Bob Gaglardi School of Business and

Economics

Practice Question Solutions

ACCT 3201
Intermediate Financial Accounting 1

Kieso, D. E., Weygandt, J. J., Warfield, T. D., Wiecek, I. M., & McConomy, B. J. (2022).
Intermediate accounting (13th Cdn. ed., Vol. 1). Toronto ON: John Wiley & Sons.
ACCT 3201 Solutions to practices questions Chapters 1 to 6

CHAPTER 1
BRIEF EXERCISE 1-1

Accounting has the responsibility of measuring company performance accurately and fairly on a timely
basis. This enables investors and creditors to assess the relative risks and returns of investment
opportunities and channel resources more effectively. If a company’s financial performance is measured
accurately, fairly, and on a timely basis, the right managers and companies are able to attract investment
capital. Unreliable and irrelevant information leads to poor capital allocation, which adversely affects the
securities market and ultimately the performance of the economy as a whole.

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

BRIEF EXERCISE 1-2

Some stakeholders using financial accounting information and financial statements include:

Investors – These stakeholders are interested in the performance of their investment in the company.
They will use the financial statements to evaluate management stewardship and effectiveness.

Creditors – These stakeholders are interested in evaluating the company to decide whether to lend it
money. They use the statements to evaluate the risk that will be taken in making the loan. For example,
lenders want to know whether the company will be able to repay its loans when due and service both
interest and principal on a timely basis.
Canada Revenue Agency (CRA) – This stakeholder establishes the rules for measuring taxable income.
It is interested in the fair measurement of the financial position and financial performance of the company
so that the appropriate amount of tax will be paid. The financial statement’s net income is the starting
point in preparing tax returns. Net income for accounting purposes is adjusted to arrive at net income for
tax purposes, which is used to calculate the amount of tax payable. The CRA is principally interested in
compliance with the Income Tax Act.

Financial Analysts – These stakeholders provide investment advice to their clients. They are interested in
evaluating the investment opportunities and potential of various companies.

Note: This is only a suggested list of stakeholders and their possible uses of the financial accounting
information. There are many other stakeholders as discussed in the chapter that would be acceptable
answers to this question.

Different stakeholders make different decisions that require different information. For example, lenders
want to know whether the company will be able to repay its loans but the Canada Revenue Agency (CRA)
wants to know the amount of taxes that should be paid for the current year. Much of the information that
the lenders would request, such as who are the company’s major customers and the amounts they owe
the company, would be of no interest to the CRA for income tax purposes yet may be of relevance in a
GST/HST review.
LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1-3

The overall objective of financial reporting is to provide financial information that is useful to users
(primarily capital providers such as investors and lenders) and that is decision relevant (i.e., will help them
make decisions about allocating capital). The statements should communicate information about:
1. the entity’s economic resources and claims to those resources and
2. changes in those resources and claims.

Note the emphasis on resource (or capital) allocation decisions, which requires a focus on the statement
of financial position. The assessment of management stewardship is also important since users need to
know whether management is doing their job to maximize shareholder value (which is also called fiduciary
duty). As a general rule, it is assumed that management stewardship is already taken into account in the
resource allocation decision.

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

BRIEF EXERCISE 1-4

Information asymmetry exists when one stakeholder in the financial reporting process has more or different
information than another. For example, management generally has more information about the company
than external investors or creditors. While it is neither practical nor optimal for perfect information
symmetry to exist, financial reporting serves the role of ensuring that relevant information is properly
communicated to external parties such as investors, and others.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-5

Where information asymmetry exists, there is a risk that the party with the additional information will act in
its own self-interest to the detriment of the other party and/or the capital market in general. For instance,
management might withhold negative information about the company for fear that it will hurt the manager’s
bonus. This would not be optimal for external parties such as creditors and investors who may need that
information before they invest or lend the company money. The risk that the party with the additional
information may act in its own self-interest is known as moral hazard. If people understand that this
behaviour is tolerated in the marketplace, the marketplace may attract people and companies that accept
and tolerate this behaviour (known as adverse selection). This will degrade the capital marketplace as
there will be less transparency and information sharing and thus suboptimal capital allocation.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1-6

A common set of standards applied by all businesses and entities provides financial statements which are
reasonably comparable. Without a common set of standards, each enterprise could, and would, develop
its own theory structure and set of financial reporting practices, resulting in a lack of comparability among
enterprises.

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

BRIEF EXERCISE 1-7

General-purpose financial statements are not likely to satisfy the specific needs of all interested parties.
Since the needs of interested parties such as creditors, managers, owners, governmental agencies, and
financial analysts vary considerably, it is unlikely that one set of financial statements would be equally
appropriate for these varied uses. The level of detail in financial statements is based on specific
requirements in accounting standards and management’s perception of users’ needs, balanced against
the cost of providing this additional information.

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

BRIEF EXERCISE 1-8

Accounting was affected and changed between 1900 and 1930 by the growth of the corporate form of
enterprise, the growing separation of management from ownership, the imposition of tax on business and
individual income, and the stock market crash (attributed in part to lax accounting standards and
oversight), and the subsequent great depression.

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

BRIEF EXERCISE 1-9

The International Accounting Standards Board (IASB) is the dominant standard setting body in the world
in 126 jurisdictions, including all of the G20 jurisdictions. Thousands of companies throughout the world
will use either the full IFRS or the version for small and medium size enterprises.
According to the IFRS web site: “Our mission is to bring transparency, accountability and efficiency to
financial markets around the world by developing IFRS Standards. Our work serves the public interest by
fostering trust, growth and long-term financial stability in the global economy.”
See: www.ifrs.org for further details.

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

BRIEF EXERCISE 1-10

The Accounting Standards Board (AcSB) of Canada has primary responsibility for setting GAAP in
Canada. This is accomplished through a lengthy and complex process. Two basic premises underlie the
process of establishing financial accounting standards: (1) the AcSB should respond to the needs and
viewpoints of the entire economic community, not just the public accounting profession, and (2) it should
operate in full public view through a “due process” system that gives interested persons enough
opportunity to make their views known. The Accounting Standards Oversight Council (AcSOC) oversees
AcSB activities: its activities include setting the agenda and reporting to the public, among other things.

The AcSB is responsible for setting standards for non-publicly accountable private enterprises (ASPE),
not-for-profit entities, and pension plans only. Standards for publicly accountable entities are set by the
International Accounting Standards Board (IASB). It is important to note that non-publicly accountable
entities also have the option to use IFRS.

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

BRIEF EXERCISE 1-11

The Provincial Securities Commissions (including the Ontario Securities Commission) collectively are one
of the stakeholders in standard-setting. Standard-setting is the responsibility of the Accounting Standards
Board (AcSB) (for ASPE) and the International Accounting Standards Board (IASB) (for IFRS). The
Accounting Standards Oversight Council (AcSOC) sets the strategic direction and priorities of the AcSB.
AcSOC membership consists of regulators and representatives of the financial analyst communities,
amongst others.

The OSC issues its own disclosure requirements. These additional requirements are applicable only to
companies registered with the OSC.
LO 2 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1-12

One of the functions of the Ontario Securities Commission (OSC) and the Securities and Exchange
Commission (SEC) is to represent and protect the interests of investors. They do not represent the
interests of different users of financial information. Since the early 1970s CPA Canada and its predecessor
CICA had the sole legislative and regulatory authority to set national private sector accounting standards
in Canada. It delegates this to the AcSB. Starting in 2011, the AcSB is responsible for ASPE and the IASB
is responsible for IFRS. This ensures that accounting standards have a high degree of acceptance from
its broad community of constituents.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1-13

The sources of pressure are innumerable, but the most intense and continuous pressure to change or
influence accounting principles or standards comes from individual companies, industry associations,
governmental agencies, securities commissions, practicing accountants, academicians, professional
accounting organizations, and public opinion. As we move towards international harmonization, the U.S.
accounting standards will have a continuing influence on IFRS due to the significant capital pool and flows
associated with U.S. markets.

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

BRIEF EXERCISE 1-14

The users of financial information from public companies have different needs than the users of financial
information from private companies. Public corporations need the opportunity to present financial
information using consistent accounting rules as those used globally. To accomplish this, public
companies need to follow the International Financial Reporting Standards (IFRS). Doing so helps
Canadian companies compete in a global market. Following this set of policies and standards is not
essential to privately owned businesses who may have less complex business models and/or fewer
financial statement users, who do not expect as extensive measurement and disclosure requirements as
those required under IFRS.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1-15

No one particular proposal is expected in answer to this question. The students’ proposals, however,
should be defensible relative to the following criteria:
1. The method must be efficient, responsive, and expeditious.
2. The method must be free of bias and be above or insulated from pressure groups.
3. The method must have legislative authority or otherwise command widespread support.
4. The method must produce sound yet practicable accounting principles or standards.
The students’ proposals might take the form of alterations of the existing methodology, an accounting
court, or governmental device.

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

BRIEF EXERCISE 1-16

The explanation should note that generally accepted accounting principles have “substantial authoritative
support.” They consist of accounting practices, procedures, theories, and broad principles and
conventions of general application, including underlying concepts and methods, which are recognized by
a large majority of practicing accountants as well as other members of the business and financial
community. GAAP is divided into primary and other sources. Primary sources must be looked to first for
how to treat an issue. Where primary sources do not deal with the issue, the accounting policy selected
must be consistent with the primary sources as well as developed through use of professional judgement
in accordance with the conceptual framework.

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

BRIEF EXERCISE 1-17

Primary sources of GAAP are the core standards. Where these standards do not cover the accounting in
question, then other sources are looked to. Judgment must be applied in looking at these other sources
to ensure that they are appropriate and relevant.

For public companies or private companies choosing to follow IFRS, GAAP incorporates IFRS, IAS, and
Interpretations. Some IFRS and IAS are accompanied by guidance. The guidance will note whether it is
an integral part of the IFRS or IAS or not. Other sources include pronouncements of other standard setting
bodies, other accounting literature and accepted industry practices. The entity may also look at IFRS for
similar or related transactions.

