gain (loss) Gain on disposal of land Net income OCI for revaluation gain (loss) Comprehensive income

2025 $3,100 2,900

Cash Land Total assets

$6,500 1,550 $8,050

Share capital Accumulated revaluation surplus Retained earnings Total shareholder's equity

$7,500

2026 $3,500 2,900

21 .

2027 $2,600 2,200

2028 $2,400 2,300

Answer: Revaluation ($000s) Revenue Expenses Revaluation gain (loss) Gain on disposal of land Net income OCI for revaluation gain (loss) Comprehensive income

2025 $3,100 2,900

2026 $3,500 2,900 (50)

2027 $2,600 2,200 50

200 350 $550

550 (350) $200

450 200 $650

2028 $2,400 2,300 0 300 400 (200) $200

Cash Land Total assets

$6,500 1,550 $8,050

$7,100 1,150 $8,250

$7,500 1,400 $8,900

$9,100 0 $9,100

Share capital Accumulated revaluation surplus Retained earnings Total shareholder's equity

$7,500 350 200 $8,050

$7,500 0 750 $8,250

$7,500 200 1,200 $8,900

$7,500 0 1,600 $9,100

Diff: 2 Type: ES Skill: Computational Objective: 10.1 Apply the revaluation model of accounting for non-current assets.

Learning Objective 2 1) What is the "recoverable amount"? A) The present value of the future cash flows expected to be derived from an asset. B) The amount obtainable from the sale of an asset in an arm's-length transaction less the costs of disposal. C) The higher of an asset's fair value less costs to sell and its value in use. D) The lower of an asset's fair value less costs to sell and its value in use. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

2) Which of the following is correct with respect to when the impairment test must be performed? A) An annual test is required for definite lived assets under IFRS. B) An annual test is required for definite lived assets under ASPE. C) An annual test is required for indefinite lived assets under IFRS. D) An annual test is required for indefinite lived assets under ASPE. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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3) Explain how non-current assets such as definite lived intangibles, indefinite lived intangibles and goodwill are tested for impairment under IFRS. Answer: • An enterprise should annually search for indications that its assets may be impaired. • An enterprise should annually test for impairment of goodwill and intangible assets with indefinite lives. • For purposes of impairment procedures, an enterprise should group assets with interdependent cash flows into cash generating units. Diff: 1 Type: ES Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

4) Which is an exception to the rule: "test for impairment only if there are indicators for impairment"? A) Intangible assets with indefinite lives. B) Intangible assets with definite lives. C) Internally generated goodwill. D) Tangible assets with definite lives. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

5) Which of the following is NOT a concept supporting impairment testing? A) An asset should be presented at its fair value. B) An asset's carrying value should be recoverable from sale. C) An asset's carrying value should be recoverable from use. D) An asset should not be overstated. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

6) Which is NOT a source of information that would be used as an indicator of impairment? A) Adverse changes in the technological competitive or legal environment of the entity. B) Market value of asset has increased more than would be expected from normal aging. C) Market value of asset has decreased more than would be expected from normal aging. D) The market value of the entity as a whole is less than the carrying value of its net assets. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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7) Which statement is NOT correct? A) Impairment testing is required under ASPE. B) Impairment testing is required under IFRS. C) Impairment testing is not required under ASPE. D) Impairment testing is required under both IFRS and ASPE. Answer: C Diff: 1 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

8) What is "fair value less costs to sell"? A) The present value of the future cash flows expected to be derived from an asset. B) The amount obtainable from the sale of an asset in an arm's-length transaction less the costs of disposal. C) The higher of an asset's fair value less costs to sell and its value in use. D) The amount obtainable from the sale of an asset in an arm's-length transaction between knowledgeable, willing parties. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

9) What is "value in use"? A) The present value of the future cash flows expected to be derived from an asset. B) The amount obtainable from the sale of an asset in an arm's-length transaction less the costs of disposal. C) The higher of an asset's fair value less costs to sell and its value in use. D) The lower of an asset's fair value less costs to sell and its value in use. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

10) What is "fair value"? A) The present value of the future cash flows expected to be derived from an asset. B) The amount obtainable from the sale of an asset in an arm's-length transaction less the costs of disposal. C) The higher of an asset's fair value less costs to sell and its value in use. D) The amount obtainable from the sale of an asset in an arm's-length transaction between knowledgeable, willing parties. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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11) What are "costs of disposal"? A) The incremental costs directly attributable to the disposal of an asset. B) The incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense. C) The incremental costs directly attributable to the disposal of an asset, excluding finance costs. D) The amount obtainable from the sale of an asset in an arm's-length transaction between knowledgeable, willing parties. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

12) What impairment, if any, exists on these product lines? Product A $7,222,000 2,500,000 5,062,000 90,000 4,375,000

Original cost Accumulated depreciation Fair value Costs to sell Value in use A) Product A

Product B $0

B) Product A Product B $347,000 C) Product A

Product B $0 $236,000

D) Product A Product B $347,000 $236,000

25 .

Product B $12,536,000 4,200,000 8,916,000 340,000 8,100,000

Answer: A Explanation: A) Product A Value in use

$4,375,000

Fair value Less: costs to sell Fair value less costs to sell

5,062,000 (90,000) $4,972,000

Original cost Less: accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$7,222,000 (2,500,000) 4,722,000 4,972,000 $

Since fair value less costs to sell is greater than net carrying value, there is no impairment. Product B Value in use

$8,100,000

Fair value Less: costs to sell Fair value less costs to sell

8,916,000 (340,000) $8,576,000

Original cost Less: accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$12,536,000 (4,200,000) 8,336,000 8,576,000 $

Since fair value less costs to sell is greater than net carrying value, there is no impairment. Diff: 3 Type: MC Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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13) What impairment, if any, exists on these product lines? Product A $7,200,000 2,500,000 5,000,000 100,000 4,375,000

Original cost Accumulated depreciation Fair value Costs to sell Value in use A) Product A

Product B $12,000,000 4,000,000 8,000,000 350,000 7,500,000

Product B $0

B) Product A Product B $325,000 C) Product A $0

Product B $350,000

D) Product A Product B $325,000 $350,000

27 .

Answer: C Explanation: C) Product A Value in use

$4,375,000

Fair value Less: costs to sell Fair value less costs to sell

$5,000,000 (100,000) $4,900,000

Original cost Less: accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$7,200,000 (2,500,000) 4,700,000 4,900,000 $

Since fair value less costs to sell is greater than net carrying value, there is no impairment. Product B Value in use

$7,500,000

Fair value Less: costs to sell Fair value less costs to sell

8,000,000 (350,000) $7,650,000

Original cost Less: accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$12,000,000 (4,000,000) 8,000,000 7,650,000 $

350,000

Diff: 3 Type: MC Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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14) What impairment, if any, exists on this product line?

Original cost Accumulated depreciation Fair value Costs to sell Value in use

Product CDC $5,200,000 2,100,000 4,500,000 500,000 4,300,000

A) $0 B) $900,000 C) $1,200,000 D) $4,000,000 Answer: A Explanation: A) Value in use

$4,300,000

Fair value Less: costs to sell Fair value less costs to sell

$4,500,000 (500,000) $4,000,000

Original cost Less: accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$5,200,000 (2,100,000) 3,100,000 4,300,000 $

Since value in use is greater than net carrying value, there is no impairment. Diff: 2 Type: MC Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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15) What is the recoverable amount for this product line?

Original cost Accumulated depreciation Fair value Costs to sell Value in use

Product KJY $5,200,000 2,100,000 4,500,000 500,000 4,100,000

A) $900,000 B) $3,100,000 C) $4,000,000 D) $4,100,000 Answer: D Explanation: D) Value in use

$4,100,000

Fair value Less: costs to sell Fair value less costs to sell

$4,500,000 (500,000) $4,000,000

Original cost Less: accumulated depreciation Net carrying value

$5,200,000 (2,100,000) 3,100,000

Recoverable amount (higher of value in use and FV less costs to sell)

$4,100,000

Diff: 2 Type: MC Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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16) What is the recoverable amount for this product line?

