Professional Documents
Culture Documents
Week 1:
AP1-8
a. CL
b. SI
c. CL This account is created when a company receives cash from a customer but has not
yet provided a good or service. The company has an obligation to provide the good or
service.
d. NCA
e. CA
f. SI
g. SCF
h. SI & SCF. The interest paid would be an expense on the statement of income.
i. SC
j. CA
k. NCL
AP1-14
a. SFP
b. SI
c. SFP
d. SFP
e. SI
f. SI
g. Neither (would be a cash inflow in the financing section of the statement of cash flows).
The Common Shares account on the statement of financial position would increase by the
amount of cash received, but the total value would also include cash received from shares
issued previously.
h. SFP
i. SI
j. SFP
[Notice that none of the items appear on both the SFP and the SI. This is because the nature
of these statements is different. The SFP shows balances at a point in time, while the SI
shows what happened to a company over a period of time].
RI1-3
At December 31, 2013, Ten Peaks total assets of $30,968 were financed by liabilities of
$8,459 and equity of $22,509. Approximately 72.7% of Peaks assets were financed by
shareholders, while 27.3% were financed using debt.
c.
In 2013, Ten Peaks had a net cash outflow of $4,181 from financing activities (the company
paid dividends and repaid debt principal) and a net cash outflow of $370 for investing
activities (the company purchased plant and equipment).
d.
AP2-8
AP2-8
Assets
Date
Jan
1
Cash
12,500
22,000
A/R
Inv.
Equip.
24,700
(4,000)
15
16,000
A/P
Wages
Payable
S/H Equity
Loan
Payable
12,500
Common
Shares
R/E
Rev/
Exp/
DD
25,000
Rev
(14,000)
Exp
22,000
15
Liabilities
24,700
8,000
9,000
(14,000)
4,000
19
(15,000)
25
7,800
27
(7,800)
10,500
28
28
(15,000)
(7,600)
(2,200)
200
28
800
AP2-15
$15,000 x 6% = $900
($10,000 - $1,000) 6 = $1,500
AP2-29
a. Sales revenue
$69,900
Less expenses:
Cost of goods sold
Wage expense
Rent expense
Advertising expense
Utilities expense
Interest expense
Depreciation expense
Miscellaneous expenses
Total expenses
Net income
$34,900
26,000
3,600
800
300
100
500
400
66,600
$ 3,300
10,500
Rev
(7,600)
Exp
(2,400)
Exp
(800)
Exp
b.
Beginning balance
Plus: Net income
Less: Dividends declared
Ending balance
c.
0
3,300
1,200
$ 2,100
$3,500
2,500
300
8,000
14,300
5,000
Total Assets
$19,300
$2,000
400
2,400
4,800
7,200
Shareholders equity
Common shares
Retained earnings
Total Shareholders equity
10,000
2,100
12,100
$19,300
AP3-4
1. DR Prepaid Insurance (A)
CR Cash(A)
2. DR Inventory (A)
CR Accounts Payable (L)
1,800
1,800
140,000
140,000
3. DR Cash (A)
DR Accounts Receivable (A)
CR Sales Revenue (SE)
40,000
160,000
110,000
5. DR Cash (A)
CR Accounts Receivable (A)
140,000
6.
DR Cash (A)
CR Unearned Revenue (L)
200,000
140,000
25,000
7. DR Equipment (A)
CR Cash(A)
CR Notes Payable (L)
140,000
44,000
12,000
1,500
3,000
2,500
110,000
25,000
40,000
100,000
44,000
12,000
1,500
3,000
120,000
20,000
4,000
2,500
120,000
20,000
4,000
AP3-6
a.
1. DR Cash (A)
CR Common Shares (SE)
200,000
2. DR Inventory (A)
CR Accounts Payable (L)
475,000
640,000
200,000
475,000
380,000
4. DR Cash (A)
CR Accounts Receivable (A)
580,000
430,000
640,000
380,000
580,000
430,000
6. DR Vehicles (A)
CR Cash (A)
36,000
24,000
2,000
20,000
36,000
26,000
18,000
2,000
2,000
6,000
2,000
6,000
Cash
0
200,000
580,000
Accounts Receivable
Bal.
0
430,000
36,000
(5)
(6)
(3)
640,000
580,000
(4)
26,000
18,000
6,000
(7)
(8)
(10)
Bal. 60,000
Bal. 264,000
Prepaid Rent
0
2,000
Bal.
(7)
Bal.
Bal.
(2)
Bal.
2,000
Inventory
0
475,000
380,000
Vehicles
(3)
95,000
Bal.
(6)
0
36,000
Bal.
36,000
430,000
Bal.
0
475,000
2,000
Bal.
(2)
(8)
47,000
Bal.
Common Shares
0
200,000
Bal.
(1)
200,000
Bal.
Retained Earnings
0
Bal.
Dividends Declared
Bal.
0
(10)
6,000
Bal.
Sales Revenue
6,000
0
640,000
Bal.
(3)
640,000
Bal.
Bal.
380,000
Bal.
(7)
Rent Expense
0
24,000
Operating Expense
Bal.
0
(8)
20,000
Bal.
24,000
Bal.
Bal.
(9)
Bal.
Depreciation Expense
0
2,000
2,000
20,000
c.