For private companies following ASPE, primary sources of GAAP include (in descending order of
authority) the CPA Canada Handbook sections 1400 to 3870 including Appendices and Accounting
Guidelines including Appendices. Other sources include Background information and Basis for
conclusions documents, pronouncements from other standard setting bodies including IFRS and other
sources such as accounting text books, journals and articles. ASPE specifically labels the sources as
being primary sources or other sources.

An entity should apply every primary source of GAAP that deals with the accounting and reporting of
transactions encountered by an entity. This means that primary sources must be looked to first.

Where primary sources do not deal with a specific issue, the entity should use judgment in looking to the
other sources and then adopt accounting policies that are consistent with the primary sources as well as
the Conceptual Framework.

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

BRIEF EXERCISE 1-18

The chair of the FASB was indicating that too much attention is put on the bottom line and not enough on
the development of quality products. Managers should be less concerned with short-term results and be
more concerned with the long-term results. In addition, short-term tax benefits often lead to long-term
problems.

The second part of his comment relates to accountants being overly concerned with following a set of
rules, so that if litigation ensues, they will be able to argue that they followed the rules exactly. The problem
with this approach is that accountants often seem to want more and more rules with less reliance on
professional judgement. Less professional judgement leads to inappropriate use of accounting
procedures in difficult situations.

In the accountants’ defense, recent legal decisions have imposed vast new liability on accountants. The
concept of accountant’s liability that has emerged in these cases is broad and expansive; the number of
classes of people to whom the accountant is held responsible is almost limitless.
LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1-19

”Economic consequences” means the impact of accounting reports on the wealth positions of issuers and
users of financial information and the decision-making behaviour resulting from that impact. In other
words, accounting information impacts various users in many different ways, which leads to wealth
transfers among these various groups.

If politics plays too much of a role in the development of accounting standards, standards could become
subject to manipulation for the purpose of furthering whatever policy prevails at the moment. No matter
how well intentioned the standard setters may be, if information is designed to indicate that investing in a
particular enterprise or industry involves less risk than it actually does, or is designed to encourage
investment in a particular segment of the economy, financial reporting will suffer an irreplaceable loss of
credibility.

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-20

Principles-based standards are considered to be based on a conceptual framework and the accounting
principles that result may require significant professional judgement in interpreting and applying the
standards to ensure compliance. Rules-based standards are generally quite detailed, and in many
instances follow a “check-box” mentality that some contend may shield accountants, auditors and
companies from legal liability. IFRS and ASPE tend to follow the principles-based standard-setting system,
while U.S. GAAP is generally considered more rules-based (even though it is based on principles). This
is because it is more prescriptive and detail-oriented.

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

BRIEF EXERCISE 1-21

Concern exists about fraudulent financial reporting because it can undermine the entire financial reporting
process. Failure to provide information to users that is accurate can lead to inappropriate allocations of
resources in our economy. In addition, failure to detect massive fraud can lead to additional governmental
oversight of the accounting profession and financial reporting more generally.
Even though GAAP (including IFRS and ASPE) provides structured information that is relevant and
represents underlying business transactions and events, it may be manipulated. This is because the
various stakeholders in the process often act in their own self-interest. For instance, members of
management may seek to optimize their own bonus or the value of their stock options.

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

BRIEF EXERCISE 1-22

Some of the reasons for difference include:

1. The objectives of financial reporting often differ among countries.
2. The institutional structures are often not comparable.
3. Strong nationalist tendencies may be pervasive and therefore there is reluctance to adopt any one
country’s approach.

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

BRIEF EXERCISE 1-23

Accountants must perceive the moral dimensions of some situations because GAAP does not define or
cover all specific features that are to be reported in financial statements. In these instances accountants
must choose among alternatives. These accounting choices influence whether particular stakeholders
may be harmed or benefited. Ethical decision-making involves awareness of potential harm or benefit
and taking responsibility for the choices, which should always consider the public interest.
LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1-24

Some major challenges facing the accounting profession relate to the following items:
Credibility – how to regain public confidence in the aftermath of corporate fraud and poor reporting
practices.
Globalization of companies and capital markets – Canadian companies are operating and trading
securities in global markets and are subject to accounting regulations in other jurisdictions.
Canadian investors are investing in the global marketplace.
Non-financial measurement – how to report significant key performance indicators such as
customer satisfaction indexes, backlog information and reject rates on goods purchased.
Soft assets – how to measure and report intangible assets, such as market know-how, intellectual
capital, market dominance, and well-trained employees.
Timeliness – how to report more reliable real-time information in the Internet age.

LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-25

The following are some of the key provisions of the Sarbanes-Oxley Act (SOX), enacted in 2002:
• Establishes an oversight board for accounting practices. The Public Company Accounting Oversight
Board (PCAOB) has oversight and enforcement authority and establishes auditing, quality control,
and independence standards and rules for auditors.
• Implements stronger independence rules for auditors. Audit partners, for example, are required to
rotate every five years and auditors are prohibited from offering certain types of consulting services
to corporate clients.
• Requires CEOs and CFOs to personally certify that financial statements and disclosures are
accurate and complete and requires CEOs and CFOs to forfeit bonuses and profit sharing when
there is an accounting restatement.
• Company management must report on the effectiveness of the financial reporting internal control
system and the auditors must assess and report on these internal controls.
• Requires audit committees of Boards of Directors to be comprised of independent members and
members with financial expertise.
• Companies must disclose whether they have a code of ethics for their senior financial officers.

In Canada, many of the SOX requirements have been put in place, in part by pronouncements by
Canadian securities administrators such as the OSC.
LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001, cpa-t004 CM: Reporting and Audit

CHAPTER 2
BRIEF EXERCISE 2.1

a. Representational faithfulness (Completeness)

b. Relevance
c. Representational faithfulness (Neutrality)
d. Representational faithfulness
e. Relevance (Predictive value)
f. Representational faithfulness (Freedom from material error)
g. Relevance (Feedback value)
h. Comparability
i. Understandability
j. Timeliness
k. Verifiability

LO 2 BT: K Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 2.2

a. Verifiability
b. Comparability
c. Timeliness
d. Comparability (knowledge of this fact enables better comparison over time).
e. Representational faithfulness (Neutrality)
f. Representational faithfulness (Completeness)
g. Representational faithfulness (Freedom from material error)

LO 2 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 2.11

a. A corporate fleet of cars for senior management is an asset: the cars are tangible economic resources.
The cars have been acquired through a past transaction. Additionally, the cars are present economic
resources that produce cash inflows in conjunction with other economic resources – the cars are used
by senior management to generate cash flows for the company. By virtue of its ownership, the
company has control over the resources.
b. A franchise licence to operate a Tim Hortons store is an asset: the licence is an intangible economic
resource. It can be sold or used to generate revenues (subject to contractual terms) and related cash
flows. The agreement grants exclusive ownership and access to the franchisee. Additionally, the
contractual rights provide a present economic resource that is not contingent on a future event.
c. Customized manufacturing machinery that can only be used for one product line and for which there
is a small and limited customer market is an asset: the machine is a tangible economic resource. The
fact that it is of limited use or applicability will factor in its measurement or valuation – this does not
affect its recognition as an asset. It is capable of providing future economic benefit through its use
by the manufacturing company that owns and controls it.
d. The guarantee is a present resource that allows the subsidiary access to capital on a reduced cost
basis and resulted from a past transaction or event. The benefit of having the parent company’s
unconditional promise to pay is reflected through a lower interest rate from the bank. However,
assuming the guarantee came at no cost to the subsidiary, in this case, it is not recognized as an
asset.
e. If the spring water is freely available to all, it is not a specific asset to FreshWater Inc. Although the
water has value, it does not have economic value for purposes of the accounting definition as
FreshWater Inc. does not legally own or control the spring and cannot restrict others’ access to it.
f. If Mountain Ski makes the snow on their own slopes, it can be considered their asset – the value may
be short-lived however and the associated costs would generally be expensed when incurred. The
snow is controlled by Mountain Ski only to the extent it falls on their property (which they have control
over). Snow that falls naturally onto the land owned by Mountain Ski would be valued at $0 since it
literally fell from the sky at no cost.

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

BRIEF EXERCISE 2.12

a. Environmental remediation after a chemical spill when a law has been broken: this is an obligation
that the entity must fulfill and the entity has no discretion to avoid. An entity must follow the
laws/regulations of the legal jurisdiction in which it operates with no practical ability to avoid the cost.
These laws result in a legal liability if the entity violates the law. It is enforceable by law or statute.
Once the entity has the obligation from the spill, the law will be sufficiently clear that the entity must
bear the costs for clean-up. The obligation exists at the balance sheet date, assuming the spill event
occurred prior to the balance sheet date, making it a present responsibility.
b. Environmental remediation after a chemical spill when no law has been broken: If there is no legal
burden or requirement to bear the remediation costs, whether there is a liability will depend on
whether the entity actually has an obligation for remediation. It must be determined whether there
are other means by which remediation is enforceable on the entity, that is, whether there is little or
no discretion for the entity to avoid the costs. In some jurisdictions, specific actions by the entity,
such as a statement accepting responsibility and agreeing to clean-up costs, may be sufficient to be
 enforceable in a court of law. Alternatively, it may represent a constructive obligation (i.e. the
company has remediated for similar spills in the past even though not legally obligated to do so);
constructive obligations are discussed in Chapter 6 and 13. Again, it is assumed that the spill took
place prior to the balance sheet date so that if the entity is obligated, it is a present duty or
responsibility.
c. Replanting trees under an existing contract: A liability exists once the obligation – cutting a tree –
occurs (that is, it results from a past transaction or event). After that occurs, the entity has no
practical ability to avoid the cost which will result in a future outflow of resources.
Replanting trees based on a voluntary corporate policy: A constructive obligation exists even though the
entity may not have a legal requirement to replant trees because its corporate policy has created the
expectation that it will do so. See further discussion about constructive obligations in Chapter 6 and 13.
It is a duty at the balance sheet date as it resulted from an event that occurred prior to the reporting
date.
d. Collection of cash for future delivery of services – air travel: Once the cash is received, an obligation
exists to deliver the service or issue a refund of the cash to the customer. Following the collection of
the cash, the airline has the obligation deliver the service in accordance with the terms dictated in
the charter contract. Until the flight takes place, the cash received remains an amount reported under
Unearned Revenue. Westjet refers to this account as Advance ticket sales on their consolidated
statement of financial position.
LO 3 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 2.15

a. Equity – residual interest of owners

b. Revenues – ordinary activities of company
c. Assets,
d. Assets
e. Expenses – ordinary activities of company
f. Losses – peripheral or incidental activities
g. Liabilities
h. Equity – Distributions to owners
i. Equity – Investments by owners
LO 3 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 2.2

a. Feedback value.
b. It is generally the role of professional judgement to identify
and balance trade-offs between fundamental qualitative
characteristics and enhancing qualitative characteristics.
These include: between relevance and representational
faithfulness; between relevance and verifiability; between
relevance and comparability; between relevance and
timeliness; between relevance and understandability. Note
that the fundamental qualitative characteristics have
precedence over the enhancing characteristics.
Constraint: Cost/Benefit
Note – other examples are also acceptable
c. Neutrality.
 d. Not acceptable – in many cases, this goes against
representational faithfulness. We should consider the
substance of a transaction as well as its legal form with
substance over form taking precedence
e. Neutrality.
f. Understandability.
g. Timeliness.
h. Relevance.
i. Comparability.
j. Verifiability.
k. Freedom from material error or completeness.