Original cost Accumulated depreciation Fair value Costs to sell Value in use

Product BGF $10,200,000 6,100,000 6,500,000 1,500,000 4,000,000

A) $100,000 B) $4,000,000 C) $4,100,000 D) $5,000,000 Answer: D Explanation: D) Value in use

$4,000,000

Fair value Less: costs to sell Fair value less costs to sell

6,500,000 (1,500,000) $5,000,000

Original cost Less: accumulated depreciation Net carrying value

10,200,000 (6,100,000) 4,100,000

Recoverable amount (higher of value in use and FV less costs to sell)

5,000,000

Diff: 2 Type: MC Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

17) Explain when a non-current asset is impaired. Answer: • An asset (or cash generating unit) is impaired if its carrying amount exceeds its recoverable amount. • The recoverable amount is the higher of fair value less costs to sell and value in use. Diff: 1 Type: ES Skill: Conceptual Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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18) A company owns an office building that it rents out to other businesses. Due to a downturn in the economy, rental rates have dropped while vacancy rates have increased. Due to these circumstances, the company evaluated the building for impairment. The building has a cost of $70 million, accumulated depreciation of $47.05 million, and a value in use of $20 million. In addition, the company has recently received an offer to purchase the building for $22 million. Legal and other costs necessary to complete a sale of this type would amount to $200,000. Required: Determine the amount of impairment, if any. Answer: Fair value Costs to sell Fair value less costs to sell (a) Value in use (b)

$22,000,000 (200,000) 21,800,000 20,000,000

Higher of (a) and (b) Carrying amount $70,000,000 - $47,050,000 Amount of impairment

$21,800,000 22,950,000 $ 1,150,000

Diff: 2 Type: ES Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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19) Due to increased competition from low-cost foreign manufacturers, Genevive's Toy Company is experiencing significant declines in sales. The company produces its toys from an assembly line. The equipment in this assembly line has not been previously revalued or impaired. For the year ending December 31, 2024, the controller gathered the following information relating to the assembly line equipment, which is considered to be a cash generating unit: Original cost Accumulated depreciation Fair value Costs to sell Risk adjusted cost of capital

$6,379,000 2,400,000 3,247,000 145,000 6%

Incremental cash flows for -2025 -2026 -2027 -2028 -2029 and thereafter

$1,100,000 1,000,000 800,000 900,000 0

Required: Determine whether the assembly line is impaired, and if so, the amount of the impairment. Answer: Nominal amount Discount factor PV of cash flows Incremental cash flow 2025 $1,100,000 1/1.06 $1,037,736 2 Incremental cash flow 2026 $1,000,000 1/1.06 889,996 Incremental cash flow 2027

$800,000

Incremental cash flow 2028 Value in use

$900,000

1/1.063 1/1.064

671,695 712,884 $3,312,311

Fair value Less: costs to sell Fair value less costs to sell

$3,247,000 (145,000) $3,102,000

Original cost Less accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$6,379,000 (2,400,000) 3,979,000 3,312,311 $ 666,689

Diff: 2 Type: ES Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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20) Reid Resch is a maker of instruments for measuring weight, temperature, pressure, and so on. Due to the increasing use of digital instruments, one of the company production lines based on analogue technology is potentially impaired. Management has produced the following information relating to this production line, which is considered to be a cash generating unit: Original cost Accumulated depreciation Fair value Costs to sell Risk adjusted cost of capital

$4,940,000 1,800,000 3,270,000 48,000 5%

Incremental cash flows for -2025 -2026 -2027 -2028 -2029 and thereafter

$ 200,000 1,200,000 1,200,000 1,000,000 0

Required: Determine whether the production line is impaired, and if so, the amount of the impairment. Answer: Nominal amount Discount factor PV of cash flows Incremental cash flow 2025 $200,000 1/1.05 $190,476 2 Incremental cash flow 2026 $1,200,000 1/1.05 1,088,435 Incremental cash flow 2027

$1,200,000

Incremental cash flow 2028 Value in use

$1,000,000

1/1.053 1/1.054

1,036,605 822,702 $3,138,218

Fair value Less: costs to sell Fair value less costs to sell

$3,270,000 (48,000) $3,222,000

Original cost Less accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell Impairment loss

$4,940,000 (1,800,000) 3,140,000

3,222,000 0

Since fair value less costs to sell is greater than net carrying value, there is no impairment. Diff: 2 Type: ES Skill: Computational Objective: 10.2 Evaluate whether a non-current asset should be tested for impairment, whether the asset is impaired, and the extent of impairment.

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21) Bean World Company produces two distinct product lines: dried beans and canned beans. Due to changing consumer tastes, the company is evaluating these two cash generating units for impairment for the year ending December 31, 2024. Relevant information is as follows:

Original cost Accumulated depreciation Fair value Costs to sell Risk adjusted cost of capital

Dried beans Canned beans $7,222,000 $12,536,000 2,500,000 4,200,000 5,062,000 8,916,000 90,000 340,000 5% 5%

Incremental cash flows for -2025 -2026 -2027 -2028 -2029 and thereafter

$ 800,000 1,200,000 1,300,000 1,700,000 0

$2,400,000 3,400,000 3,700,000 0 0

Required: Determine whether either product line is impaired, and if so, the amount of the impairment.

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Answer: Dried beans Incremental cash flow 2025

Nominal amount $800,000

Incremental cash flow 2026

$1,200,000

Discount factor 1/1.05 1/1.052

PV of cash flows $761,905

Incremental cash flow 2027

$1,300,000

1/1.053

1,122,989

Incremental cash flow 2028 Value in use

$1,700,000

1/1.054

1,398,594 $4,371,923

1,088,435

Fair value Less: costs to sell Fair value less costs to sell

$5,062,000 (90,000) $4,972,000

Original cost Less accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$7,222,000 (2,500,000) 4,722,000

4,972,000 0

Since fair value less costs to sell is greater than net carrying value, there is no impairment. Canned beans Incremental cash flow 2025

Nominal amount $2,400,000

Incremental cash flow 2026

$3,400,000

Incremental cash flow 2027 Incremental cash flow 2028 Value in use

$3,700,000 $0

Discount factor 1/1.05 1/1.052

PV of cash flows $2,285,714 3,083,900

1/1.053

3,196,199 0 $8,565,813

Fair value Less: costs to sell Fair value less costs to sell

$8,916,000 (340,000) $8,576,000

Original cost Less accumulated depreciation Net carrying value Less: recoverable amount (higher of value in use and FV less costs to sell) Impairment loss

$12,536,000 (4,200,000) 8,336,000

8,576,000 0

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Learning Objective 3 1) How is an impairment loss allocated to the non-current asset(s)? A) Allocate the impairment loss in proportion to the gross amounts of the assets in the cash generating unit. B) Allocate the impairment loss to assets with the highest carrying amounts in the cash generating unit. C) Allocate the impairment loss in proportion to the net carrying amounts of the assets in the cash generating unit. D) Allocate the impairment loss to assets with the lowest carrying amounts in the cash generating unit. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

2) Which of the following is correct with respect to the "recoverable amount"? A) It is defined as the lower of the value in use or fair value less cost to sell under IFRS. B) It is defined as the lower of the value in use or fair value less cost to sell under ASPE. C) Under IFRS, it is defined as the sum of the undiscounted cash flows expected from use of the asset. D) Under ASPE, it is defined as the sum of the undiscounted cash flows expected from use of the asset. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

3) Which of the following is correct with respect to when the impairment test must be performed? A) An annual test is required for long-lived assets under IFRS. B) An annual test is required for long-lived assets under ASPE. C) Under IFRS, a test is required for long-lived assets only when there are indications an asset may be impaired. D) Under ASPE, a test is required for long-lived assets only when there are indications an asset may be impaired. Answer: D Diff: 3 Type: MC Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

4) Which of the following is correct with respect to the "impairment loss"? A) It is defined as the carrying amount less recoverable amount under IFRS. B) It is defined as the carrying amount less recoverable amount under ASPE. C) Under IFRS, it is defined as the sum of the undiscounted cash flows expected from use of the asset. D) Under ASPE, it is defined as the sum of the undiscounted cash flows expected from use of the asset. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

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5) Which of the following is correct with respect to the "impairment loss"? A) It is defined as the carrying amount plus recoverable amount under IFRS. B) It is defined as the carrying amount less fair value under ASPE. C) Under IFRS, it is defined as the sum of the undiscounted cash flows expected from use of the asset. D) Under ASPE, it is defined as the sum of the undiscounted cash flows expected from use of the asset. Answer: B Diff: 3 Type: MC Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

6) Which of the following is correct with respect to the "reversal of impairment loss"? A) It is defined as the carrying amount less recoverable amount under IFRS. B) It is defined as the carrying amount less fair value under ASPE. C) It is possible under IFRS if the recoverable amount subsequently rises. D) It is possible under ASPE if the recoverable amount subsequently rises. Answer: C Diff: 3 Type: MC Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

7) Which of the following is correct with respect to the "impairment loss under the revaluation model"? A) All impairment losses flow through the income statement under ASPE. B) All impairment losses flow through the income statement under IFRS. C) All impairment losses flow through the revaluation surplus account under ASPE. D) All impairment losses flow through the revaluation surplus account under IFRS. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

8) Based on the following information, what is the net amount that this equipment should be reported at on BAC's balance sheet at December 31, 2026? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$500,000 300,000 220,000 240,000 10,000