Sweet Dreams Chocolatiers Ltd.
Trial Balance
December 31, 2016
Cash
Accounts receivable
Prepaid rent
Inventory
Vehicles
Accumulated depreciation, vehicles
Accounts payable
Common shares
Retained earnings
Dividends declared
Sales revenue
Cost of goods sold
Rent expense
Operating expense
Depreciation expense
Debit
$264,000
60,000
2,000
95,000
36,000
Credit
$2,000
47,000
200,000
-06,000
640,000
380,000
24,000
20,000
2,000
$889,000
$889,000
AP3-28
In 2016, the company did not prepare the following entry:
DR Wage Expense (SE)
3,000
CR Wages Payable (L)
3,000
The company did make and post the following entry in 2017:
DR Wage Expense (SE)
3,000
CR Cash (A)
3,000
b.
c.
66,373
34,724
( 10,305)
$90,792
Because the company has an opening balance in its Retained Earnings account, we know
that:
1. This is not its first year of operations;
2. The company has been profitable;
3. The companys profits have exceeded the dividends declared that have been
declared in past years; and.
4. The shareholders equity is larger than the capital originally contributed to the
company for the shareholders ownership interests (common shares). The additional
net assets (equity) were generated by inflows of net assets from revenues in excess
of the outflow of net assets for expenses in operating the business.
(in $000s)
DR Depreciation Expense (SE)
CR Accumulated Depreciation, Production
Equipment (XA)
CR Accumulated Depreciation, Buildings (XA)
CR Accumulated Depreciation, Computer
Equipment (XA)
7,035
6,006
213
816
d.
High Liner Foods would likely prepay its insurance costs on its property, plant and
equipment and inventory, and its rent payments for non-owned space it uses. Because
both insurance and rent relate to specific periods of time, these costs would be
expensed as time passes and the services covered by the costs are used up.
AP3-21
a. Perfect Pizza: Journal Entries
1. DR Inventory (A)
CR Accounts Payable (L)
230,000
2. DR Cash (A)
DR Accounts Receivable (A)
CR Sales Revenue
510,000
40,000
3. DR Wages Expense
DR Wages Payable (L)
CR Cash (A)
103,000
2,000
DR Utilities Expense
CR Cash (A)
25,000
220,000
5. DR Cash (A)
CR Accounts Receivable (A)
b.
230,000
550,000
105,000
25,000
220,000
50,000
50,000
225,000
15,000
225,000
15,000
Adjusting entries
8. DR Rent Expense
CR Prepaid Rent (A)
1,500
9. DR Wages Expense
CR Wages Payable (L)
2,500
7,500
1,500
2,500
7,500
12,000
12,000
33,000
510,000
50,000
220,000
Accounts
105,000
25,000
(4)
15,000
(3)
(3)
Bal.
(2)
15,000
40,000
Receivable
50,000
(5)
5,000
(7)
228,000
Inventory
10,000
230,000 225,000 (6)
Bal.
(1)
Bal.
15,000
1,500
Equipment
Bal.
60,000
30,000
7,500
60,000
80,000
48,000
Wages Payable
(3)
2,000
2,000
Bal.
0
2,500
(9)
2,500
Accounts Payable
220,000
(4)
Bal.
(10)
37,500
Vehicles
80,000
Bal.
Prepaid Rent
3,000
(8)
1,500
7,000
230,000
Bal.
(1)
17,000
Common Shares
110,000
Retained Earnings
16,000
Bal.
110,000
(CE)
Bal.
16,000
15,000 173,500 (CE)
174,500
Dividends Declared
Bal.
0
(7)
15,000
15,000
15,000
(CE)
0
Income Summary
Bal.
0
550,000 (CE)
(CE) 376,500
173,500
(CE) 173,500
0
Sales Revenue
550,000
(CE)
225,000
550,000
225,000 (CE)
0
Bal.
(3)
Wages Expense
0
103,000
(9)
103,000
2,500
Bal.
(3)
Utilities Expense
0
25,000
25,000
25,000 (CE)
225,000
105,500
0
105,500 (CE)
0
Bal.
Rent Expense
0
(8) 1,500
1,500
Bal.
(10)
(11)
1,500 (CE)
Depreciation Expense
0
7.500
12,000
19,500
19,500 (CE)
0
0
d.
Perfect Pizza
Adjusted Trial Balance
December 31, 2016
Cash
Accounts receivable
Inventory
Prepaid rent
Equipment
Accumulated depreciation, equipment
Vehicles
Accumulated depreciation, vehicles
Accounts payable
Wages payable
Common shares
Retained earnings
Dividends declared
Sales revenue
Cost of goods sold
Wages expense
Utilities expense
Rent expense
Depreciation expense
e.
Debit
$ 228,000
5,000
15,000
1,500
60,000
80,000
15,000
225,000
105,500
25,000
1,500
19,500
$781,000
Credit
37,500
48,000
17,000
2,500
110,000
16,000
550,000
$781,000
Perfect Pizza
Statement of Income
For the year ended December 31, 2016
Sales revenue
Expenses
Cost of goods sold
Wages expense
$550,000
$225,000
105,500
Utilities expense
Rent expense
Depreciation expense
Total expenses
25,000
1,500
19,500
376,500
Net income
f.