LO 2,5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 2.8

1. Monetary unit
2. Full disclosure
3. Historical cost and matching
4. Going concern
5. Fair value
6. Historical cost
7. Full disclosure
8. Revenue recognition and realization
9. Full disclosure
10. Full disclosure
11. Economic entity and control
12. Periodicity
13. Matching/fair value
14. Historical cost
15. Matching
LO 4 BT: K Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 2.12

a. A conceptual framework is useful for standard setters since having an established body of concepts
and objectives helps them to develop additional useful and consistent standards. This results in a
coherent set of standards that are built upon the same foundation. An understanding of the underlying
concepts helps the preparer and the auditor ensure consistent and meaningful application of the
principles. Such a framework also increases the financial statement user’s understanding of, and
provides confidence in, financial reporting. It also enhances comparability of different companies’
financial statements.

b. Foundational principle or characteristic violated:

1. Periodicity; relevance (predictive and feedback value); timeliness
2. Historical cost; verifiability; relevance
3. Historical cost or matching; comparability; representational
faithfulness; relevance
4. Revenue recognition and realization; representational faithfulness
5. Full disclosure; representational faithfulness; relevance
6. Economic entity; free from material error, representational
faithfulness
 7. Control; comparability; representational faithfulness
8. Matching; free from error; relevance
9. Full disclosure and representational faithfulness (neutrality)

(Note that other principles/characteristics may also be discussed. There is rarely a single right and
wrong answer to these types of questions.)

LO 1,2,4 BT: C Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

CHAPTER 3
EXERCISE 3.4

a.
1. Using a financial calculator:
PV $ 100,000
I ?% Yields 11.0 %
N 2
PMT 0
FV $ (123,210)
Type 0

2. Excel formula =RATE(nper,pmt,pv,fv,type)

Result: 11%
b. 1.Using a financial calculator:
PV ? Yields $ 97,394.69
I 11%
N 2
PMT 0
FV $(120,000.00)
Type 0

2. Using Excel: = PV(rate,nper,pmt,fv,type)

Result: $97,394.69

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and Finance
EXERCISE 3.7

a. Time diagram:
Viavélo Inc.
PV =? i = 5%
PV–OA =? Principal

$2,000,000 interest

$110,000 $110,000 $110,000 $110,000 $110,000 $110,000

0 1 2 3 26 27 28

n = 28

1. Using a financial calculator:

PV ? Yields $ 2,148,981.27
I 5%
 N 28
PMT $ (110,000)
FV $(2,000,000)
Type 0

2. Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $2,148,981.27
b. The bonds are reported at amortized cost, a cost-based measure.

c. There are no measurement uncertainties for this bond liability that would require disclosure in
Viavélo’s financial statement notes. The amount and timing of cash flows are fixed along with the
rate of interest as stated in the bond agreement.

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and Finance
EXERCISE 3.10

Estimated
Cash Probability Expected
Outflow X Assessment = Cash Flow
$200 10% $ 20
450 30% 135
600 50% 300
750 10% 75 $
530

Present Value = Expected Cash Flow X PV Factor Table PV.1, n = 2, I = 6%

Present Value = $530 X .89000 = $472

LO 2,4 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and Finance
 CHAPTER 4
BRIEF EXERCISE 4.16

a.
Sierra Corporation
Income Statement
For the Year Ended December 31, 2023

Sales revenue $5,850,000

Cost of goods sold 4,610,000
Gross profit 1,240,000
Operating expenses
Selling expenses $572,000
Administrative expenses 445,000 1,017,000
Income from operations 223,000
Other revenues and gains
Investment income 227,000
 450,000
Other expenses and losses
Interest expense 160,000
Income before income tax 290,000
Income tax expense 84,000
Net income $ 206,000

Earnings per share1 $2.06

1
($206,000 / 100,000)

b. Price earnings ratio

Market price per share = $66.00 = 32 times

EPS $2.06

LO 5,7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and Finance
BRIEF EXERCISE 4.17

Blue Collar Corporation

Partial Statement of Financial Performance
For the Year Ended December 31, 2023

Income from continuing operations $12,600,000

Discontinued operations
Loss from operation of discontinued
restaurant division (net of tax
$135,000)
$315,000
Loss on disposal of restaurant
division (net of tax of $38,000) 89,000 404,000
Net income 12,196,000

Other comprehensive income

Items that will not be recycled
subsequently to net income or loss:
 Unrealized gain on fair value-OCI
investments (net of tax of $18,000) 43,000

Comprehensive income $12,239,000

Earnings per share:

Income from continuing operations $1.26
Discontinued operations (.04)
Net income $1.22

Note: Earnings per share information related to comprehensive income is not required under
IFRS.

LO 5,7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

BRIEF EXERCISE 4.19

Parfait Limited
Statement of Changes in Shareholders’ Equity
 For the Year Ended December 31, 2023
Accumulated
Other
Common Retained Comprehensive
Shares Earnings Income Total
Beginning balance $600,000 $900,000 $250,000 $1,750,000
Comprehensive income
Net income1 50,000 50,000
Other comprehensive Income 60,000 60,000
Dividends _______ (300,000) _______ (300,000)

Ending balance $600,000 $650,000 $310,000 $1,560,000

1
($900,000 – $750,000 – $100,000).

LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reportin
EXERCISE 4.2

a. Calculation of net income:

Income from operations $375,000

Other revenues and gains
Gain on disposal of equipment $27,000
Gain on disposal of FV-NI investments 33,000
Gain on disposal of FV- OCI investments 71,0001 131,000
506,000
Other expenses and losses
Loss on disposal of building 68,000
Unrealized loss on FV-NI investments 54,000 122,000
Income before income tax 384,000
Income tax expense 99,000
Net income $285,000
 b. Calculation of retained earnings:

Balance, January 1 $410,000

Add: Net income 285,000
Balance, December 31 $695,000

1
$55,000 + ($126,000 - $110,000)
c. Accumulated other comprehensive income (AOCI) had a balance of $129,000 ($74,000 +
$55,000) at January 1, 2023. Prior to the transfer to Retained Earnings, the balance in AOCI at
December 31, 2023 is $74,000 which relates to revaluation surplus (land). This amount represents
the cumulative revaluation gains/(losses) related to the piece of land accounted for under the
revaluation model. Under the revaluation model, revaluation gains are recorded as revaluation
surplus (OCI) and accumulated in AOCI until the asset is retired or disposed of. Pike sold the
piece of land in 2023 when the carrying amount of the land was $216,000. The balance in AOCI
related to previous revaluations of the land to fair value using the revaluation method is not
recycled or reclassified to income. Rather, the balance is transferred to Retained Earnings
directly.

$55,000 of the opening AOCI balance was related to cumulative unrealized gains/(losses)
related to the measurement of debt investments at fair value through OCI (FV-OCI). Pike sold
the related FV-OCI debt investments in 2023, and upon sale, Pike would have captured any
unrealized gain for the year to date ($126,000 - $110,000) in OCI, and transferred (recycled)
the cumulative unrealized gains/(losses) from OCI [$55,000 + ($126,000 - $110,000)] to net
income (according to company policy).

d. Under ASPE, other comprehensive income is not recognized. The revaluation model is not
permitted under ASPE. Investments that are traded in an active market are accounted for as
FV-NI under ASPE.
Calculation of net income:

Income from operations $375,000

Other revenues and gains
Gain on disposal of equipment $27,000
Gain on disposal of land 74,0001
Gain on disposal of FV-NI
investments
49,0002 150,000
525,000
Other expenses and losses
Loss on disposal of building 68,000
Unrealized loss on FV-NI investments 54,000 122,000
Income before income tax 403,000
Income tax expense 99,000
Net income $304,000
 Calculation of retained earnings:

Balance, January 1 $465,000

Add: Net income 304,000
Balance, December 31 $769,000

1
($216,000 - $142,000)
2
$33,000 + ($126,000 - $110,000)

Note: under ASPE, retained earnings at January 1, 2023 would be $465,000 ($410,000 + $55,000),
because all investments designated as FV-OCI under IFRS would be accounted for as FV-NI under
ASPE. Under ASPE, no OCI exists and investments traded in an active market are accounted for
as FV-NI. Therefore, all previously recognized unrealized gains/(losses) on those investments
($55,000) would have been recorded in net income and closed to retained earnings in previous
years.

e. The sum of the AOCI and Retained Earnings under IFRS equal the balance of Retained Earnings
under ASPE as follows:
 IFRS ASPE
Retained Retained
AOCI Earnings Earnings

Balance Jan. 1, 2023 $129,000 $410,000 $465,000

Unrealized gain FV-OCI debt
investments during 2023 16,000
Realized gain recycled to net income (71,000)
Transfer of accumulated revaluation
surplus on land (74,000) 74,000
Net income 285,000 304,000
Balance Dec. 31, 2023 0 $769,000 $769,000