A) $200,000 B) $220,000 C) $230,000 D) $240,000 Answer: A Explanation: A) Asset NBV = ($500,000 - $300,000) = $200,000 which is lower than the recoverable amount; thus, no impairment exists. Diff: 2 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

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9) Based on the following information, what is the net amount that this equipment should be reported at on FlexiHose's balance sheet at December 31, 2026? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$500,000 250,000 220,000 240,000 10,000

A) $220,000 B) $230,000 C) $240,000 D) $250,000 Answer: B Explanation: B) Recoverable amount = higher of VIU and FV - SC which is higher of $220,000 and $240,000 - $10,000 = $230,000 Asset NBV = ($500,000 - $250,000) = $250,000 which is higher than the recoverable amount; impairment exists; report at recoverable amount Diff: 2 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

10) Based on the following information, what is the net amount that this equipment should be reported at in the balance sheet at December 31, 2026? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$500,000 230,000 250,000 240,000 10,00

A) $230,000 B) $240,000 C) $250,000 D) $270,000 Answer: C Explanation: C) Recoverable amount = higher of VIU and FV - SC which is higher of $250,000 and $240,000 - $10,000 = $230,000; Recoverable amount = $250,000 Asset NBV = ($500,000 -$230,000) = $270,000 which is higher than the recoverable amount; impairment exists, thus write down to and report at recoverable amount. Diff: 2 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

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11) Based on the following information, what is the recoverable amount for the impairment test? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$750,000 530,000 230,000 240,000 5,000

A) $220,000 B) $230,000 C) $235,000 D) $240,000 Answer: C Explanation: C) Recoverable amount = higher of VIU and FV - SC, which is higher of $230,000 and $240,000 - $5,000 = $235,000; Recoverable amount = $235,000 Diff: 2 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

12) Based on the following information, what is the impairment amount to be recorded? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$750,000 530,000 230,000 240,000 5,000

A) $0 B) $10,000 C) $15,000 D) $20,000 Answer: A Explanation: A) Recoverable amount = higher of VIU and FV - SC, which is higher of $230,000 and $240,000 - $5,000 = $235,000; Recoverable amount = $235,000 BUT asset NBV = ($750,000 - $530,000) = $220,000 which is lower than the recoverable amount; therefore, no impairment exists. Diff: 3 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

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13) Based on the following information, what is the impairment amount to be recorded? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$750,000 530,000 130,000 140,000 15,000

A) $90,000 B) $125,000 C) $130,000 D) $220,000 Answer: A Explanation: A) Recoverable amount = higher of VIU and FV-SC which is higher of $130,000 and $140,000 - $15,000 = $125,000; recoverable amount = $130,000 Asset NBV = ($750,000 - $530,000) = $220,000 which is higher than the recoverable amount; impairment exists. Impairment = $130,000 – $220,000 = $90,000 Diff: 3 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

14) Based on the following information, what is the net book value of the asset on the December 31, 2026, balance sheet? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$750,000 400,000 300,000 200,000 15,000

A) $185,000 B) $200,000 C) $300,000 D) $350,000 Answer: C Explanation: C) Recoverable amount = higher of VIU and FV-SC which is higher of $300,000 and $200,000 - $15,000 = $185,000. Recoverable amount = $300,000 NBV = $750,000 - $400,000 = $350,000; higher than recoverable; impairment is $350,000 - $300,000 = $50,000; New NBV = $300,000 Diff: 3 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

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15) Based on the following information, what is the recoverable amount? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$750,000 530,000 300,000 200,000 15,000

A) $185,000 B) $200,000 C) $220,000 D) $300,000 Answer: D Explanation: D) Recoverable amount = higher of VIU and FV-SC which is higher of $300,000 and $200,000 - $15,000 = $185,000; Recoverable amount = $300,000 Diff: 3 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

16) Based on the following information, what is the impairment booked at December 31, 2026? Cost Accumulated depreciation Value in use (sum of discounted cash flows) Fair value Disposal costs

$750,000 300,000 300,000 200,000 15,000

A) $150,000 B) $185,000 C) $300,000 D) $450,000 Answer: A Explanation: A) Recoverable amount = higher of VIU and FV-SC which is higher of $300,000 or $200,000 $15,000 = $185,000; recoverable amount = $300,000 NBV = $750,000 - $300,000 = $450,000; higher than recoverable amount; therefore, impairment is $450,000 $300,000 = $150,000. Diff: 3 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

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17) On December 31, 2026, CA Inc. had a machine with an original cost of $20,000 and accumulated depreciation of $5,000. An impairment test on that date indicated that the machine had a value in use of $12,000 and a fair value of $10,000 (no disposal costs). What impairment loss is recorded for fiscal 2026? A) $3,000 B) $5,000 C) $8,000 D) $10,000 Answer: A Explanation: A) ($20,000 - $5,000) - $12,000 = $3,000 Diff: 2 Type: MC Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

18) Explain how an impairment loss is allocated to non-current assets that are part of a cash generating unit. Answer: An enterprise should allocate the impairment loss of a cash generating unit among the assets comprising that unit, in proportion to each asset's carrying value. An exception to proportional allocation occurs when such allocation would result in an asset's carrying amount falling below its recoverable amount, in which case no impairment is attributed to that asset. Diff: 2 Type: ES Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

19) Explain how an impairment loss is recorded for non-current assets. Answer: An impairment loss is recorded by writing down the carrying amount of the asset and recording a loss through profit and loss and retained earnings, except when the enterprise has a revaluation surplus, in which case the loss flows through other comprehensive income to reduce that surplus. Diff: 2 Type: ES Skill: Conceptual Objective: 10.3 Account for the impairment of different types of non-current assets.

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20) Adam's Bikes produces specialized bicycle frames. The production process uses two machines, which together form a cash generating unit (CGU). The following information is relevant to the evaluation of impairment for these machines.

Net carrying value Fair value less costs to sell Value in use

Bending machine Welding machine $550,000 $450,000 380,000 See requirement

Total CGU $1,000,000 See requirement 950,000

Required: a. Assume that the welding machine has a fair value less costs to sell of $420,000. Determine the amount of impairment that should be recorded for the cash generating unit and for each of the two machines. b. Assume that the welding machine has a fair value less costs to sell of $455,000. Determine the amount of impairment that should be recorded for the cash generating unit and for each of the two machines. Answer: a. The total impairment in the cash generating unit is $1,000,000 – $950,000 = $50,000. The bending machine has 55% of the carrying value ($550,000 / $1,000,000), so it bears 55% of the impairment loss, or $27,500. The welding machine absorbs the remaining 45%, or $22,500. b. The total impairment in the cash generating unit is $1,000,000 – $950,000 = $50,000. Since the welding machine's fair value less costs to sell exceeds its carrying amount, it is not impaired. Therefore, the entire impairment must be allocated to the bending machine to reduce its carrying value by $50,000. Diff: 2 Type: ES Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

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21) Stay Dry Raincoats uses three different machines (A, B, and C) to manufacture raincoats. These machines are considered to be a cash generating unit (CGU). Due to climate change and changes in consumer preferences, demand for raincoats has declined in recent years. The following information is relevant to the evaluation of impairment.

Net carrying value Fair value less costs to sell Value in use

A $800,000 1,000,000 NA

B $1,430,000 1,330,000 NA

C $1,170,000 670,000 NA

Total $3,400,000 3,000,000 2,700,000

Required: Determine the amount of impairment loss that should be recorded for the cash generating unit and for each of the three machines. Answer: Note that Machine A is not impaired because its fair value less costs to sell is higher than its carrying value.

Net carrying value Recoverable amount (fair value less costs to sell) Impairment loss Net carrying value Percentage of total carrying value* Total impairment loss Impairment loss allocated

Machine A Machine B Machine C CGU Total $1,000,000 $1,430,000 $1,170,000 $3,400,000 3,000,000 $ $-

400,000

$1,430,000 $1,170,000 $2,600,000 55% 45% 100% × 400,000 × 400,000 × 400,000 $ 220,000 $ 180,000 $ 400,000

*Lower of the net carrying value and fair value less costs to sell. **Percentage of total carrying value: $1,430,000 / ($1,430,000 + $1,170,000) = 55%; $1,170,000 / ($1,430,000 + $1,170,000) = 45%. Diff: 2 Type: ES Skill: Computational Objective: 10.3 Account for the impairment of different types of non-current assets.