$173,500
DR Sales Revenue
CR Income Summary
550,000
DR Income Summary
CR Cost of Goods Sold
CR Wages Expense
CR Utilities Expense
CR Rent Expense
CR Depreciation Expense
376,500
DR Income Summary
CR Retained Earnings
173,500
550,000
225,000
105,500
25,000
1,500
19,500
173,500
15,000
15,000
[NOTE: The first three closing entries above which use an Income summary account,
could be combined together. Also the Income summary is not necessary, as it is
created and then reduced to zero when Retained earnings is updated. That is:
DR Sales Revenue
CR Cost of Goods Sold
CR Wages Expense
CR Utilities Expense
CR Rent Expense
CR Depreciation Expense
CR Retained Earnings
550,000
225,000
105,500
25,000
1,500
19,500
173,500
g.
Perfect Pizza
Statement of Financial Position
As at December 31, 2016
Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid rent
Total current assets
$ 228,000
5,000
15,000
1,500
249,500
Equipment
Less accumulated depreciation
$60,000
(37,500)
Vehicles
Less accumulated depreciation
Total non-current assets
80,000
(48,000)
Total assets
32,000
54,500
$304,000
Liabilities
Accounts payable
Wages payable
Total liabilities (current)
Shareholders equity
Common shares
Retained earnings*
Total shareholders equity
22,500
$17,000
2,500
19,500
$110,000
174,500
284,500
$304,000
default charge will only be reported as revenue in the event that the customer defaults
on the contract.
UP4-4 I would recommend that the company count a sale when it ships the goods, as long as a
reasonable estimate can be made of the possibility of non-payment by the customer.
Such an estimate is not likely to be a problem for a large company due to past
experience with customer collections.
I would not wait until the company receives payment unless I had reason to suspect that
sales were being made to marginal customers with a high risk of non-payment. This
could be a danger if my sales people are so motivated by the incentive plan that they are
foregoing the companys usual customer credit investigation policies.
I would not count revenue when the sales person generates a purchase order. Although
it can be argued that this is closer to the time when the sales person has expended the
effort to sell the customer and thus provides a more timely measure of sales peoples
performance, the first revenue recognition criteria has not been met. Until the goods are
shipped, the company has not fully earned the revenue by fulfilling their responsibility to
the customer.
RI4-1
a. 2013 Gross Profit Margin: $6,211 / $53,873 = 11.5%
2012 Gross Profit Margin: $4,663 / $59,713 = 7.8%
Ten Peaks gross margin has increased by 3.7% from 2012 to 2013. This is a significant
improvement. It means that the company has been able to increase its selling prices or
reduce its product costs (or both) so the company has more of each dollar of sales to
cover its non-product costs.
b. Ten Peaks uses a multi-step approach in the preparation of its consolidated statement of
income and comprehensive income.
c. Ten Peaks presents its expenses by function. This approach requires a higher level of
professional judgment than presenting by nature, as all operating expenses must be
allocated among the various functions of the company. E.g. The total payroll costs must
be allocated between expense categories such as sales and marketing and
administration based on where each employee works (e.g. job description).
d. Note 3.13 to the financial statements indicates revenue presented is net of estimated
customer returns, rebates, and other similar allowances. The term net indicates that
allowances for returns and rebates are DEDUCTED from the original amount of revenue.
e. Ten Peaks five criteria align closely with the five criteria outlines in Exhibit 4-2:
1. Persuasive evidence of an arrangement is similar to criterion #4 that it is probable that
economic benefits will flow to the seller.
2. The goods were shipped is similar to criterion #1 that the risks and rewards have been
transferred to the buyer.
3. Title has passed is similar to criterion #2 that the seller has no further involvement
with the goods.
4. The price has been determined is similar to criterion #3 that the revenue can be
reliably measured.
5. Collection is reasonably assured is similar to criterion #4 that it is probable that
economic benefit will flow to the seller as a result of the transaction.
As Ten Peaks also noted that the amount of revenue is reduced for estimated
customer returns, it is also meeting criterion #5 that the costs incurred or that will
be incurred to complete the transaction can be reliably measured.
AP5-6
1.
DR Inventory
CR Accounts Payable
2.
DR Vehicles
300,000
300,000
No effect on cash.
30,000
CR Loan Payable
CR Cash
3.
DR Cash
80,000
CR Land
CR Gain on Disposal
DR Loan Payable
DR Interest Expense
CR Cash
17,500
2,500
5.
DR Wage Expense
45,000
CR Cash
6.
DR Dividends Declared
CR Dividends Payable
DR Dividends Payable
Decreases cash by
30,000 $30,000.
30,000
CR Cash
AP5-20
a. Accounts receivable, end of last year
$ 30,000
+ Sales
315,000
A ????
$ 34,000
A = $311,000
$ 49,000
+ Purchases
B ????
(246,000)
$ 43,000
B = $240,000
$ 33,000
+ Purchases
240,000
C ????
$
37,000
C = $236,000
UP5-4
The bank loan officer is very interested in determining the ability of the company to pay back
its loan. If the loan is short-term, then the bank must look for repayment of the loan from
operating cash flows and secondarily from other sources of cash that the company might
have. The statement of cash flows best provides this information.