LO 3,8 BT: AP Difficulty: C Time: 50 min. AACSB: None CPA: CPA: cpa-t001 Reporting
EXERCISE 4.8

a. Multiple-Step Form
Flett Tire Repair Corporation
Income Statement
For the Year Ended December 31, 2023

Sales Revenue
Sales revenue $930,000
Less: Sales returns and allowances 15,000
Net sales revenue 915,000

Cost of Goods Sold

Merchandise inventory, January 1, 2023 $120,000
Purchases $600,000
Less purchase discounts 10,000
Net purchases 590,000
Add freight in 14,000 604,000
Total merchandise available for sale 724,000
 Less merchandise inventory,
137,000
December 31, 2023
Cost of goods sold 587,000
Gross profit 328,000

Operating Expenses
Service expenses
Service salaries and wages 71,000
Depreciation expense—garage
equipment 18,000
Garage supplies expense 9,000 98,000
Administrative expenses
Administrative salaries and
wages
39,000
Depreciation expense—building 28,500
Office supplies expense 9,500 77,000 175,000
Income from operations 153,000

Other revenues and gains

 Dividend revenue 20,000
Gain on disposal of equipment 5,500
178,500

Other expenses and losses

Interest expense 9,000
Loss from flood damage 50,000 59,000

Income before income tax 119,500

Income tax expense 29,875

Net Income $89,625

EXERCISE 4.16
a.
Rainy Day Umbrella Corporation
Statement of Changes in Equity
For the Year Ended December 31, 2023
(all amounts in thousands)

Preferred Common Contr. Retained Acc. Other

Shares Shares Surplus Earnings Comp. Inc. Total

Beginning Balance $3,375 $8,903 $3,744 $23,040 $2,568 $41,630

Comprehensive Income:
Net income 7,320 7,320
Other comprehensive income 585 585
Dividends to shareholders:
Preferred (30) (30)
Common (20) (20)
Issue of Common shares 285 285
Ending Balance $3,375 $9,188 $3,744 $30,310 $3,153 $49,770

b.
Rainy Day Umbrella Corporation
Statement of Financial Position (Partial)
December 31, 2023
(all amounts in thousands)

Share capital:
Preferred shares $ 3,375
Common shares 9,188
Total share capital 12,563
Contributed surplus 3,744
Total paid-in capital 16,307
Retained earnings 30,310
Accumulated other comprehensive income 3,153
 Total shareholders’ equity $49,770

LO 6 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting
EXERCISE 4.18

Net income:
Income from continuing operations
before tax $23,650,000
Income tax expense (30%) 7,095,000
Income from continuing operations 16,555,000
Discontinued operations
Loss before tax $3,225,000
Less income tax recovery 967,500 2,257,500
Net income $14,297,500

Preferred dividend entitlement

($10,750,000 x 10%): $ 1,075,000

Weighted average common shares outstanding:

12/31/23–3/31/23 (3,600,000 x 3/12) 900,000
 4/1/23–12/31/23 (4,000,000 x 9/12) 3,000,000
Weighted average 3,900,000

Earnings per share:

Income from continuing operations $3.971
Discontinued operations (.58)2
Net income $3.393

1
($16,555,000 – $1,075,000) ÷ 3,900,000.
2
$2,257,500 ÷ 3,900,000.
3
($14,297,500 – $1,075,000) ÷ 3,900,000.

LO 7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

CHAPTER 5
EXERCISE 5.2

a. 8 l. 6
 b. 4 m. 1
c. 6 n. 7
d. 6 o. 3
e. 3 p. 2
f. 1 q. 1
g. 6 r. 1
h. 6 s. 6
i. 1 t. 6
j. 1 u. 11
k. 7 v. 10

LO 3 BT: K Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 5.3

Financial
Classification Monetary Instrument
a. 1.
b. 2. X
c. 6.
d. 1.
e. 7.
f. 4.
g. X X
1.
h. 6. X **
i. 1. X X
j. 6. X X
k. 1.*
l. 3.
 m. 2. X X
n. 6. X X
o. X.
p. 3.
q. 11.
r. 6. X X
s. 5.

* Under IFRS, a non-current asset would typically be reclassified as a current asset when it meets
the criteria to be classified as held for sale.
** Financial instruments are contracts between two or more parties that create a financial asset for
one party and financial liability or equity instrument for the other. Therefore, non-contractual items
such as taxes payable and HST payable are not financial instruments.

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

EXERCISE 5.4
a.
Bruno Corp.
Statement of Financial Position
December 31, 2023

Assets

Current assets
Cash $ 290,000
FV - NI Investments 120,000
Accounts receivable $357,000
Less allowance for expected credit losses 17,000 340,000
Inventory, at lower of cost and net realizable value 401,000
Prepaid expenses 12,000
Total current assets 1,163,000

Long-term investments
Land held for future use 175,000
Investment in bonds to collect cash flows 90,000 265,000
Property, plant, and equipment
Buildings $730,000
Less accumulated
depreciation—buildings
160,000 570,000
Equipment 265,000
Less accumulated
105,000 160,000 730,000
depreciation—equipment

Goodwill 80,000
Total assets $2,238,000

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable $ 195,000
Bank overdraft 30,000
Notes payable 125,000
Rent payable 49,000
 Total current liabilities 399,000

Long-term debt
Bonds payable $553,000
Pension obligation 82,000 635,000
Total liabilities 1,034,000

Shareholders’ equity
Common shares, unlimited authorized
issued 290,000 shares 290,000
Contributed surplus 180,000
Retained earnings* 734,000
Total shareholders’ equity 1,204,000
Total liabilities and shareholders’ equity $2,238,000

*$2,238,000 – $1,034,000 – $290,000 – $180,000 = $734,000

*b . The bank overdraft is classified as a current liability, as there is no legal right to offset the
bank overdraft against the positive cash balance. The bank accounts are at different banks.
Had the bank overdraft been offset (netted) against the cash balance as originally prepared
 by the bookkeeper, there would have been no effect on working capital. The net amount of
current assets, less current liabilities would not change in absolute amount.

However, the classification change does affect the current ratio (current assets / current
liabilities):

Overdraft netted Proper classification

$1,163 – $30 $1,163
$399 – $30 $399
= 3.07 = 2.91

Those who prepared the statement of financial position likely did not do the misclassification
of the bank overdraft on purpose. The bank account in overdraft is likely one of several bank
accounts used by Bruno Corp. This particular account happens to fall in a temporary
overdraft position, as allowed by the bank, as of the fiscal year end of the business.

LO 3,4,11 BT: AP Difficulty: M Time: 40 min. AACSB: Ethics CPA: cpa-t001 cpa-e0001 CM: Reporting and Ethics

EXERCISE 5.5
a.
 Garfield Corp.
Statement of Financial Position
As at July 31, 2023

Assets
Current assets
Cash $ 66,000*
Accounts receivable $ 46,700**
Less allowance for expected credit
losses
3,500 43,200
Inventory 65,300***
Total current assets 174,500

Long-term investments
Bond sinking fund investment 12,000

Property, plant, and equipment

Equipment 112,000
 Less accumulated depreciation—
28,000 84,000
equipment

Intangible assets
Patents, net of accumulated amortization 21,000
Total assets $291,500

Liabilities and Shareholders’ Equity

Current liabilities
Notes and accounts payable $ 52,000****
Income tax payable 9,000
Total current liabilities 61,000

Bonds payable 75,000

Total liabilities 136,000

Shareholders’ equity
Common shares 105,000
Retained earnings 50,500 __155,500
 Total liabilities and shareholders’ equity $291,500
* ($69,000 – $12,000 + $9,000) *** ($60,000 + $5,300)
** ($52,000 – $5,300) ****($44,000 + $8,000)
EXERCISE 5.5 (CONTINUED)

*b. Since there is no legal right to offset the credit balances in accounts receivable against any
other amounts owing from customers, these balances need to be classified as a current liability,
unless the amounts are deemed to be immaterial. Had the credit balances in accounts
receivable been offset (netted) against other debit balances as originally presented, there would
have been no effect on working capital. The net amount of current assets, less current liabilities
would not change in absolute amount.

However, the classification change does affect the current ratio (current assets / current
liabilities) as demonstrated below:

Credit balances netted Proper classification

$174,500 – $8,000 $174,500
$61,000 – $8,000 $61,000
= 3.14 = 2.86
 The persons preparing the statement of financial position likely did not feel that the credit
balances in accounts receivable warranted a reclassification. They likely were not aware of the
impact the credit balances would have on the current ratio. Materiality would also be a basis
for leaving the credit balances to offset the debit balances in accounts receivable.

The credit balances in accounts receivable represent amounts owing to specific customers.
Following are possible conditions or situations that would give rise to a credit balance in
accounts receivable:
1. Customers have returned goods after paying for a shipment and credit memorandums
for the sales returns have been applied subsequent to collection on account.

2. A customer has inadvertently overpaid an account.

3. Garfield’s policy on returned items does not allow a cash refund. Instead the policy calls
for the credit to be applied to a future purchase on account.
4. Some accounting software packages treat customer prepayments (unearned revenues)
as credit balances in accounts receivable, since the customer information is part of the
accounts receivable subsidiary ledger.

LO 3,4,11 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

EXERCISE 5.11

a.
 Uddin Corp.
Statement of Financial Position
December 31, 2023

Assets
Current assets $1,380,500a
FV – OCI Investments 20,500
Property, plant, and equipment
Land $ 30,000
Buildings ($1,120,000 + $31,000) $1,151,000
Less accumulated depreciation
($130,000 + $4,000) (134,000) 1,017,000
Equipment ($320,000 – $20,000) 300,000
Less accumulated depreciation
($11,000 – $8,000 + $9,000) (12,000) 288,000
Total 1,335,000
Intangible assets
Patents, net ($40,000 – $3,000) 37,000

Total assets $2,773,000

 Liabilities and Shareholders’ Equity
Current liabilities ($1,020,000 + $13,000) $1,033,000
Long-term liabilities
Bonds payable ($1,100,000 + $75,000) 1,175,000
Total liabilities 2,208,000
Shareholders’ equity
Common shares $180,000
Retained earnings* 385,000
Total shareholders’ equity 565,000
Total liabilities and shareholders’ equity $2,773,000

* ($174,000 + $391,000 – $180,000)

a
The amount determined for current assets is calculated last and
is a derived or “plug” figure. That is, total liabilities,
shareholders’ equity and other asset balances are calculated
because information is available to determine these amounts.