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Learning Objective 4 1) What is "agricultural activity"? A) The harvested product of biological assets. B) A living animal or plant. C) The transformation of biological assets. D) Planting, harvesting and marketing produce. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

2) How is income and expense recognized for biological assets under IFRS? A) Changes in fair value. B) Percentage of completion method. C) Completed contract method. D) Cash basis. Answer: A Diff: 1 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

3) Which of the following is correct with respect to the accounting for "investment properties"? A) Under ASPE, either the cost or fair value model may be used. B) Under IFRS, either the cost or fair value model may be used. C) Under ASPE, either the revaluation or fair value model may be used. D) Under IFRS, either the revaluation or fair value model may be used. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

4) Which of the following is correct with respect to "investment properties"? A) These are land or buildings used for production or administrative purposes of the business. B) These are land, buildings or machinery used for production or administrative purposes of the business. C) These are land or buildings used for rental income purposes of the business. D) These are land, buildings or machinery used for rental income purposes of the business. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

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5) Which of the following is correct with respect to the "fair value model"? A) A model that recognizes changes in value of the asset in the statement of changes in equity. B) A model that recognizes changes in value of the asset in the revaluation surplus account. C) A model that recognizes changes in value of the asset in other comprehensive income. D) A model that recognizes changes in value of the asset in profit or loss. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

6) Which of the following is correct with respect to the "fair value model"? A) Depreciation is required annually. B) Depreciation is optional. C) Depreciation is not required. D) Depreciation is required annually when there has been a decline in fair value. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

7) Which of the following is correct with respect to the "fair value model"? A) A model that does not recognize any depreciation expense in the financial statements. B) A model that recognizes depreciation annually in the revaluation surplus account. C) A model that recognizes depreciation annually in the income statement. D) A model that recognizes depreciation annually in the other comprehensive income. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

8) Which of the following is correct with respect to the accounting for "investment properties"? A) Under IFRS, fair values must be disclosed if the cost model is used. B) Under ASPE, fair values must be disclosed if the cost model is used. C) Under IFRS, either the revaluation or fair value model may be used. D) Under ASPE, either the revaluation or fair value model may be used. Answer: A Diff: 3 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

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9) When does agricultural activity end? A) To the point just before harvest. B) To the point of harvest. C) To the point of sale to wholesaler. D) To the point of sale to final customer. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

10) When does agricultural activity end? A) At the acquisition of the biological asset. B) At the point of reproduction of the biological asset. C) At the point of harvest of the biological asset. D) At the point of sale to the wholesaler. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

11) Which statement is correct? A) Agricultural activity relates to the point of harvest and beyond. B) Agricultural activity includes fishing from the open ocean. C) Agricultural activity includes logging from unmanaged forests. D) Agricultural activity involves transforming biological assets. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

12) Which statement is NOT correct? A) Agricultural activity involves growth, degeneration and reproduction. B) Agricultural activity includes processing into the final product. C) Revenue recognition for agricultural produce is covered under the requirements of IAS 18. D) Inventory valuation for agricultural produce is covered under the requirements of IAS 2. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

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13) Which statement is NOT correct? A) Accounting for biological assets is covered by the requirements of IAS 41. B) Biological assets include grapes, milk, wine, cheese and lumber. C) End of processing activities are covered under the requirements of IAS 18. D) Post harvesting processing activities are covered under the requirements of IAS 2. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

14) Which statement is correct? A) Vines are biological assets until they are converted to juice. B) Vines are biological assets until they are converted to wine. C) Trees are biological assets until they are converted to logs. D) Trees are biological assets until they are converted to lumber. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

15) Which statement is NOT correct? A) Biological assets are living animals or plants. B) Biological assets are associated with agricultural activities. C) Agricultural produce is the product of biological assets. D) Agricultural produce is associated with post-harvest activities. Answer: D Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

16) When does an entity use the "cost less any depreciation" approach for biological assets? A) At time of initial recognition upon acquisition. B) If the entity cannot obtain fair value information. C) At time of subsequent measurement on each balance sheet. D) If the entity can obtain fair value information. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

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17) When should an entity select the exception to using "fair value less point of sale costs" approach for biological assets? A) At time of initial recognition upon acquisition. B) If the entity cannot obtain fair value information. C) At time of subsequent measurement on each balance sheet. D) If the entity can obtain fair value information. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

18) Which statement is correct about using the "fair value less point of sale costs" approach for biological assets? A) The exception to "cost less depreciation" can be made at any subsequent measurement date. B) Fair value may not be available for initial recognition, but could be used for subsequent measurement. C) Fair value may be available for initial recognition, but then not be used for subsequent measurement. D) Under this accounting method, fair value can only be higher than cost. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

19) Where are gains and losses on agricultural activity reported in the financial statements? A) Gains are recorded through profit and loss, but losses should be recorded in other comprehensive income. B) Losses are recorded through profit and loss, but gains should be recorded in other comprehensive income. C) Gains and losses are recorded through profit and loss, and nothing should be recorded in other comprehensive income. D) Gains and losses are recorded in other comprehensive income, and nothing should be recorded through profit and loss. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

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20) Explain the meaning of biological assets and agricultural produce. Classify each of the following items as: biological asset, agricultural produce, or neither.

Item Biological asset i. Blueberries ii. Blueberry jam iii. Trees in a virgin (unmanaged) forest iv. Christmas trees on a tree farm v. Peach trees

Agricultural produce

Neither

Answer: Biological assets are living plants and animals used in agricultural activities. Agricultural produce are items harvested from biological assets, but unprocessed.

Item Biological asset i. Blueberries ii. Blueberry jam iii. Trees in a virgin (unmanaged) forest iv. Christmas trees on a tree farm ✓ v. Peach trees ✓

Agricultural produce ✓

Neither ✓ ✓

Diff: 2 Type: ES Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

51 .

21) Explain the meaning of biological assets and agricultural produce. Classify each of the following items as: biological asset, agricultural produce, or neither.

Item i. Salmon in the ocean ii. Farmed salmon iii. Wheat iv. Potted tropical plants in nursery v. Cattle used in breeding

Agricultural Biological asset produce

Neither

Answer: Biological assets are living plants and animals used in agricultural activities. Agricultural produce are items harvested from biological assets, but unprocessed.

Item i. Salmon in the ocean ii. Farmed salmon iii. Wheat iv. Potted tropical plants in nursery v. Cattle used in breeding

Biological asset

Agricultural produce

Neither ✓

✓ ✓ ✓ ✓

Diff: 2 Type: ES Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

22) Explain the accounting for assets related to the agricultural industry. Answer: • Agricultural activities include acquisition, growth, reproduction, and production including harvest. Subsequent processing is not part of agriculture for the purposes of IFRS. • Enterprises should measure agricultural produce at fair value less point-of-sale costs. • Enterprises should measure biological assets at fair value less point-of-sale costs, except in cases where they are unable to reliably measure fair value; in such cases, enterprises should measure biological assets at cost less accumulated depreciation. • Once a biological asset is carried at fair value, it should continue to be carried on that basis. Diff: 2 Type: ES Skill: Conceptual Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

52 .

23) Information about the PPE for Jeffery Inc. is provided below. Determine the balance sheet presentation under the cost and fair value model for each year. Ignore the impact of income taxes and assume that a full year depreciation is taken each year using the straight-line method. In $ millions

Land Building — 20 year useful life Machinery — 5 year useful life

Purchase Price $10

Year 1

Fair value at the end of Year 1

Fair value at the Fair value at the end of Year 2 end of Year 3 $12 $14 $13

4.8

3.5

2.7

Year 2

Year 3

Balance Sheet Land Building Machinery Total Depreciation Net effect on equity for the year

53 .

Answer: Under the cost model:($ millions) Year 1 Balance Sheet Land Building Accumulated depreciation building Net book value - building Machinery Accumulated depreciation machinery

Year 3

$10

(2) 38

(4)

(6)

36 5

34 5

(2)

(3)

3 3

2 3 ($3)

5 (1) 4

Net book value - machinery Total Depreciation Net increase / (decrease) on equity for the year

3 ($3)

($3)

Under the fair value model: ($ million) Year 1 Balance Sheet Land Building Ending Land &Bldg Opening Land & Bldg Gain/ (loss) in fair value

Machinery Total Depreciation Machinery Net increase / (decrease) on equity for the year

Year 2

Year 2 $12 45 57 50 n 7

Year 3 $14 40 54 57 (3)

$13 45 58 54 n 4

Would be the same Would be the same Would be the same as cost model since as cost model since as cost model since fair value model is fair value model is fair value model is not applicable to not applicable to not applicable to this class of PPE this class of PPE this class of PPE $1

($4)

Diff: 2 Type: ES Skill: Computational Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

54 .

24) Information about the PPE for Jeremy Inc. is provided below. The company held the land and building to earn rental income and appropriately applied the fair value model for the land and building. Assume that the company takes a full of depreciation each year under the straight line method. The company decided to use the building as its new head office at the beginning of Year 3. Prepare the journal entries required to record the change in use for Year 3. In $ millions:

Land Building — 20 year useful life Machinery — 5 year useful life

Fair value at the Fair value at the Fair value at the Purchase Price end of Year 1 end of Year 2 end of Year 3 $10 $12 $14 n $13 40

4.8

3.5

2.7

Answer: In $ millions: Dr. Building PPE Cr. Building Investment Property

40 40

Diff: 2 Type: ES Skill: Computational Objective: 10.4 Apply the specialized standards for the recognition and measurement of assets relating to investment properties and agricultural activities.