The information on the statement of income represents the companys best estimate of the
net cash proceeds that will ultimately result from the sale of goods and services during the
current accounting period. However, there are many timing differences in these numbers
that prevent net income from being a short-run predictor of cash. If the banker is evaluating a
long-term loan, then the statement of income becomes much more important since the
repayment of the loan will take place over a much longer period of time.
$60,251,276
(10,618,617)
$49,632,659
$41,075,084
(4,428,916)
$36,646,168
Both cash from operating activities and net capital expenditures increased substantially in
2013 as compared to 2012. Overall, net free cash flow increased by $12,986,491 or 35%
during this period, which is a very positive trend.
f.
Sirius has improved its ability to cover total debt with cash from operating activities. On
the surface, it appears that only a small percent of the debt could be covered, however if
40% of the debt related to deferred revenue, then this would be a much better picture.
Deferred revenue is a liability to provide services in the future to customers who have
already paid for those services. An increase in this area indicates an increase in prepaid
accounts, a strength for the company as it is a liability that does not require future cash
payments.
g. In 2012, no dividends were paid. In 2013, $53,706,925 of dividends were paid. This is
slightly less than the $60,251,276 cash inflows from operating activities, and is 4.4 times
the companys net income for the period.
AP7-1
a)
i. FIFO
Costs
Apr 1
Beg. Inv.
75
$45,000
$600
Apr 3
Purchase
50
31,250
$625
125
76,250
$610
(30)
(18,300)
11
Sale
Purchase
Sales
$33,000
95
57,950
$610
25
16,250
$650
120
74,200
$618.33
15
Sale
(55)
(34,008)
$68,750
22
Sale
(40)
(24,733)
$48,000
28
Purchase
25
15,459
50
33,750
$675
_______
$49,209
$656.12
$149,750
75
30 units X $610
$18,300
$34,008
$24,733
$77,041
$72,709
Ending Inventory = $49,209 from the table above or (75 units X $656.12/unit =
$49,209)
b.
AP7-7
a.
Specific Identification:
COGS = $2,150 + $4,400 + $2,400 + $1,930
= $10,880
Ending inventory
= 8,220
= $4,500 + $3,720
b.
$19,100
In order to use specific identification, the physical units must be unique (separately
identifiable) and records must specifically identify the unit and its cost. In general, this is
feasible only if the units are relatively high-priced, so that such a tracking system can be
justified based on the additional information that the system provides. The chiming clocks
are few in number, likely different in appearance and quality (given differing costs), thus
each clock would be assigned its actual cost in the accounting system.
c.
As the clocks can be separately identified and are few in number, specific
identification is feasible, cost effective, and provides more useful information to
management as to the companys profitability. When a companys inventories
are not interchangeable (i.e. the goods are unique and each item can be
identified), then the company is required to use the specific identification cost
formula. As such, Exquisite would not have the option to use the weightedaverage cost formula.
Specific identification best represents the operating results for Exquisite Jewellers. As the
clocks are unique, they would not be sold at the same price. Exquisite management
would refer to the cost of each individual clock purchased when setting a selling price for
the clock. Thus management would need access to the individual clock purchase price
already, so using the specific identification method would not require a change to the
companys record keeping. This method best matches the actual cost of the goods sold to
the sales revenue generated, thus better measuring mark-up on individual clocks sold and
company performance.
AP7-9
a. The decline in net realizable value is relevant because when users see inventory listed on
the statement of financial position they assume that if it is recorded at cost, it will be
sold for at least as much as its carrying amount, and likely much more. For most
companies, the value of inventory on the statement of financial position represents the
purchase cost, the company then applies a mark-up, and sells the inventory to customers
at a much higher selling price.
This is not the case for CPCs newsprint inventory, whose net realizable value is now less
than its cost. Consequently, the inventory should be reported at its lower net realizable
value, rather than its cost. If inventory has been written down to a net realizable value
which is lower than the original cost, there will probably be no profit recognized when
the goods are sold, as the expected selling price is this net realizable value. The loss on
inventory caused by the drop in net realizable value below cost, is recorded in the
income statement in the time period when the loss in value occurs, not when the
inventory is sold. This earlier recognition of the loss is prudent.
b. Inventory must be reported at the lower of cost and net realizable value on the
statement of financial position and the current NRV is $505 per tonne which is less than
the average cost of $520 per tonne. As a result, the inventory should be valued at
$631,250 ($505 x 1,250 tonnes). This assumes that the selling prices in the markets in
which CPC sells its newsprint reflect the same prices as the international market. If CPC
also has to incur additional selling costs associated with selling its newsprint, the unit net
realizable value would have to be further reduced by the per tonne selling costs.
c. CPC would also have to determine whether it has firm contracts with its customers that
provide for a full recovery of CPCs inventory and selling costs in which case no reduction
in carrying amount may be appropriate at the end of 2016.
d. In deciding the dollar amount of inventory to report, several accounting concepts are
important. The accounting principle of historic cost is key, which states that assets
should normally be valued at their acquisition or production cost. However, the
qualitative characteristic of relevance comes into play in this case where historic cost
may not be the most relevant measure for the inventory. Net realizable value would be
more useful for investor decision-making. The requirement for accounting
measurements to represent faithfully what is being reported would also argue for NRV
which comes closer to the actual value of the inventory asset to the company.