PROBLEM 5.3
a.

Eastwood Inc.
Statement of Financial Position
December 31, 2023

Assets

Current assets
Cash $ 41,000
Accounts receivable $163,500
Less allowance for expected credit
losses 154,800
8,700
Inventory—at lower of FIFO cost and 208,500
NRV
Prepaid insurance 5,900
Total current assets $ 410,200

Long-term investments
 FV – OCI investments, of which investments carried
at $120,000 have been pledged as security for
notes payable to the bank 378,000

Property, plant, and equipment

Land 85,000
Building under construction 124,000
Equipment 400,000
Less accumulated depreciation 240,000 160,000 369,000

Intangible assets
Patents 40,000
Less accumulated amortization 4,000 36,000
Total assets $1,193,200

Liabilities and Shareholders’ Equity

Current liabilities
Notes payable to bank, secured by FV-OCI
investments with carrying amount $120,000 $ 94,000
Accounts payable 148,000
 Income tax payable 49,200
Total current liabilities $ 291,200

Long-term liabilities
7% bonds payable, $200,000, due January 1, 2035 180,000
Total liabilities 471,200

Shareholders’ equity
Capital shares
Common shares; unlimited shares authorized,
500,000 shares issued and outstanding 500,000
Retained earnings 138,000
Accumulated other comprehensive income 84,000* 722,000
Total liabilities and shareholders’ equity $1,193,200

* Opening balance of $45,000 + $39,000 ($378,000 – $339,000) for unrealized holding gain – OCI on FV-OCI investments.

b. If the Construction in Process account represents the costs of construction of a building for resale,
the account is an inventory account, and a current asset. However, the Construction in Process
account in Eastwood’s trial balance represents the costs of construction of a building for use by
Eastwood, which is a property, plant, and equipment account, and a long-term asset. Incorrect
 classification of the Construction in Process account as an inventory account would overstate current
assets, which is a measure that a potential creditor would use in evaluating Eastwood’s liquidity.
Incorrect classification of accounts presents biased and misleading information on the statement of
financial position. Proper classification of accounts is necessary in presenting a statement of
financial position that is useful and faithfully representative.

LO 4,6 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5.9

a.
Sargent Corporation
Statement of Financial Position
December 31, 2023

Assets
Current assets
Cash $ 190,000
FV - NI investments 80,000
Accounts receivable $170,000
Less allowance for expected credit losses 10,000 160,000
Inventory, at lower of FIFO cost and
net realizable value 180,000
Total current assets $ 610,000

Long-term investments
FV – OCI investments 155,000
Bond sinking fund 250,000
Note receivable from related company due 2029 40,000
Land held for future use 270,000 715,000

Property, plant, and equipment

Land 500,000
Buildings $1,040,000
 Less accumulated depreciation—
buildings 360,000 680,000
Equipment 450,000
Less accumulated depreciation—
equipment 180,000 270,000 1,450,000

Intangible assets
Patents (net of accumulated amortization) 115,000
Franchise (net of accumulated amortization) 265,000 380,000
Total assets $3,155,000

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable $ 140,000
Notes payable 80,000
Bank overdraft 40,000
Income tax payable 40,000
Unearned revenue 5,000
 Total current liabilities 305,000

Long-term liabilities
Notes payable $ 120,000
7% bonds payable, due 2031 960,000 1,080,000
Total liabilities 1,385,000

Shareholders’ equity
Capital shares
Preferred shares; 200,000 shares
authorized, 70,000 issued $ 450,000
Common shares; unlimited
authorized, 100,000 issued 1,000,000 1,450,000
Retained earnings 290,000
Accumulated other comprehensive income 30,000
Total shareholders’ equity 1,770,000
Total liabilities and shareholders’ equity $3,155,000

b. The main purposes of the statement of financial position are to provide information about the assets,
liabilities and shareholders’ equity, to allow the reader to assess how well the business is using its
 assets to earn a return, and to evaluate the business’ capital structure. The details are intended to
provide all of the necessary information to assess business risk and future cash flows, and are lost
in the condensed presentation, especially if items are offset. It would be difficult with the condensed
format to analyze the company’s liquidity, solvency and financial flexibility. The final goal is to
analyze profitability and return on investment, when relating the income statement to the level of
investment outlined in the statement of financial position.

LO 2,3,4 BT: AP Difficulty: C Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 5.10

Criticisms of the statement of financial position of the Manion Corporation:

1. An allowance for expected credit losses for the accounts receivable is not indicated, and there is no
indication that the amount presented is “net”.

2. The basis for the valuation and the method of pricing of inventory are not indicated, and it is not
indicated that inventory is reported at the lower of cost and net realizable value, as required by IFRS.

3. An investment in a subsidiary company is not an investment ordinarily held to be sold within one
year or the operating cycle. As such, this account should not be classified as a current asset, but
rather should be included under the heading “Long-term investments”. If this is an investment in the
common shares of the subsidiary (as opposed to an advance) it would be eliminated in consolidation,
as all subsidiaries are consolidated under IFRS.

4. Investments in shares listed under investments should be described as to the measurement model
used to account for these investments, for instance, “FV-NI” or “FV-OCI” depending on the nature
of the investments and accounting policy choice.
5. Buildings and land should be segregated. The term “reserve for” should be replaced by
“accumulated” and the accumulated depreciation should be shown as a subtraction from the
Buildings account only.

6. Investment in bonds to be held to maturity would be more appropriately shown under the heading of
"Investments" and should be shown at “amortized cost”.

7. Reserve for Income Taxes should be entitled Income Tax Payable.

8. Customers' Accounts with Credit Balances is an immaterial amount. As such, this account need not
be shown separately. The $1 credit could readily be netted against Accounts receivable, or grouped
with Accounts payable without any material misstatement.

9. Bonds Payable are inadequately disclosed. The interest rate, interest payment dates, and maturity
date should be indicated.

10. Additional disclosure relative to the Common Shares account is needed. This disclosure should
include the number of shares authorized and issued.

11. Earned Surplus should be entitled Retained Earnings.

12. Cash Dividends Declared should be disclosed on the statement of changes in equity under the
section for retained earnings as a reduction of retained earnings. Dividends Payable, in the amount
 of $8,000, should be shown on the statement of financial position among the current liabilities,
assuming payment has not occurred.

13. Grand totals should have captions for “Total Assets” and “Total Liabilities and Shareholders’ Equity”.

14. Shareholders’ equity may need to show “Accumulated Other Comprehensive Income” since the
company has investments and would have unrealized gains and losses to disclose if they are using
the Fair Value through OCI model.

LO 4,5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
 CHAPTER 6

EXERCISE 6.7

1. Grupo would recognize revenue of $1,000,000 at delivery.

2. Grupo would recognize revenue of $800,000 at the point of sale. The point of sale will occur
when the goods reach their destination.

3. Grupo would recognize revenue of $464,000 at the point of sale. Interest revenue of $36,000
will be earned over the next 2 years using the effective interest method.

4. Grupo would record the sales revenue at the point of sale at the amount of $45,000, which is
the fair value of the merchandise sold. This amount is the best estimate since Grupo is unable
to determine the market value of the common shares obtained in the exchange (since the
shares are shares of a private company).
LO 5 BT: C Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 6.16

a.
Steps Analysis
Step 1: Identify the Both parties have agreed to enter into a
contract with contract. The quantity, price, and
customers. payment terms have been agreed to and
each party’s rights under the contract are
clear. The contract has commercial
substance. There are no indications of
any concerns regarding collectibility.

Step 2: Identify the The contract includes two performance

separate obligations: the sale of the goods and
performance the installation of the goods.
obligations in the
contract.
Step 3: Determine $400,000
the transaction price.
Step 4: Allocate the Schedule 1 below
transaction price to
the separate
performance
obligations.
Step 5: Recognize The first performance, the sale of goods,
revenue when each is satisfied on March 1, 2023, when the
performance goods are delivered to Ricard. The
revenue related to this performance
obligation is obligation would be recognized at this
satisfied. point.

The second performance obligation

related to the installation of the goods is
satisfied and the revenue is recognized
on June 18, 2023, when the installation is
completed.
 EXERCISE 6.16 (CONTINUED)

a. (Continued)
Schedule 1

Stand-
Alone
(SA) % of Total Allocation
Performance Selling SA Selling Contract of Contract
obligation Price Price Price Price
Deliver goods $370,000 90.24% X $400,000 $360,960
Installation 40,000 9.76% X $400,000 39,040
$410,000 100 % $400,000

b.
Jan. 2, 2023
No entry – neither party has performed under the contract.
 March 1, 2023
Cash ............................................................... 270,000
Accounts Receivable ....................................... 90,960
Sales Revenue ......................................... 360,960
To record sales

Cost of Goods Sold ......................................... 300,000

Inventory ................................................... 300,000
To record cost of goods sold

June 18, 2023

Cash ($400,000 - $270,000)............................ 130,000

Service Revenue - Installation ................. 39,040
Accounts Receivable ............................... 90,960

The sale of the goods is recognized once delivered. The installation fee is recognized when the
goods are installed.
LO 2,6,7 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
 EXERCISE 6.17

a.

Stand-
Alone (SA) % of Total Allocation of
Performance Selling SA Selling Contract Contract
obligation Price Price Price Price
Deliver equip. $1,000,000 95.24% X $1,000,000 $952,400
Installation 50,000 4.76% X $1,000,000 47,600
$1,050,000 100 % $1,000,000

b.
May 2, 2023
No entry – neither party has performed under the contract.