Learning Objective 5 1) What is a "disposal group"? A) A component of an entity that either has been disposed of or is classified as held for sale. B) A group of assets and liabilities to be disposed of together in a single transaction. C) A component with operations and cash flows distinguishable from the rest of the entity. D) A group of current assets that will be recovered through sale rather than continuing use. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

2) How should a discontinued operation be presented in the financial statements? A) Summary information is presented as well as a subsequent provision of more extensive breakdowns of revenues, expenses, taxes, and financing cash flow figures. B) Separate discussion is not required in the financial statement notes. C) Presentation of separate amounts in the statement of comprehensive income, net of tax. D) Presentation of a single amount in the statement of comprehensive income, before tax. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

55 .

56 .

3) What is a "discontinued operation"? A) A component of an entity that either has been disposed of or is classified as held for sale. B) A component of an entity that has been disposed of or will be sold within one year. C) A component with operations and cash flows that are not distinguishable from the rest of the entity. D) A group of assets and liabilities to be disposed of together in separate transactions. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

4) When is a "disposal group" classified as held for sale? A) When a component of an entity either has been disposed of or is classified as held for sale. B) When the group of assets is both available for sale and expected to sell within a year. C) When a group of assets and liabilities are to be disposed in several transactions. D) When the carrying value for a group of current assets will be recovered through sale rather than continuing use. Answer: B Diff: 2 Type: MC Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

5) How is "discontinued operations" information presented in the financial statements? A) Summary information is presented as well as a subsequent explanation of more extensive breakdowns of revenues, expenses, taxes, and financing cash flow figures. B) A single amount is presented for discontinued operations on the balance sheet. C) The net profit from discontinued operations is presented separately. D) The net gain or loss from disposal of discontinued operations is presented separately. Answer: A Diff: 2 Type: MC Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

6) What information is NOT necessary about discontinued operations in the statement of comprehensive income or in the notes? A) Revenues. B) Expenses. C) Disposal costs. D) Income taxes. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

57 .

7) What is a "component" of an entity? A) A division of an entity that either has been disposed of or is classified as held for sale. B) A group of assets and liabilities to be disposed of together in a single transaction. C) A part of an entity with operations and cash flows distinguishable from the rest of the entity. D) A group of non-current assets that have been disposed or are classified as held for sale. Answer: C Diff: 2 Type: MC Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

8) The following information is available about George Inc.'s discontinued operations: Profit attributable to discontinued operations (before taxes) Net gain on disposal Income taxes attributable to discontinued operations

$1,500,000 200,000 100,000

What single amount will be presented on George's statement of comprehensive income? A) $1,400,000 B) $1,500,000 C) $1,600,000 D) $1,700,000 Answer: C Explanation: C) $1,500,000 + $200,000 - $100,000 = $1,600,000 Diff: 2 Type: MC Skill: Computational Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

9) The following information is available about Fred Inc.'s discontinued operations: Profit attributable to discontinued operations (before taxes) Net loss on disposal Income taxes attributable to discontinued operations

$1,700,000 200,000 100,000

What single amount will be presented on Fred's statement of comprehensive income? A) $1,400,000 B) $1,500,000 C) $1,600,000 D) $1,700,000 Answer: A Explanation: A) $1,700,000 - $200,000 - $100,000 = $1,400,000 Diff: 2 Type: MC Skill: Computational Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

58 .

10) Explain how non-current assets that are part of a discontinued operation should be accounted for. Answer: • Enterprises that have disposed of, or plan to dispose of, assets significant enough to be considered a component of the entity should provide separate presentation and disclosure of the results of the discontinued operations. Diff: 2 Type: ES Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

11) Explain how non-current assets that are held for sale should be accounted for. Answer: • Enterprises should classify non-current assets as held for sale if those assets are available for sale and expected to be sold within one year from the classification date. • Non-current assets held for sale should be tested for impairment, with the recoverable amount defined as fair value less costs to sell. Diff: 2 Type: ES Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

59 .

12) Speakspere Partners is scaling back operations; the partnership has the following assets on its books that it is considering for sale: a. Speakspere has a parcel of land, valued at $1 million, that is currently vacant. The land is located in an area of the city that was undeveloped and Speakspere had purchased it a number of years ago in anticipation of growth. Actual growth has been slower than expected and has in fact been declining since last year. Speakspere is unsure whether a willing buyer can be found under these conditions. b. Speakspere's operations are located in an office building and a separate storage facility. Speakspere owns the land on which these facilities reside. The partnership is able to vacate the storage facility on short notice and there is an active market for similar storage. As for the office, Speakspere plans to continue its operations, and does not foresee vacating the office space in the immediate future. Required: Determine whether Speakspere should present the assets described above as non-current assets held for sale. Be sure to provide any supporting explanation for your conclusions. Answer: Available for Classify as nonCurrent or sale within Expected to sell current assets held Asset non-current year within year for sale Land - vacant Non-current Yes No No Land - occupied Non-current No n/a* No Office Non-current No n/a* No Storage facility Non-current Yes Yes Yes *The partnership plans to continue its operations, so the office and related land is not available for sale. Given this intention, it is not relevant to consider whether these assets could be expected to sell within a year. Diff: 2 Type: ES Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

13) Explain why non-current assets held for sale are recorded at the lower of carrying value and fair value less costs to sell. Answer: Non-current assets held for sale should be recorded at the lower of the two amounts (essentially lower of cost and market) in order to (i) present a realistic estimate of the amount that can be realized from the sale, while (ii) not providing management an opportunity to manage earnings. If managers were allowed to simply use the fair value less costs to sell (rather than the lower of the two amounts), they could potentially classify assets as non-current assets held for sale, in order to recognize gains on non-current assets that have appreciated in value while not having any intention to actually sell these assets. Diff: 2 Type: ES Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

60 .

14) Explain why non-current assets held for sale are valued at fair value less costs to sell rather than at their value in use. Answer: Fair value less costs to sell is the more appropriate measure of market value than value in use because the non-current assets held for sale classification indicates that the enterprise intends to discontinue using these assets and sell them instead. Value in use suggests that the enterprise plans to continue to use the assets, usually for a specified period of time. Diff: 2 Type: ES Skill: Conceptual Objective: 10.5 Apply the accounting standards relating to non-current assets held for sale and discontinued operations.

61 .

Appendix A Financial Statement Analysis and Using Accounting Information to Value a Company TestGen Questions in Word LO A-1 Describe the purpose of common size financial statements and the information they convey. 1) Which of the following statements is correct regarding “common size financial statements”? A) Common size financial statements are a form of benchmarking. B) Common size financial statements are used to evaluate the liquidity of a company. C) Common size financial statements are a type of vertical analysis. D) Common size financial statements are used primarily for horizontal analysis. Answer: C Diff: 1 Type: MC Skill: Concept Objective: A-1 Describe the purpose of common size financial statements and the information they convey. 2) Which of the following practices presents income statement items as a percentage of sales? A) Benchmarking B) Horizontal analysis C) Trend analysis D) Vertical analysis Answer: D. Common-size financial statements, which are a form of vertical analysis, present income statement items as a percentage of sales. Diff: 1 Type: MC Skill: Concept Objective: A-1 Describe the purpose of common size financial statements and the information they convey. 3) Which of the following practices presents balance sheet items as a percentage of total assets? A) Benchmarking B) Horizontal analysis C) Trend analysis D) Vertical analysis Answer: D. Common-size financial statements, which are a form of vertical analysis, present balance sheet items as a percentage of total assets. Diff: 1 Type: MC Skill: Concept Objective: A-1 Describe the purpose of common size financial statements and the information they convey. 4) Use the financial statement information that follows to prepare common size financial statements for Example Company Inc. for 2024 and 2025. Round percentages to one decimal place, e.g. 45.2%. Example Company Inc. Income Statement For the years ended December 31 (in millions of dollars) 2025 2024 Revenue $53,400 $50,100 Cost of goods sold 36,800 32,700 Gross profit Operating expenses

16,600 11,800

17,400 13,100 1 .