AP7-14
a.
i.Chicoutimi Lte
$6,150,000 - $2,460,000
$2,406,250 - $962,500
= $3,690,000
= $1,443,750
$3,690,000/$6,150,000
$1,443,750/$2,406,250
= 60%
= 60%
($395,000 + $425,000)/2
($150,000 + $200,000)/2
= $410,000
= $175,000
$2,460,000/$410,000
$962,500/$175,000
= 6 times
= 5.5 times
Gross margin:
Sales - COGS
Average inventory
Inventory turnover ratio:
COGS/Average inventory
b.
i.
75,000
75,000
[Note: It would be fine if you had debited some kind of Spoiled goods expense. The
name of the account does not matter as much as realizing that there needs to be a DR to
the income statement which reduces net income.]
ii.
Revised cost of goods sold: $2,460,000 + $75,000 = $2,535,000
Revised average inventory: ($395,000 + $425,000 - $75,000)/2 = $372,500
Gross margin: $6,150,000 - $2,535,000 = $3,615,000
Gross margin ratio: $3,615,000/$6,150,000 = 58.8%
Inventory turnover ratio: $2,535,000/$372,500 = 6.8 times
iii.
Therefore, the cost of goods sold percentage of sales increases and the gross margin ratio
decreases. The inventory turnover ratio, on the other hand, appears to improve as it is
now a larger number. This is deceptive and a result of merely increasing the numerator
and decreasing the denominator as a result of recognizing the impairment in the
inventorys value.
c.
Without additional information and assuming Jonquire Lte did not require a valuation
adjustment this year, it appears from the ratios that the two companies are fairly evenly
managed. Jonquires gross margin ratio is marginally higher than Chicoutimis and its inventory
turnover ratio based on cost numbers is a little below that of Chicoutimi. However, the fact
that Chicoutimis management was required to recognize a $75,000 impairment or 17.6% of its
ending inventory value, probably indicates that there was mismanagement on Chicoutimis part
for that significant shrinkage factor. It appears that Jonquire Lte is better at managing its
inventory.
AP8-1
a.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
b.
11.
13.
14.
Land
Land
Land
Building
Land Improvements
Land Improvements (but may also be expensed)
Equipment
If non-recoverable (non-refundable) then include as part of the cost of
the Equipment. If the taxes are a GST or HST, the company can claim a
refund if the equipment is to be used in the business. In this case, the
taxes would have no effect on any asset or an expense account.
Equipment
Equipment
Expense
Equipment
Expense
Expense
AP8-6
a.
$1.20 x
$1.20 x
$1.20 x
$1.20 x
$1.20 x
15,000 =
24,000 =
30,000 =
28,000 =
18,000 =
115,000
$18,000
$28,800
$36,000
$33,600
$21,600
$138,000
b.
=
=
=
=
$60,000
$36,000
$21,600
$12,960
$ 7,440
$ 138,000
In order to be faithful to the matching concept, the company should choose the
depreciation method that best reflects the pattern in which the economic benefits
embodied in the asset are expected to be used up or consumed.
AP8-15
2016
May 27
June 9
3,500
Trucks
35,600
Cash
Trucks *
Cash
35,600
3,500
* It is reasonable to assume that the racks increase the trucks usefulness, even
though they do not increase its resale value.
Dec. 31
1
2
Depreciation Expense 1
3,515
Accumulated Depreciation, Trucks
3,515
2017
April 5
650
650
July 23
Trucks
8,000
Cash
Dec. 31
2
b.
Depreciation Expense2
Accumulated Depreciation, Trucks
8,000
7,055
7,055
UP8-1 In theory, all expenditures resulting in economic benefits that extend past the current
year should be capitalized. However, the amounts paid for the small tools are not
significant and the cost-benefit and materiality concepts should be applied in this case.
The cost-benefit concept says that professional judgement should be exercised in
applying accounting standards because the cost of applying some may outweigh the
potential benefits associated with the information that would otherwise be reported. In
this case, the amounts involved are not significant to a readers analysis and decisions
(i.e. the items and the related depreciation expense are not material). The companys
accounting treatment is appropriate and does not violate accounting standards (IFRS).
The qualitative characteristics in the IFRS conceptual framework would definitely support
application of the cost-benefit and materiality concepts in this situation.
UP8-6
The gain reported was determined as the excess of the proceeds on disposal over the
carrying amount or undepreciated cost of the equipment on our books. It is properly
called a gain because the term revenue is reserved for regular operating activity
transactions involving the sale of goods and provision of services or from allowing others
to use our assets. The term gain (rather than revenue) signals to the reader of the
income statement that this is a non-operating item, and may not occur on a regular
basis.
There was no problem with our prior financial statements. Accounting for most assets
relies on estimates. Examples include estimating how much of our receivables will not be
collected, estimating what the net realizable value of our inventory is, judging whether
our capital assets are impaired based on estimated, but unknown future cash flows, etc.
Depreciation expense is an excellent example of an estimate because the amount of
expense charged to each year is the result of making three estimates: the pattern in
which the assets benefits are provided, the assets useful life, and its residual value.