June 1, 2023
Cash ............................................................... 950,000
Contract Asset ............................................... 2,400
 Sales Revenue ......................................... 952,400
To record sales

Cost of Goods Sold ......................................... 600,000

Inventory ................................................... 600,000
To record cost of goods sold

September 30, 2023

Cash ................................................................. 50,000

Service Revenue - Installation ................. 47,600
Contract Asset.......................................... 2,400

LO 6,7 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 6.19

a. The separate performance obligations are the oven, installation, and maintenance service, since
each item has stand-alone value to the customer.

b.
 Stand-
Alone % of Allocation
(SA) Total SA of
Performance Selling Selling Contract Contract
obligation Price Price Price Price
Oven $800 78.05% X $1,000 $780
Installation 501 4.88% X $1,000 49
Maintenance 175 17.07% X $1,000 171
$1,025 100 % $1,000

1
$50 = $850 – $800 (differential between oven with and without installation services)
LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 6.36

a. No computation of gross profit necessary as no gross profit to be recognized prior to

completion of contract.

Construction costs incurred during the year ......... $ 1,185,800

Partial billings on contract (25% X $6,000,000) ...... (1,500,000)
Contract Liability ..................................................... $ (314,200)

b. Contract price ............................................... $6,000,000

Costs to date ......................................... $1,185,800

Estimated costs to complete ............... 4,204,200
Total ........................................ 5,390,000

Estimated profit ($6,000,000 – $5,390,000) 610,000

% of completion1.................... X 22%
Gross profit ........................................... $ 134,200
1
($1,185,800 ÷ $5,390,000 = 22%)

Revenue recognized (22% X $6,000,000) ……………. $1,320,000

Partial billings on contract (25% X $6,000,000) ...... (1,500,000)
Contract Liability ..................................................... $ (180,000)

LO 12,14 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
 *PROBLEM 6.9

a. 2023 2024 2025

Contract price $2,800,000 $2,800,000 $2,800,000
Less estimated cost:
Costs to date 800,000 1,800,000 2,350,000
Estimated costs to complete 1,700,000 600,000 ______-_
Estimated total costs 2,500,000 2,400,000 2,350,000
Estimated total gross profit $ 300,000 $ 400,000 $ 450,000
Percent complete 32% 75% 100%
[ $800,000] [$1,800,000] [$2,350,000]
[$2,500,000] [$2,400,000] [$2,350,000]
*PROBLEM 6.9 (CONTINUED)

a. (continued) Percentage-of-completion
Recognized Recognized
in Prior in Current
To Date Years Year
2023
Revenues ($2,800,000 × 32%) $ 896,000 $ 896,000
Costs 800,000 800,000
Gross profit $ 96,000 $ 96,000
2024
Revenues ($2,800,000 × 75%) $2,100,000 $ 896,000 $1,204,000
Costs 1,800,000 800,000 1,000,000
Gross profit $ 300,000 $ 96,000 $ 204,000
2025
Revenues ($2,800,000 × 100%) $2,800,000 $2,100,000 $700,000
Costs 2,350,000 1,800,000 550,000
Gross profit $ 450,000 $ 300,000 $150,000
 *PROBLEM 6.9 (CONTINUED)
b. Percentage-of-completion 2023 2024

Contract Asset/Liability 800,000 1,000,000

Materials, Cash, Payables 800,000 1,000,000
To record cost of construction
Accounts Receivable 850,000 1,450,000
Contract Asset/Liability 850,000 1,450,000
To record progress billings
Cash 700,000 1,500,000
Accounts Receivable 700,000 1,500,000
To record collections
Contract Asset/Liability 896,000 1,204,000
Revenue from Long-Term Contracts 896,000 1,204,000
To record revenues
Construction Expenses 800,000 1,000,000

Contract Asset/Liability 800,000 1,000,000

To record construction expenses
*PROBLEM 6.9 (CONTINUED)

c. Balance in Contract Asset/Liability account – Percentage-of-

completion
December 31,2024:

Costs 2023 $ 800,000

Billings 2023 (850,000)
Construction revenue 2023 896,000
Construction expenses 2023 (800,000)
Balance Dec. 31, 2023 46,000
Costs 2024 1,000,000
Billings 2024 (1,450,000)
Construction revenue 2024 1,204,000
Construction expenses 2024 (1,000,000)
Balance Dec. 31, 2024 $ (200,000)

d. Percentage-of-completion

ESSAN CONSTRUCTION INC.

Income Statement 2024
Revenue from long-term contracts $1,204,000
Construction expenses 1,000,000
Gross profit $ 204,000
SFP (12/31) 2024
Current assets
Accounts receivable 1 $ 100,000
Current liabilities
Contract liability (net) (above) $ 200,000
1
Progress billings to date Dec. 31,2024 $2,300,000
Collections to date 2,200,000
Balance Dec. 31,2024 $100,000
 Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Solutions Manual 4.94 Chapter 4

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
ACCT 3201 Solutions to practices questions Chapters 7 to 12

CHAPTER 7
EXERCISE 7.2

1. Cash balance of $625,000. Only the chequing account balance

should be reported as cash. The certificate of deposit of
$1,100,000 should be reported as a short-term investment, the
cash advance to subsidiary of $980,000 should be reported as a
receivable, and the utility deposit of $180 should be identified as
a receivable from the gas company.

2. Cash balance is $484,650 calculated as follows:

Chequing account balance $500,000
Overdraft (17,000)
Petty cash 300
Coin and currency 1,350
$484,650

Cash held in a bond sinking fund is restricted. Assuming the

bonds are noncurrent, the restricted cash is also reported as
noncurrent.

3. Cash balance is $549,800 calculated as follows:

Chequing account balance $540,000
Bank draft from customer 9,800
$549,800

The postdated cheque of $11,000 should be reported as a

receivable. Assuming the $100,000 cash restricted due to
compensating balance is not included in the chequing account
 amount, it should be reported separately and classified as current
or noncurrent (depending on the nature of the arrangement). If the
$100,000 is included in the cash balance above and is correctly
classified as a current item, this restriction must be disclosed and
the nature of the restriction would be described in a note
indicating the type of arrangement and amount. Postage stamps
on hand are reported as part of supplies or prepaid expenses.

4. Cash balance is $95,000 calculated as follows:

Chequing account balance $57,000
Money market mutual fund 38,000
$95,000

The NSF cheque received from customer should be reported as a

receivable (it would have been removed from the cash account
per books, and added to accounts receivable).

5. Cash balance is $700,900 calculated as follows:

Chequing account balance $700,000
Cash advance received from customer 900
$700,900

Cash restricted for future plant expansion of $500,000 should be

reported as restricted cash in noncurrent assets. The 60-day
treasury bills of $180,000 should be reported as cash equivalents.
Cash advance received from customer of $900 should be included
as part of cash and the credit reported as a liability; cash advance
of $7,000 to company executive should be reported as a
receivable; refundable deposit of $26,000 paid to federal
government should be reported as a receivable.
LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 7.5

a.
7/1 Accounts Receivable .................................... 9,000
Sales Revenue ...................................... 9,000

7/3 Sales Returns and Allowances..................... 700

Accounts Receivable ........................... 700

7/5 Cash ($19,000 X 91%) .................................... 17,290

Loss on Disposal of Receivables ................. 1,710
Accounts Receivable .......................... 19,000

7/9 Cash ......................................................... 10,670

Finance Expense ($11,000 X 3%) ............ 330
Notes Payable ................................. 11,000
To record note payable

12/29 Allowance for Doubtful Accounts........... 7,470

Accounts Receivable. ...................... 7,470
[$9,000 – $700 = $8,300;
$8,300 – (10% X $8,300) = $7,470]
b.

If the receivables are factored without recourse, the transaction would

be treated as a sale of receivables under ASPE and IFRS. The risks
and rewards are assumed to have been transferred and control is also
assumed to have been transferred.

c.

If the receivables are factored with recourse, under IFRS

the risks and rewards will not be considered to have been transferred.
There is no transfer because Janut is guaranteeing payment if the
customer does not pay the receivable. One of the IFRS 9 criteria of
risks and rewards being transferred has not been met: “The entity has
no obligation to pay amounts to the eventual recipients unless it
collects equivalent amounts from the original receivable.” The
receivables, therefore, remain on the books of Janut and a loan
liability is recorded.

Under ASPE, Janut uses the decision tree provided under

the standard. Assuming they have surrendered control (assets
are isolated, transferee can pledge/sell assets, no repurchase
agreement), Janut can use a financial components approach and the
receivables can be removed from the books. A recourse obligation
(liability) is recorded for the estimated amount that would have to be
paid for the debtors who do not pay their receivables balance, as well
as an estimated liability for any servicing costs.

LO 4,10 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 7.7

Balance, January 1, 2023 $400,000

Loss on impairment accrual
.8% X ($80,000,000 X 0.9) 576,000
976,000
Uncollectible receivables written off (500,000)
Balance, December 31, 2023 before adjustment 476,000
Allowance adjustment 49,000
Balance, December 31, 2023 $525,000

Loss on Impairment .................................... 49,000

Allowance for Expected Credit
Losses.................................................
49,000

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

EXERCISE 7.10

Balance 1/1 ($850 – $155) $ 695 Over one year

Eight months
4/12 (#2412) ($2,110 – $1,000 – $300) 810 and 18 days

11/18 (#5681) ($2,000 – $1,250) 750 One month

 and 12 days
Balance December 31 $2,255

Inasmuch as later invoices have been paid in full, all three of these
amounts should be investigated to determine why Hopkins Co. has not
paid them. The amounts in the beginning balance and #2412 should be
of particular concern. (Note to instructor: multiple interpretations of
accounts to investigate are possible)

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

EXERCISE 7.11

a. Interest bearing note – Option 1:

September 30, 2023

Notes Receivable ...................................... 105,000
Accounts Receivable ....................... 105,000

December 31, 2023

Interest Receivable .................................. 2,100
Interest Income1 ............................... 2,100
1
($105,000 X 8% X 3/12)

September 30, 2024

Cash .......................................................... 113,400
Interest Receivable .......................... 2,100
Interest Income2 ............................... 6,300
 Notes Receivable ............................. 105,000
2
($105,000 X 8% X 9/12)

b. Non-interest bearing note – Option 2:

September 30, 2023

Notes Receivable ...................................... 105,000
Accounts Receivable ....................... 105,000

December 31, 2023

Notes Receivable ...................................... 2,100
Interest Income3 ............................... 2,100
3
($105,000 X 8% X 3/12)

September 30, 2024

Notes Receivable ...................................... 6,300
Interest Income4 ............................... 6,300
4
($105,000 X 8% X 9/12)
To record interest income

Cash .......................................................... 113,400

Notes Receivable ............................. 113,400
To record the collection of the note receivable

c. There is no difference in the amount of interest income earned

in 2023 and 2024 because both options bear interest at 8%. The
“non-interest bearing” note has the interest included in the face
amount of the note and is journalized to account for this. The
actual interest earned is the same under both options.
c. The liquidity of Big Corp. at December 31, 2023 will remain
unchanged whichever option is selected. Under option 1, the note
balance remains at $105,000 but interest receivable of $2,100
results in a total of $107,100 under current assets. Under Option
2, the balance of the note, after recording the accrual of interest
income is also $107,100 under current assets. The cash flows will
also be the same under both options as the amount collected at
the maturity of the note is $113,400.