Operating profit

4,800

4,300

Interest and finance costs

900

1,000

Income before taxation

3,900

3,300

Income taxes

1,170

990

Net income

$ 2,730

$ 2,310

Example Company Inc. Balance Sheet As at December 31 (in millions of dollars) 2025 Assets Current assets Cash and cash equivalents $ 1,250 Accounts receivable 4,900 Inventories 5,100 Prepaid assets 200

$ 1,200 4,550 4,850 250

Current assets Non-current assets

11,450 36,300

10,850 28,650

Total assets

$47,750 $39,500

Liabilities Current liabilities Accounts payable Other current liabilities

$ 5,350 3,800

$ 4,900 3,700

Current liabilities Long-term indebtedness

9,150 16,000

8,600 9,400

Total liabilities

25,150

18,000

Common shares

1,000

Retained earnings

21,600

20,500

Equity

22,600

21,500

Total liabilities and equity

$47,750 $39,500

2024

Equity

Answer: Example Company Inc. Common Size Income Statement For the years ended December 31 (in millions of dollars) 2025 2025 2024 Revenue Cost of goods sold

$53,400 100.0% 36,800 68.9%

2024

$50,100 100.0% 32,700 65.3% 2 .

Gross profit

16,600

31.1%

17,400

34.7%

Operating expenses

11,800

22.1%

13,100

26.1%

Operating profit

4,800

9.0%

4,300

8.6%

Interest and finance costs

900

1.7%

1,000

2.0%

Income before taxation Income taxes

3,900 1,170

7.3% 2.2%

3,300 990

6.6% 2.0%

Net income

$ 2,730

5.1%

$ 2,310

4.6%

Example Company Inc. Common Size Balance Sheet As at December 31 (in millions of dollars) 2025 2025 2024

2024

Assets Current assets Cash and cash equivalents

$ 1,250

2.6%

$ 1,200

3.0%

Accounts receivable

4,900

10.3%

4,550

11.5%

Inventories

5,100

10.7%

4,850

12.3%

Prepaid assets

200

0.4%

250

0.6%

Current assets

11,450

24.0%

10,850

27.5%

Non-current assets

36,300

76.0%

28,650

72.5%

Total assets

$47,750

100.0% $39,500

100.0%

Accounts payable

$ 5,350

11.2%

$ 4,900

12.4%

Other current liabilities

3,800

8.0%

3,700

9.4%

Current liabilities

9,150

19.2%

8,600

21.8%

Long-term indebtedness

16,000

33.5%

9,400

23.8%

Total liabilities

25,150

52.7%

18,000

45.6%

Common shares

1,000

2.1%

1,000

2.5%

Retained earnings

21,600

45.2%

20,500

51.9%

Equity

22,600

47.3%

21,500

54.4%

Total liabilities and equity

$47,750

100.0% $39,500

100.0%

Liabilities Current liabilities

Equity

Diff: 2 Type: SA Skill: Concept Objective: A-1 Describe the purpose of common size financial statements and the information they convey.

3 .

A-2 Describe the purpose of ratio analysis and the information the output conveys. 1) The return on common equity (ROCE) ratio is an example of what type of ratio? A) Liquidity ratio B) Profitability ratio C) Solvency ratio D) Credit risk ratio Answer: B Profitability ratio Diff: 1 Type: MC Skill: Concept Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys. 2) Complete the table below by categorizing each ratio as a liquidity ratio, a profitability ratio, or a solvency ratio. Ratio Category of ratio Accounts payable turnover ratio Accounts receivable turnover ratio Current ratio Earnings per share (EPS) Gross (profit) margin Interest coverage ratio Inventory turnover ratio Long-term debt to equity ratio Profit margin on sales Quick ratio Return on assets Return on equity Answer: Ratio Accounts payable turnover ratio Accounts receivable turnover ratio Current ratio Earnings per share (EPS) Gross (profit) margin Interest coverage ratio Inventory turnover ratio Long-term debt to equity ratio Profit margin on sales Quick ratio Return on assets Return on equity

Category of ratio Liquidity ratio Liquidity ratio Liquidity ratio Profitability ratio Profitability ratio Solvency ratio Liquidity ratio Solvency ratio Profitability ratio Liquidity ratio Profitability ratio Profitability ratio

Diff: 1 Type: SA Skill: Concept Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys. Exhibit A-1 4 .

Example Company Inc. Income Statement For the years ended December 31 (in millions of dollars) Revenue

2025 $53,400

2024 $50,100

Cost of goods sold

36,800

32,700

Gross profit

16,600

17,400

Operating expenses

11,800

13,100

Operating profit Interest and finance costs

4,800 900

4,300 1,000

Income before taxation Income taxes

3,900 1,170

3,300 990

Net income

$ 2,730

$ 2,310

Example Company Inc. Balance Sheet As at December 31 (in millions of dollars) 2025 Assets Current assets Cash and cash equivalents $ 1,250 Accounts receivable 4,900

$ 1,200 4,550

Inventories Prepaid assets

5,100 200

4,850 250

Current assets Non-current assets

11,450 36,300

10,850 28,650

Total assets

$47,750 $39,500

Liabilities Current liabilities Accounts payable

$ 5,350

$ 4,900

Other current liabilities

3,800

3,700

Current liabilities Long-term indebtedness

9,150 16,000

8,600 9,400

Total liabilities

25,150

18,000

Common shares

1,000

Retained earnings

21,600

20,500

Equity

22,600

21,500

Total liabilities and equity

$47,750 $39,500

2024

Equity

5 .

3) Use the information in Exhibit A-1 to calculate the return on assets (ROA) ratio for 2025 using operating profit margin and asset turnover. For interim and final calculations, round dollar-based calculations to the nearest whole dollar, round percentages to four decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6). Answer: Net operating profit after taxes (NOPAT) for the year ended December 31, 2025 = Net income + Interest expense × (1 – Tax rate) = $2,730 + $900 × (1 – $1,170 / $3,900) = $3,360. Operating profit margin for the year ended December 31, 2025= NOPAT / Sales = $3,360 / $53,400 = 6.29%. Asset turnover for the year ended December 31, 2025 = Sales / Average assets = $53,400 / (($47,750 + $39,500) / 2) = 122.41%. Return on assets (ROA) for the year ended December 31, 2025 = Operating profit margin × Asset turnover = 6.29% × 122.41% = 7.70%. Diff: 2 Type: SA Skill: Comp Objective: A-2 Describe the purpose of ratio analysis and the information conveyed by the output. 4) Use the information in Exhibit A-1 to calculate the return on common equity (ROCE) ratio for 2025 using operating earnings leverage, return on assets (ROA), and financial leverage. Assume ROA for the year was 7.70%. For the interim and final calculations, round dollar-based calculations to the nearest whole dollar, round percentages to four decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6). Answer: Net operating profit after taxes (NOPAT) for the year ended December 31, 2025 = Net income + Interest expense × (1 – Tax rate) = $2,730 + $900 × (1 – $1,170 / $3,900) = $3,360. Earning leverage for the year ended December 31, 2025 = Income available to common shareholders / NOPAT = $2,730 / $3,360 = 81.25%. ROA for the year ended December 31, 2025 = 7.70% from facts in question. Financial leverage for the year ended December 31, 2025 = Average assets / Average common equity = (($47,750 + $39,500) / 2) / (($22,600 + $21,500) / 2) = $43,625 / $22,050 = 197.85%. ROCE for the year ended December 31, 2025 = Earnings leverage × ROA × Financial leverage = 81.25% × 7.70% × 197.85% = 12.38%. Diff: 2 Type: SA Skill: Comp Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys. 5) Use the information in Exhibit A-1 to calculate the ratios listed below for 2025: i) Current ratio ii) Quick ratio iii) Accounts receivable turnover ratio iv) Inventory turnover ratio v) Accounts payable turnover ratio Use sales and cost of goods sold as proxies for credit sales and purchases, respectively. Round ratios to one decimal place (e.g. 1.6). Answer: i) The current ratio as at December 31, 2025 = Current assets / Current liabilities = $11,450 / $9,150 = 1.3:1. ii) The quick ratio as at December 31, 2025 = (Cash + Accounts receivable) / Current liabilities = ($1,250 + $4,900) / $9,150 = 0.7:1. iii) The accounts receivable turnover ratio for the year ended December 31, 2025 = Credit sales / Average accounts receivables = $53,400 / (($4,900 + $4,550) / 2) = 11.3 turns per year. iv) The inventory turnover ratio for the year ended December 31, 2025 = Cost of goods sold / Average inventory = $36,800 / (($5,100 + $4,850) / 2) = 7.4 turns per year. v) The accounts payable turnover ratio for the year ended December 31, 2025 = Purchases / Average accounts payable = $36,800 / (($5,350 + $4,900) / 2) = 7.2 turns per year. Diff: 2 Type: SA 6 .