Accounting is so reliant on estimates that it would not be reasonable to go back and
adjust prior reports every time an actual amount is later found to be different from the
estimate. Instead, users of financial statements understand that managements best
estimates are necessary for accounting measurements and that estimates are used
throughout financial accounting and reporting.
The gain on the sale of the equipment indicates that the estimates used for useful life
and/or residual value, were incorrect. The useful life was either longer than had been
estimated and/or the residual value was higher than estimated. This means that
depreciation expense recorded was higher than it would have been had the estimates
been precisely correct. Again, management uses its best estimates, but actual results
understandably vary.
and those of the pharmacy. They support one another. Prescription files are similar to a
customer list for other types of operations. Customers also tend to go back to the same
pharmacy when it is convenient, and when they receive excellent service. This can lead
to improved health outcomes also, as when there is a continuing relationship between
pharmacist and patient, the pharmacist may be able to make medical suggestions.
d. Goodwill arises from accounting for a business combination, when one entity purchases
another business. It is the excess of the purchase price over the fair value of identifiable
net assets acquired in that business combination. Goodwill is not amortized; it is tested
for impairment annually or more often if events or changes in circumstances indicate
that it might be impaired.
C8-5
a.
b. At the beginning of 2016, if management concludes that the asset will no longer be used
and that it is to be sold, the classification of the asset changes from an item of PP&E to
an asset held for sale. No further depreciation is taken. At this time, the asset is
remeasured to the lower of its carrying amount and its fair value less costs of disposal
(net realizable value). In early 2016, because its carrying amount and net realizable value
are the same amount, no adjustment is necessary to its $312,500 carrying value. By
December 31, 2016, however, the warehouse must be written down to the lower net
realizable value of $260,000. The following entry is needed:
Loss on Impairment
Accumulated Impairment Losses, Buildings *
52,500
220,000
87,500
52,500
40,000
($350,000 / 20) x 5
52,500
This approach, therefore, results in net income that is $35,000 higher in 2016, a balance
sheet value that is also $35,000 higher ($295,000 versus $260,000) at December 31,
2016, and having the warehouse reported as an item in the companys productive PP&E
assets.
In 2017, when the warehouse is sold for $220,000, a loss of $75,000 ($220,000 NBV
$295,000) is reported rather than a loss of $40,000 (per item c. above). In effect, this
transfers a $35,000 loss from 2016 to 2017.
From a shareholders perspective, if the dollar amounts of the building and potential loss
were material in relation to the companys assets and earnings, the treatment of the
building suggested by the financial VP could make a difference in a decision. This is
because the shareholder has no indication of the impaired state of the warehouse and
the fact that the company will not be able to recover the carrying amount from the
assets use or disposal. This user assumes that the asset is still functioning as a
productive asset and contributing to earnings. If the amounts were significant enough, a
shareholders decision to hold or sell the companys shares could be influenced by the
difference in reported earnings and assets.
Note: There is a flaw in the financial vice-presidents suggestion. Because the
warehouses carrying amount is higher than its recoverable amount at December 31,
2016, accounting standards would require Conservative Company to recognize an
impairment loss in 2016 of $295,000 - $260,000 = $35,000. This write down is required
regardless of whether the asset is classified as held for sale.
AP9-2 a.
DR
1.
Equipment
Accounts Payable
Cash
32,000
2.
Inventory
Accounts Payable
93,000
Accounts Payable
Cash
86,000
CR
28,000
4,000
93,000
86,000
3.
4.
Rent Payable
Rent Expense
Prepaid Rent
Cash
10,000
10,000
10,000
Unearned Revenue
Service Revenue
5,000
5.
Wages Expense
Wages Payable
6,000
6.
Warranty Expense
Warranty Provision
5,000
AP9-5
a.
16,000
1,200
Current Liabilities:
Accounts payable
Wages payable
Unearned revenue
Warranty provision
1,200
$120,000
6,000
9,000
26,800
$161,800
Warranty Expense
Warranty Provision
(1 month warranties)
40,000
40,000
Warranty Provision
Cash
(1 month warranties)
36,000
80,000
Operating Expense
Cash
(2 year extended warranties)
31,000
Unearned Revenue
Service Revenue
($31,000/$60,000 X $80,000)
6,000
16,000
Warranty Provision
Cash
b.
30,000
36,000
80,000
31,000
41,333
41,333
Note: the $80,000 charged to customers for the extended warranties will become
revenue to the company as it performs the contracted services on the computers. The
amount of revenue recognized each year is based on the proportion of expense incurred
relative to the total expense expected over the warranty period. The accounting for this
type of warranty differs from the accounting for the warranty that was provided as part
of the original sales price. The one-month warranty was merely to correct any
deficiencies with the product when it was sold. The sale of the extended warranty is an
operating line of business to Computers Galore Ltd. It therefore recognizes the revenue
from this type of warranty transaction as it is earned on the basis of the proportion of
related expenses incurred.
Reitmans uses letters of credit to assist them in dealing with foreign suppliers. When
Reitmans places a purchase order for merchandise from a foreign vendor, the
supplier requires a guarantee that Reitmans will be able to pay for the goods once
they are manufactured and delivered. To accomplish this, Reitmans gets the bank to
issue a letter of credit that says the bank guarantees payment to the vendor. This
guarantee is considered part of the total amount of the companys line of credit.