LO 6 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 7.14

a. Notes Receivable ................................. 159,438

Service Revenue ......................... 159,438*

Using a financial calculator:

PV ? Yields $ (159,439)
I 12%
N 2
PMT 0
FV $ 200,000
Type 0
Excel formula:
=PV(rate,nper,pmt,fv,type)

* Present value of note:

 PV of $200,000 due in 2 years at 12%
$200,000 X .79719 = $159,438

Notes Receivable.................................. 19,133

b.
Interest Income1 ......................... 19,133
1
($159,438 X 12%)

c. Notes Receivable.................................. 21,429

Interest Income2 .......................... 21,429
2
[($159,439 + $19,133) X 12%]

Cash ...................................................... 200,000

Notes Receivable ....................... 200,000

d. The balance of the note at December 31, 2023 is $178,571

($200,000 less discount balance of $21,429). The note would be
classified as a current asset on the SFP as the maturity date of
the note of December 31, 2024 is within the next fiscal year.
e. 2024 & 2025 interest income would be $20,281 per year.
[($200,000 – 159,438) / 2 = $40,562 / 2 years = $20,281]

f. Fair value of the consulting services provided can be used to

value and record the transaction, instead of fair value of the note
received.

LO 6,8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 7.4

a.

Balance at January 1, 2023 $184,000

Bad debt expense accrued in 2023
($9,400,000 X 2.5%) 235,000
Recovery of bad debts in 2023
previously written off 15,000
434,000
Deduct write-offs for 2023
($95,000 + $69,000) 164,000
Balance at December 31, 2023
before change in accounting estimate 270,000
Increase due to change in accounting estimate
during 2023 30,250
Balance at December 31, 2023
adjusted (Schedule 1) $300,250

Schedule 1
Calculation of Allowance for Doubtful Accounts
at December 31, 2023

Aging Doubtful
category Balance % accounts

Nov – Dec. 2023 $1,080,000 8 $ 86,400

July – Oct. 650,000 12.5 81,250
Jan – Jun. 420,000 20 84,000
Prior to 1/1/23 81,000* 60 48,600
 $300,250

*$150,000 – $69,000

b. Campbell Corporation
Journal Entry
December 31, 2023
Account Dr. Cr.

Bad Debt Expense ...................................... 30,250

Allowance for Doubtful Accounts ........ 30,250
To record adjustment resulting from a
change in accounting estimate

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

PROBLEM 7.7

a.
October 1, 2023
Notes Receivable ........................................ 150,000
Sales Revenue .................................. 150,000

December 31, 2023

Interest Receivable ..................................... 3,750
Interest Income1 ................................. 3,750
1
($150,000 X 10% X 3/12)

October 1, 2024
 Cash ........................................................... 15,000
Interest Receivable ............................ 3,750
Interest Income2 ................................. 11,250
2
($150,000 X 10% X 9/12)

December 31, 2024

Interest Receivable ..................................... 3,750
Interest Income3 ................................. 3,750
3
($150,000 X 10% X 3/12)

October 1, 2025
Cash ........................................................... 165,000
Interest Receivable ............................ 3,750
Interest Income4 ................................. 11,250
Notes Receivable............................... 150,000
4
($150,000 X 10% X 9/12)

b.
October 1, 2023
Notes Receivable ........................................ 150,000
Sales Revenue .................................. 150,000

December 31, 2023

Interest Receivable ..................................... 3,750
Interest Income5 ................................. 3,750
5
($150,000 X 10% X 3/12)
 January 1, 2024
Interest Income ........................................... 3,750
Interest Receivable ........................... 3,750

October 1, 2024
Cash ........................................................... 15,000
Interest Income .................................. 15,000

December 31, 2024

Interest Receivable ..................................... 3,750
Interest Income6 ................................. 3,750
6
($150,000 X 10% X 3/12)

January 1, 2025
Interest Income ........................................... 3,750
Interest Receivable ........................... 3,750

October 1, 2025
Cash ........................................................... 165,000
Interest Income .................................. 15,000
Notes Receivable............................... 150,000

LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 7.8

a.
Value of the note receivable:
Using a financial calculator:
PV ? Yields $ (55,844)
I 11%
N 4
PMT $18,000
FV 0
Type 0
Excel formula: =PV(rate,nper,pmt,fv,type)

Or
PV of $18,000 annuity
@ 11% for 4 years ($18,000 X 3.10245) $55,844.10

Instalment Note Receivable Schedule

Note
Cash Interest Principal Carrying
Date Collected Income Collected Amount
Dec. 31 2023 $55,844.10
Dec. 31 2024 $18,000.00 $6,142.85 $11,857.15 43,986.95
Dec. 31 2025 18,000.00 4,838.56 13,161.44 30,825.51
Dec. 31 2026 18,000.00 3,390.81 14,609.19 16,216.32
*
Dec. 31 2027 18,000.00 1,783.68 16,216.32 -
*
Rounded by $.12

b.
1. December 31, 2023
Cash .............................................................. 36,000.00
Notes Receivable ........................................... 55,844.10
Service Revenue .................................. 91,844.10

To record revenue at the present value of the

note plus the immediate cash payment:
PV of $18,000 annuity
@ 11% for 4 years ($18,000 X 3.10245) $55,844.10
Down payment 36,000.00
Capitalized value of services $91,844.10

2. December 31, 2024

Cash ........................................................... 18,000.00
Notes Receivable............................... 11,857.15
Interest Income .................................. 6,142.85
3. December 31, 2025
Cash ......................................................... 18,000.00
Notes Receivable............................. 13,161.44
Interest Income ................................ 4,838.56

4. December 31, 2026

Cash ......................................................... 18,000.00
 Notes Receivable............................. 14,609.19
Interest Income ................................ 3,390.81

5. December 31, 2027

Cash ......................................................... 18,000.00
Notes Receivable............................. 16,216.32
Interest Income ................................ 1,783.68

c. From the perspective of Zhang, an instalment note reduces the risk of

non-collection when compared to a non-interest-bearing note. For a non-
interest-bearing note, the full amount is due at the maturity of the note. An
instalment note provides interest and a reduction of the principal balance in
every annual payment received. This is demonstrated in the instalment
note receivable schedule. In addition, receiving cash earlier enables it to be
used for other purposes.

LO 6 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 7.9

a. 1. Cash inflows from notes:

2023 2024 2025 2026 2027

9% Note receivable
Principal $600,000 $600,000 $600,000
Interest* 162,000 108,000 54,000

8% Note receivable
Principal 400,000
Interest 32,000 32,000 32,000

Non-interest-bearing note
receivable
Payment 200,000

Instalment contract
receivable
Down payment 60,000
Payments 45,125 45,125 45,125 45,125

6% Note receivable
Principal 200,000
Interest ______ 6,000 ______ ______ ______

$854,000 $991,125 $1,331,125 $45,125 $45,125

* 9% Note receivable interest payment calculations:

2023: $1,800,000 X 9% = $162,000
2024: ($1,800,000 - $600,000) X 9% = $108,000
2025: ($1,800,000 - $600,000 - $600,000) X 9% = $54,000

2. Interest Income reported in 2023:

Note Receivable—Sale of Division

Interest earned – 1/1 to 5/1/2023
($1,800,000 X 9% X 4/12) $ 54,000
Interest earned – 5/1 to 12/31/2023
($1,200,000 X 9% X 8/12) 72,000 $ 126,000

Note Receivable—Employees
Interest earned 1/1 to 12/31/2023
($400,000 X 8%) 32,000

Zero-interest-bearing Note—Patent
Face amount 4/1/23 $200,000
Less imputed interest
[$200,000 – ($200,000 X 0.79719)] 40,562
Balance, 4/1/2023 159,438
Interest earned to 12/31/2023
($159,438 X 12% X 9/12) 14,349

Instalment Contract—Sale of Land

Interest accrued from 7/1 to 12/31/2023
 ($140,000 X 11% X 6/12) 7,700

Note Receivable - Saini

Interest earned 8/1 to 12/31
($200,000 x 6% x 5/12) 5,000

Total Interest Income reported in 2023 $185,049

3. Notes and interest reported as current assets:

Current portion of notes receivable

—Sale of Division $600,000 (1)
Accrued interest on note—Sale of
Division, from 5/1 to 12/31/2023
($1,200,000 X 9% X 8/12) 72,000 672,000
Current portion of instalment contract 29,725 (3)
Accrued interest—Instalment contract 7,700 37,425
Note receivable from customer 200,000
Accrued interest—customer note 5,000 205,000
Total current notes and interest $914,425

4. Notes and interest reported as long-term investments:

 Note receivable—Sale of Division $ 600,000 (1)
Note receivable—Employees 400,000
Zero-interest-bearing Note—Patent 173,787 (2)
Instalment Contract—Sale of Land 110,275 (3)
Total long-term investment $1,284,062

b. Desrosiers Ltd.
Long-Term Receivables Section
of Statement of Financial Position
December 31, 2023

9% note receivable from sale of division,

due in annual instalments of $600,000 to
May 1, 2025, less current instalment $600,000 (1)
8% note receivable from officer, due Dec. 31,
2025, collateralized by 10,000 shares of
Desrosiers Ltd., common shares with a
fair value of $450,000 400,000
Zero-interest-bearing note from sale of patent,
net of 12% imputed interest,
due April 1, 2025 173,787 (2)
Instalment contract receivable, due in
annual instalments of $45,125 to July 1,
2027, less current instalment 110,275 (3)
Total long-term receivables $1,284,062
 c. Desrosiers Ltd.
Selected Statement of Financial Position Balances
December 31, 2023

Note receivable from customer $200,000

Current portion of long-term receivables:

Note receivable from sale of division $600,000 (1)
Instalment contract receivable 29,725 (3)
Total current portion of long-term receivables $629,725

Accrued interest receivable:

Note receivable from sale of division $72,000 (4)
Instalment contract receivable 7,700
Note receivable from customer 5,000
Total accrued interest receivable $84,700

The $400,000 note receivable from Marcia Lumby, president of Desrosiers

Ltd. is classified at long-term as it is due December 31, 2025.