Skill: Comp Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys. 6) Use the information in Exhibit A-1 to calculate the ratios listed below for 2025: i) Long-term debt to equity ratio ii) Interest coverage ratio Round ratios to one decimal place (e.g. 1.6). Answer: i) The long-term debt to equity ratio as at December 31, 2025 = Long-term debt / Shareholder’s equity = $16,000 / $22,600 = 0.7:1. ii) The interest coverage ratio for the year ended December 31, 2025 = Earnings before interest and taxes (EBIT) / Interest expense = $4,800 / $900 = 5.3:1. Diff: 2 Type: SA Skill: Comp Objective: A-2 Describe the purpose of the ratio analysis and the information conveyed by the output.

Exhibit A-2 Gretta Company Inc. Income Statement For the years ended December 31 (in millions of dollars) 2025 2024 Revenue $53,400 $50,100 Cost of goods sold 36,800 32,700 Gross profit Operating expenses

16,600 11,800

17,400 13,100

Operating profit Interest and finance costs

4,800 900

4,300 1,000

Income before taxation Income taxes

3,900 1,170

3,300 990

Net income

$ 2,730

$ 2,310

Gretta Company Inc. Balance Sheet As at December 31 (in millions of dollars) Assets

2025

2024

Current assets Cash and cash equivalents

$ 1,250

$ 1,200

Accounts receivable Inventories

4,900 5,100

4,550 4,850

Prepaid assets

200

250

Current assets

11,450

10,850 7 .

Non-current assets

36,300

28,650

Total assets

$47,750 $39,500

Liabilities Current liabilities Accounts payable

$ 5,350

$ 4,900

Other current liabilities

3,800

3,700

Current liabilities Long-term indebtedness

9,150 16,000

8,600 9,400

Total liabilities

25,150

18,000

Preferred shares

100

Common shares

900

Retained earnings

21,600

20,500

Equity

22,600

21,500

Total liabilities and equity

$47,750 $39,500

Equity

7) Refer to Exhibit A-2. Other information: Dividends of $100 million were declared and paid during the year, with $90 million to the common shareholders and $10 million to the preferred shareholders. For the interim and final calculations, round dollar-based calculations to the nearest whole dollar, round percentages to four decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6). What was Gretta Company Inc.’s return on assets (ROA) ratio for 2025 calculated using operating profit margin and asset turnover? A) 7.03% B) 7.47% C) 7.70% D) 8.32% Answer: C Explanation: A) You used the company’s assets as at December 31, 2025, rather than its average assets for the year when calculating financial leverage. B) You deducted dividends declared and paid from net operating profit after taxes when calculating NOPAT. C) Net operating profit after taxes (NOPAT) for the year ended December 31, 2025 = Net income + Interest expense × (1 – Tax rate) = $2,730 + $900 × (1 – $1,170 / $3,900) = $3,360. Operating profit margin for the year ended December 31, 2025 = NOPAT / Sales = $3,360 / $53,400 = 6.29%. Asset turnover for the year ended December 31, 2025 = Sales / Average assets = $53,400 / (($47,750 + $39,500) / 2) = 122.41%. Return on assets (ROA) for the year ended December 31, 2025 = Operating profit margin × Asset turnover = 6.29% × 122.41% = 7.70%. D) You neglected to multiply interest expense by (1 – Tax rate) when calculating NOPAT. Diff: 2 Type: MC Skill: Comp Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys. 8) Refer to Exhibit A-2. Other information: Assume that ROA for the year was 7.70%. Dividends of $100 million were declared and paid during the year, with $90 million to the common shareholders and $10 million to the preferred shareholders. For the interim and final calculations, round dollar-based 8 .

calculations to the nearest whole dollar, round percentages to four decimal places (e.g. 0.1351, or 13.51%), and round ratios to one decimal place (e.g. 1.6). What was Gretta Company Inc.’s return on common equity (ROCE) ratio for 2025 calculated using earnings leverage, ROA, and financial leverage? A) 11.47% B) 12.33% C) 12.39% D) 12.43% Answer: C Explanation: A) You neglected to multiply interest expense by (1 – Tax rate) when calculating NOPAT. B) You neglected to deduct the preferred shares when calculating average common equity. C) Net operating profit after taxes (NOPAT) for the year ended December 31, 2025 = Net income + Interest expense × (1 – Tax rate) = $2,730 + $900 × (1 – $1,170 / $3,900) = $3,360. Earning leverage for the year ended December 31, 2025 = Income available to common shareholders / NOPAT = ($2,730 – $10) / $3,360 = 80.95%. ROA for the year ended December 31, 2025 = 7.70% from facts in question. Financial leverage for the year ended December 31, 2025 = Average assets / Average common equity = (($47,750 + $39,500) / 2) / (($22,600 – $100 + $21,500 – $100) / 2) = $43,625 / $21,950 = 198.75%. ROCE for the year ended December 31, 2025 = Earnings leverage × ROA × Financial leverage = 80.95% × 7.70% × 198.75% = 12.39%. D) You neglected to deduct the preferred dividends when calculating net income available to the common shareholders. Diff: 2 Type: MC Skill: Comp Objective: A-2 Describe the purpose of ratio analysis and the information the output conveys.

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LO A-3 Describe some challenges faced by financial statement analysts. 1) List three of the most significant limitations of financial statement analysis. Answer: Three of the most significant limitations of financial statement analysis are: (i) the numbers do not tell the whole story; (ii) the company’s choice of accounting policies and estimates matter; and (iii) the scarcity of directly comparable results. Diff: 1 Type: SA Skill: Concept Objective: A-3 Describe some challenges faced by financial statement analysts.

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LO A-4 Describe different methods of using accounting information to value a company. 1) Use the financial statement information that follows to calculate the value of a common share of Pippa Company Inc. as at December 31, 2025, using the book value method. There were 1,000 million common shares outstanding at the December 31, 2025, year-end. Pippa Company Inc. Balance Sheet As at December 31 (in millions of dollars) 2025 Assets Current assets Cash and cash equivalents $ 1,250

$ 1,200

Accounts receivable Inventories Prepaid assets

4,900 5,100 200

4,550 4,850 250

Current assets

11,450

10,850

Non-current assets

36,300

28,650

Total assets

$47,750 $39,500

Liabilities Current liabilities Accounts payable Other current liabilities

$ 5,350 3,800

$ 4,900 3,700

Current liabilities Long-term indebtedness

9,150 16,000

8,600 9,400

Total liabilities

25,150

18,000

Preferred shareholders

100

Common shareholders Retained earnings

5,000 17,500

4,500 16,900

Equity

22,600

21,500

Total liabilities and equity

$47,750 $39,500

2024

Equity

Answer: $22,600 million total equity − $100 million preferred equity = $22,500 million common equity; $22,500 million equity / 1,000 million shares outstanding = $22.50 per share Diff: 1 Type: SA Skill: Comp Objective: A-4 Describe different methods of using accounting information to value a company. 2) Calculate the value of a common share of Sample Company Ltd. as at December 31, 2025, using the expected future dividend model if dividends at t = 0 were $0.50 per share, the expected growth rate of dividends was 3% per annum, and the cost of capital was 6%. 11 .

Answer: ValueDiv =E(DPS1) / (r – g) = (DPS0 × (1 + g)) / (r − g) = ($0.50 × (1 + 0.03)) / (0.06 − 0.03) = $17.17 per share. Diff: 1 Type: SA Skill: Comp Objective: A-4 Describe different methods of using accounting information to value a company. 3) Calculate the value of a common share of Libby Company Inc. as at December 31, 2025, by using the earnings multiple model if earnings per share (EPS) at t = 0 were $2.87, the expected growth rate was 4% per annum, and the cost of capital was 6%. Answer: Earnings multiple = (1 + g)) / (r − g) = (1 + 0.04) / (0.06 − 0.04) = 52.0; ValueEarn = (EPS0 × (1 + g)) / (r − g) = EPS0 × Earnings multiple = $2.87  52.0 = $149.24 per share. Diff: 2 Type: SA Skill: Comp Objective: A-4 Describe different methods of using accounting information to value a company. 4) What was the value of a common share of Ample Company Inc. as at December 31, 2025, using the free cash flow model? Round present value and future cash flow calculations to the nearest whole dollar (in millions of dollars). Free cash flow (in millions of dollars) 2026 $320 2027 340 2028 380 2029 Increasing at 5% per year from the amount on December 31, 2028 Other information Cash flows Occur at the end of the year Common shares outstanding (in millions) Average in 2025—90; as at December 31, 2025—100 Appropriate discount rate 7% A) $161.26 B) $171.91 C) $180.96 D) $208.56 Answer: B Explanation: A) You discounted the present value of the growing perpetuity (cash flows from 2029 and onward) by a factor of 1.074 rather than 1.073. The present value of a growing perpetuity at the beginning of 2029 for payments commencing at the end of 2029 is (CF1/ (r − g)). In this example, the first payment of the growing annuity is due at the end of 2029, or three years after the end of Year 2026. Therefore, the present value of this payment stream needs to be brought back three years, hence the discount factor of 1.073. B) Year Free cash flow Calculations Present value 2026 $320 CF1/ (1 + r) = $320 / 1.07 $299 2027 340 CF2/ (1 + r)2 = $340 / 1.072 297 2028 380 CF3/ (1 + r)3 = $380/ 1.073 310 3 3 2029 *399 (CF4/ (r − g)) / (1 + r) = ($399,000 / (0.07 − 0.05)) / 1.07 ** 16,285 Company value as at December 31, 2025 $17,191 Number of common share outstanding as at December 31, 2025 100 Value per common share $17,191 (million) / 100 (million) $171.91 * $380,000 × (1 + 5%) = $399,000 ** Note that the present value of a growing perpetuity at the beginning of 2029 for payments commencing at the end of 2029 is (CF1/ (r − g). In this example, the first payment of the growing annuity is due at the end of 2029, or three years after the end of 2026. Therefore, 12 .