When the merchandise is delivered, Reitmans then has an account payable to the
supplier and looks to the bank to help finance the payment of the accounts payable.
When the payables are due, the letter of credit guarantee is cancelled and monies
are actually loaned to Reitmans. Therefore, the actual loan portion of the working
capital loan replaces the guaranteed portion represented by the letter of credit.
b. Credit purchases, year ended February 1, 2014: (in $000s)
Cost of goods sold
$377,913
Deduct opening inventory
( 93,317)
Add ending inventory
109,601
Credit purchases =
$394,197
[NOTE: Rearrange the formula: Opening inventory + Purchases Ending inventory = COGS]
Average trade accounts payable: (in $000s)
$41,494 + $49,593
=
$45,543.5
2
Accounts payable turnover ratio = $394,197/$45,543.5 = 8.7 times
Average payment period = 365 days/8.7 = 42 days
c.
Reitmans defers revenue from two types of transactions the sale of gift cards and
customer loyalty programs.
When gift cards are sold, the proceeds are recognized as deferred revenue. When the gift
cards are redeemed, the revenue is transferred from the deferred revenue (liability) account
to sales revenue on the statement of income. The deferred revenue account is also adjusted
to reduce it for an estimate of the value of gift cards outstanding that will not be redeemed.
When customers earn loyalty points by purchasing merchandise, Reitmans divides the
proceeds for the current purchases between sales revenue for the goods sold currently and
deferred revenue representing the fair value of the merchandise to be provided later under
the loyalty program. When customers redeem their loyalty points, revenue is transferred
from the liability unearned revenue account to the statement of income revenue account
in an amount equal to the fair value of the redeemed awards. An adjustment is also made
to reduce the unearned account and increase the earned account for the best estimate
of the loyalty points value that will not be redeemed.
The accounting issue is the measurement of the keg deposits account. From past experience, not
all the kegs will be returned, so Big Rock knows that not all the deposits received should be
included in the measure of the liability. The company, based on its past records, estimates the
percentage of kegs that are not returned and uses this information to determine an appropriate
balance of the keg liability account. The adjustment to reduce (debit) the keg liability account for
the estimate of the amount that will never be paid out, is taken into (credited to) revenue.
AP10-1
a. The interest expense decreases each month because the monthly payment includes a payment
on the principal as well as interest. Therefore, the outstanding balance of the loan is reduced
with each payment and the interest portion of the next payment goes down. Interest expense is
calculated as the carrying amount (outstanding principal balance) times the interest rate for the
loan. Since the carrying amount of the loan decreases with each blended payment, the interest
expense portion of each payment also decreases, while the principal portion of each payment
increases.
b.
Oct. 1
Cash
1,000,000
Mortgage Payable
Oct. 31
1,000,000
Interest Expense
5,000
Mortgage Payable
14,333
Cash
Nov. 30
19,333
Interest Expense
4,928
Mortgage Payable
14,405
Cash
19,333
UP10-1
With a blended payment for a mortgage, the total amount of each payment is the same, but the
portion of each payment that represents interest is reduced as the principal balance is reduced.
From a management perspective, the advantage of paying blended payments is that (1) there is
not a large principal payment at the end of the term of the loan (as there is with a bond payable
where the entire principal is paid at the end instead of over the term of the loan), thus making it
easier to budget cash flows and debt repayment over time, and (2) the interest expense, and
thus the cost of borrowing to the company decreases over time because the interest is
calculated on the remaining outstanding carrying value (principal) of the loan, which decreases
with each mortgage payment.
Companies often gain the biggest benefit from an asset when it is newly purchased (and more
likely to give the company a competitive advantage due to the use of newer technologies). It
makes sense that the larger interest expense occurs in the early years of the loan, matched to
the larger revenues that are produced.
In addition, the lender may offer the company a lower interest rate on the mortgage because the
risk of the companys possible non-payment of the debt is lower that if the lender received only
interest payments in the early years, and then found that the borrower was incapable of making
payments on the principal.
UP10-2
From a lenders perspective, the primary advantage of having long-term loans such as mortgages
structured to be repaid through equal, blended monthly payments is the reduction of risk. The
lender is able to require cash flows of repayment of the loan principal throughout the term of
the loan instead of hoping that the borrower will be able to pay off a large significant loan in 20
or 25 years. Also, as capital assets used as security for the mortgage loan age and their fair value
is reduced, amount outstanding on loan reduced as well.
AP11-2
a.
If assets sold for
Distribution of proceeds:
First, to creditors
(i)
$2,110,700
(ii)
$5,000,000
(iii)
$1,800,000
(85,000)
(85,000)
(85,000)
2,025,700
4,915,000
1,715,000
(1,000,000)
(1,000,000)
(1,000,000)
$1,025,700
$3,915,000
$ 715,000
Common shareholders are entitled to share in companys net assets upon liquidation. While
the creditors and preferred shareholders have prior claims to the assets on liquidation, their
claims are fixed. The remaining net assets (or the residual amount) is then shared by the
common shareholders. It may represent a significant profit to them, or a considerable loss.
This is the nature of the risk of being a common shareholder.
b. $2,110,700 represents the carrying amount of the assets that have been recognized, all
measured according to generally accepted accounting principles (GAAP). It is unlikely that
the proceeds on disposal would be the same as this amount for the following reasons:
Many assets are not carried at fair value or market value.
Most of the assets are measured using a cost basis, including perhaps being written
down (through impairment) to their lower value in continued use to the company. The
value in use may be higher than the amount the company could sell the assets for in a
quick sale. In fact, some of the assets may have value only to Hightech Inc., and may not
be of any value to others.
Intangibles such as patents often have a value significantly higher than their carrying
amount on the books. When a company develops patents internally, most of the costs
incurred are expensed as incurred because it isnt known whether the research will
result in future economic benefits to the company.
Companies in the high technology business are often worth more as continuing
businesses than their individual assets are worth. This is because their most important
assets, the knowledge and expertise of their management and employees, are not
captured on the statement of financial position. While assets can be sold off, the
employees and management cannot.
b.
(i)
$225, 700
$800,000
= 28.2%
(ii)
$3,115,000
$800,000
= 389.4%
(iii)
$(85,000)
$800,000
= (10.6%)
Note that rates of return are normally provided as annual rates, but the rates calculated
above are for the entire period the investment was held.
AP11-6
a.
1. Information on the number of common and preferred shares authorized will be reported
in the share capital note to the companys financial statements. No journal entry is
made until actual shares are issued.
2.
3.
4.
5.
6.
7.
1,200,000
210,000
Dividends Declared
Preferred Shares
Dividends Payable (15,000 x $2)
Dividends Payable
Cash
Dividends Declared -- Common
Shares
(240,000 x $0.10)
Dividends Payable
9.
210,000
30,000
30,000
30,000
30,000
24,000
24,000
Sales Revenue
Income Summary
750,000
Income Summary
Operating Expenses
600,000
Income Summary
Retained Earnings
8.
1,200,000
Dividends Payable
Cash
750,000
600,000
150,000
150,000
24,000
Retained Earnings
54,000
Dividends Declared Preferred Shares
Dividends Declared Common Shares
24,000
30,000
24,000
b.
210,000
1,200,000
96,000
$1,506,000
c.
AP11-10
a. Average amount received per Class A common share:
Total received for shares =
Number of shares issued
b. Votes available:
Class A common: 7,530,000 X 10 =
Class B common: 25,432,000 X 1 =
Total votes available on
TGGIs common shares =
75,300,000 votes
25,432,000 votes
100,732,000 votes
Even though there are considerably more Class B common shares issued and
outstanding, the Class A common shares control the shareholders decisions due to the
multiple votes per Class A share.
d. It is likely that TGGI is interested in having one specific group of shareholders (those
holding Class A shares) in control of all major decisions at shareholder and board of
directors meetings. Class A shareholders might be members of the family that founded
the company and is responsible for its growth, or they might be members of
management who acquired controlling interest and determined that they did not want
other parties making major decisions. They are quite willing, however, to provide them
with a return on their investment similar to that of the controlling group.
AP11-10 (Continued)
e.
Class A
Common
shares
$
Class B
Common
shares
#
Class B
Common
shares
$
Retained
earnings
$
Accumulated
other
comprehensive
income - $
Total
$
18,825
25,432
216,172
252,475
(49,443)
85,993
674
488,146
(49,443)
85,993
_______
_______
_______
_______
43
43
$18,825
25,432
$216,172
$289,025
717
$524,739
Dividends paid
Net income
Other comprehensive
income
_______
Balance, December 31,
2016
f.
7,530
RI11-3
a.
i. RONA has five types or classes of shares authorized. In addition, the Class A shares have
three different series authorized. Therefore there are 7 different types of shares with different
rights and conditions.
ii. The following table highlights main differences in the types of shares:
Common
shares
Preferred shares
Cl. A
Ser.5
Cl. A
Ser.6
Cl. A
Ser.7
Par value
No par value
Cumulative
Non-cumulative
x
n/a
n/a
Dividend rate
Redeemable at
companys
option
n/a
n/a
x
70% of
prime
rate
at
issuance
rate
Cl. B
Cl. C
Ser.1
Cl. D
x
x
5.25%
at
issuance
price
at
variable
rate
at
issuance
price
6%
at par
value of
$1
x
70% of
prime
rate
at par
value of
$1,000
4%
at
issuance
price
i. A company would have different types of shares authorized in order to appeal to a variety of
investors, to recognize that returns expected by shareholders change with changes in the
market rates of interest, and to provide flexibility to the company in the options they have
for repurchasing equity instruments.
b. RONA has 6,900,000 Class A, Series 6 preferred shares outstanding at December 29, 2013.
c. The table presented in Note 23 is similar to a statement of changes in shareholders equity
because it reconciles the opening balances of the number, amount, and share subscription
deposits for each type of share to the closing balance at year end, ending up with the total share
capital amount reported on the statement of financial position.
The table differs from a statement of changes in financial position in that it is limited to the share
capital amounts only. It does not include the other components of shareholders equity.
d. RONA Inc. was able to declare dividends of $26,331 thousand in spite of its net loss of $153,014
thousand in the year because it has retained earnings as a result of being profitable in previous
years. The companys retained earnings balance was $879,415 thousand at December 29, 2013.