the present value of this payment stream needs to be brought back three years, hence the discount factor of 1.073. C) You used the average number of shares outstanding during the year, rather than the number of shares outstanding at the end of the year. The company is being valued on a per share basis at a point in time, so it is appropriate to use the number of shares outstanding at that time. D) You neglected to discount the value of the growing perpetuity, which commences in 2029, back to the valuation date of December 31, 2025.The present value of a growing perpetuity at the beginning of 2029 for payments commencing at the end of 2029 is (CF1/ (r − g). In this example, the first payment of the growing annuity is due at the end of 2029, or three years after the end of Year 2026. Therefore, the present value of this payment stream needs to be brought back three years, hence the discount factor of 1.073. Diff: 3 Type: MCQ Skill: Comp Objective: A-4 Describe different methods of using accounting information to value a company. 5) What was the value of a common share of Gidget Company Inc. as at December 31, 2025, using the residual income model? Round present value and future cash flow calculations to the nearest whole dollar (in millions of dollars). Residual income (in millions of dollars) 2026 $15 2027 30 2028 25 2029 Increasing at 4% per year from the amount on December 31, 2028 Other information Book value of company (in millions of dollars) $600 Cash flows Occur at the end of the year Common shares outstanding (in millions) Average in 2025—210; as at December 31, 2025—200 Appropriate discount rate 8% A) $5.60 B) $5.69 C) $5.88 D) $6.55 Answer: C Explanation: A) You used the average number of shares outstanding during the year, rather than the number of shares outstanding at the end of the year. The company is being valued on a per share basis at a point in time, so it is appropriate to use the number of shares outstanding at that time. B) You discounted the present value of the growing perpetuity (cash flows from 2029 and onward) by a factor of 1.084 rather than 1.083. The present value of a growing perpetuity at the beginning of 2029 for payments commencing at the end of 2029 is (CF1/ (r − g)). In this example, the first payment of the growing annuity is due at the end of 2029, or three years after the end of Year 2026. Therefore, the present value of this payment stream needs to be brought back three years, for the discount factor of 1.083. C) Year Residual income Calculations Present value 2026 $15 RI1 / (1 + r) = $15 / 1.08 $14 2 2 2027 $30 RI2 / (1 + r) = $30 / 1.08 26 2028 $25 RI3 / (1 + r)3 = $25 / 1.083 20 2029 and thereafter *$26 (RI4 / (r − g)) / (1 + r)3 = ($26 / (0.08 − 0.04)) / 1.083** 516 Book value of company as at December 31, 2025 600 Company value as at December 31, 2025 $1,176 Number of common share outstanding as at December 31, 2025 200 Value per common share $1,176 (million) / 200 (million) $5.88 13 .

* $25 × (1 + 4%) = $26 ** Note that the present value of a growing perpetuity at the beginning of 2029 for payments commencing at the end of 2029 is (RI1 / (r − g)). In this example, the first payment of the growing annuity is due at the end of 2029, or three years after the end of 2026. Therefore, the present value of this payment stream needs to be brought back three years, hence the discount factor of 1.083. D) You neglected to discount the value of the growing perpetuity, which is to be commenced in 2029, back to the valuation date of December 31, 2025. The present value of a growing perpetuity at the beginning of 2029 for payments commencing at the end of 2029 is (CF1/ (r − g)). In this example, the first payment of the growing annuity is due at the end of 2029, or three years after the end of Year 2026. Therefore, the present value of this payment stream needs to be brought back three years, hence the discount factor of 1.083. Diff: 3 Type: MCQ Skill: Comp Objective: A-4 Describe different methods of using accounting information to value a company.

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Appendix B TestGen Questions in Word L.O. B-1 Describe the purpose of data analytics. 1. What is the overarching purpose of data analytics? A) Use digital tools to sift through data B) Detect opportunities to enhance profitability C) Analyze information to guide business decision-making D) Transform vast amounts of unstructured data into structured data Answer: C Diff: 2 Type: MC Skill: Concept Objective: B-1 Describe the purpose of data analytics. L.O. B-2 Explain the importance of data analytics to the future of accounting. 1. What is the ability to acquire, transform, visualize, and analyze data? A) The most important ability an accountant can have B) An integral part of an accountant’s skillset C) An ability that should be performed by data analysis professionals and subsequently interpreted by accountants. D) It is an ability that isunimportant until an accountant becomes a Controller or Chief Financial Officer (CFO). Answer: B Diff: 2 Type: MC Skill: Concept Objective: B-2 Explain the importance of data analytics to the future of accounting.

L.O. B-3 Define fundamental data concepts. 1. Which of the following is considered “structured” data? A) Email B) A trial balance C) Supplier invoices D) A corporate website Answer: B Diff: 2 Type: MC Skill: Concept Objective: B-3 Define fundamental data concepts. 2. As corporate Controller, you are reconciling inventory at the end of the quarter. You ask the warehouse manager to provide you with an up-to-date list of inventory. He takes a piece of paper and pencil, quickly writes down a few notes, hands the paper to you, and says “Here’s my best guess.” Which of the five “Vs” of Big Data is most at risk in this situation? 1 .

A) Velocity B) Volume C) Variety D) Veracity Answer: D Diff: 2 Type: MC Skill: Concept Objective: B-3 Define fundamental data concepts. 3. The CFO of your organization has asked you to provide up-to-date weekly profitability updates, but you only receive actual revenue results on a monthly basis. Which of the five “Vs” of Big Data is causing an issue in this situation? A) Velocity B) Volume C) Variety D) Veracity Answer: A Diff: 2 Type: MC Skill: Concept Objective: B-3 Define fundamental data concepts.

L.O. B-4 Explain the primary technical steps used in the data analytics process. 1. Your boss says to you, “We’ve just received a massive amount of unstructured data. I need you to organize these data so they can be of use to us.” Which stage of the ETL process is your boss asking you to complete? A) Load B) Process C) Extract D) Transform Answer: D Diff: 2 Type: MC Skill: Concept Objective: B-4 Explain the primary technical steps used in the data analytics process. 2. When performing data analytics, what is the process of removing unneeded data? A) Data cleansing B) Data extraction C) Data removal D) Data validation Answer: A Diff: 2 Type: MC 2 .

Skill: Concept Objective: B-4 Explain the primary technical steps used in the data analytics process.

L.O. B-5 Tell a story to effectively guide data analysis to address a variety of business issues. 1. Which of the following statements is true? A) The best insights from data analysis are achieved by examination of raw data. B) Data analysts should create a clear objective and subsequently use the objective to measure the success of revised data-driven business strategies. C) The mission statement of a company is irrelevant if decisions are made on a division-level basis rather than a company-wide basis. D) Once a company has implemented a revised strategy based on data-driven results, the data analytics process is complete. Answer: B Diff: 2 Type: MC Skill: Concept Objective: B-5 Tell a story to effectively guide data analysis to address a variety of business issues.

2. The CEO of an airline has asked you to prepare a chart that examines whether there is a relationship between revenues and air miles travelled in a year. Which of the following charts would best visualize this assessment? A) Scatter plot B) Histogram C) Stacked bar chart D) Bubble chart Answer: A Diff: 2 Type: MC Skill: Concept Objective: B-5 Tell a story to effectively guide data analysis to address a variety of business issues.

3 .

L.O. B-6 Explain why skepticism is important in data analytics. 1. You are considering investing in a company and management presents you with this impressive chart:

Based on this chart, what do you determine? A) This company is experiencing rapid growth since profitability has doubled from 2015 to 2021. B) This company is experiencing significant dependable growth since profitability is steadily increasing in large increments each year. C) The information provided in this chart by the company is misleading since the chart’s scale is not defined. D) This company is committing fraud. Answer: C Diff: 2 Type: MC Skill: Concept Objective: B-6 Explain why skepticism is important in data analytics.

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