(d) Desrosiers Ltd.

Interest Income from Long-Term Receivables
For the Year Ended December 31, 2023
Interest income:
Note receivable from sale of division $126,000
Note receivable from sale of patent 14,349 (2)
Note receivable from employee 32,000
 Instalment contract receivable from sale of land 7,700
Note receivable from customer 5,000
Total interest income for year ended 12/31/23 $185,049

Explanation of Amounts

1. Long-term Portion of 9% Note Receivable

at 12/31/2023
Face amount, 5/1/2022 $1,800,000
Less instalment received 5/1/2023 600,000
Balance, 12/31/2023 1,200,000
Less instalment due 5/1/2024 600,000
Long-term portion, 12/31/2023 $ 600,000

2. Zero-Interest-Bearing Note, Net of Imputed

Interest at 12/31/2023
Face amount 4/1/2023 $ 200,000
Less imputed interest
[$200,000 – ($200,000 X 0.79719)] 40,562
Balance, 4/1/2023 159,438
Add interest earned to 12/31/2023
($159,438 X 12% X 9/12) 14,349
Balance, 12/31/2023 $ 173,787

3. Long-term Portion of Instalment Contract

Receivable at 12/31/23
 Contract selling price, 7/1/2023 $ 200,000
Less down payment, 7/1/2023 60,000
Balance, 12/31/2023 140,000
Less instalment due, 7/1/2024
[$45,125 – ($140,000 X 11%)] 29,725
Long-term portion, 12/31/2023 $ 110,275

4. Accrued Interest—Note Receivable, Sale of

Division at 12/31/2023
Interest accrued from 5/1 to 12/31/2023
($1,200,000 X 9% X 8/12) $ 72,000

LO 6 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

CHAPTER 8

EXERCISE 8.2

a. Inventory December 31, 2023 (unadjusted) $234,890

Transaction 2 10,420
Transaction 3 -0-
Transaction 4 -0-
Transaction 5 8,540
Transaction 6 (10,438)
Transaction 7 (11,520)
Transaction 8 1,500
Transaction 9 12,500
 Inventory December 31, 2023 (adjusted) $245,892

Transaction 9 represents a special sales agreement. If Jaeco cannot

make a reasonable prediction for the amount of potential returns from
Simply, then the sale is not valid and the goods cannot be considered
sold, irrespective of the shipping terms. The inventory will remain on
Jaeco’s books at December 31, 2023.

b. Transaction 3
Sales Revenue ................................ 12,800
Accounts Receivable ............ 12,800
To reverse sale entry in 2023

Transaction 4
Purchases ....................................... 15,630
Accounts Payable ................. 15,630
To record purchase of merchandise in 2023

Transaction 8
Refund Liability .............................. 2,600
Accounts Receivable ............ 2,600
To record sales return

Transaction 9
Sales Revenue ................................. 21,000
Accounts Receivable ............ 21,000
To reverse sale entry in 2023
Transaction 3
Sales Revenue ................................. 12,800
Accounts Receivable ............ 12,800
To reverse sale entry in 2023

Transaction 4
Purchases ........................................ 15,630
Accounts Payable ................. 15,630
To record purchase of merchandise in 2023

Transaction 8
Sales Returns
and Allowances ........................... 2,600
Accounts Receivable ............ 2,600
To record sales return

Transaction 9
Sales Revenue ................................. 21,000
Accounts Receivable ............ 21,000
To reverse sale entry in 2023

LO 2,3,5,11 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 8.5

a. Unit Total % of Total Per

No. of Selling Sales Total Allocated Unit
Chairs Price Value Value Cost * Cost
Lounge chairs 400 $ 95 $38,000 37.3% $22,324.05 $55.81

Armchairs 300 85 25,500 25.0% 14,962.50 49.88

Straight chairs 700 55 38,500 37.7% 22,563.45 32.23

$102,000 $59,850.00

* Percentage of total value applied to lump sum of $59,850 paid

Beginning Balance (cost above) $59,850.00

Per Cost of
No. of Unit Goods
Sales Chairs Cost Sold
Lounge chairs 350 $55.81 $19,533.50
Armchairs 210 49.88 10,474.80
Straight chairs 120 32.23 3,867.60
$33,875.90 (33,875.90)
$25,974.10
1.1.1.1Cost of chairs remaining at end of 2023

OR: Cost of chairs remaining:

Lounge chairs: (400 – 350) X $55.81 = $ 2,790.50

 Armchairs: (300 – 210) X $49.88 = 4,489.20
Straight chairs: (700 – 120) X $32.23 = 18,693.40
Cost of ending inventory $25,973.10

*$1.00 difference due to rounding

OR: Cost ratio: $59,850

= 58.7%
$102,000

Beginning Balance (cost above) $ 59,850.00

Less: Cost of Goods Sold:

No. of Selling
Sales Chairs Price Sales
Lounge chairs 350 $95 $33,250
Armchairs 210 85 17,850
Straight chairs 120 55 6,600
57,700 X 58.7% (33,869.90)
Ending Inventory $ 25,980.10

Difference is due to rounding.

b.
Discounted Net
No. of Selling Selling NRV Realizable
Chairs Price Cost Per Unit Value
Lounge chairs 50 $71.25 * $2.00 $69.25 $ 3,462.50
Armchairs 90 59.50 ** 2.00 57.50 5,175.00
Straight chairs 580 33.00 *** 2.00 31.00 17,980.00
Net realizable value of chairs in inventory $26,617.50

* $95 x 75% = $71.25

** $85 X 70% = $59.50
*** $55 X 60% = $33.00

c.

Per Net Lower

No. of Unit Realizable of Cost
Chairs Cost Cost Value and NRV

Lounge chairs 50 $55.81 $2,790.50 $ 3,462.50 $2,790.50

Armchairs 90 49.88 4,489.20 5,175.00 4,489.20
Straight chairs 580 32.23 18,693.40 17,980.00 17,980.00
Inventory value at December 31, 2023 at LC and NRV $25,259.70

LO 2,7 BT: AP Difficulty: S Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 8.9

a.
Errors in Inventories
Net Add Deduct Deduct Add
Income Under- Over - Under-
Over- Corrected
Per statement statement statement
statement Net
Year Books Jan. 1 Dec. 31 Dec. 31
Jan. 1
Income

2018 $ 50,000 $5,000 $ 45,000

2019 52,000 $5,000 9,000 48,000
2020 54,000 9,000 $11,000 74,000
2021 56,000 $11,000 45,000
2022 58,000 2,000 60,000
2023 60,000 2,000 10,000 48,000
$330,000 $320,000

b.
Balance Revised
Original Retained Corrected Retained
Net Income Earnings Net Income Earnings
2018 $ 50,000 $ 50,000 $ 45,000 $ 45,000
2019 52,000 102,000 48,000 93,000
2020 54,000 156,000 74,000 167,000
2021 56,000 212,000 45,000 212,000
2022 58,000 270,000 60,000 272,000
2023 60,000 $ 330,000 48,000 $ 320,000
$330,000 $ 320,000
c. The original data shows a steadily increasing net income. The
revised data is much more variable. It appears that income was
manipulated by adjusting the ending balance of the inventory
account.

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

EXERCISE 8.14

a. July 4 Accounts Receivable .................. 1,440

Sales Revenue (80 X $18) ... 1,440

July 11 Purchases (150 X $16.50) ........... 2,475

Accounts Payable ............... 2,475

July 13 Accounts Receivable .................. 2,250

Sales Revenue (120 X $18.75) 2,250

July 20 Purchases (160 X $17) ................ 2,720

Accounts Payable ............... 2,720

July 27 Accounts Receivable .................. 2,000

Sales Revenue (100 X $20) 2,000

July 31 Inventory1..................................... 370

Cost of Goods Sold ..................... 4,825
 Purchases ($2,475 + $2,720) 5,195
1
($17 x 110) – ($15 x 100)

b. Sales Revenue ($1,440 + $2,250 + $2,000) $5,690

Cost of goods sold 4,825
Gross profit $ 865

c. For a periodic system, the journal entry would be

Inventory1 ............................................ 234

Cost of Goods Sold ............................ 4,961
Purchases ($2,475 + $2,720) ..... 5,195
1
($17 x 102) – ($15 x 100)

Therefore, the loss would be buried in Cost of Goods Sold

assuming there are no accounting records available against
which to compare the physical count. Alternately, if the company
maintains a modified perpetual system, with accounting records
tracking inventory in units, the company would then be able to
identify the shortage and record it separately. The loss of 8 units
(110 - 102) or $136 (8 X $17) would then be recorded as inventory
shrinkage to Inventory Over and Short and the Inventory account
(ending) would be credited. If the shortage were caused by
incorrect record keeping, the Inventory Over and Short would be
included in Cost of Goods Sold.
d.
July 4 Accounts Receivable ......................... 1,440
Sales Revenue (80 X $18) ......... 1,440
To record sales on account

Cost of Goods Sold (80 X $15) .......... 1,200

Inventory .................................... 1,200
To record cost of goods sold

July 11 Inventory (150 X $16.50) ..................... 2,475

Accounts Payable .................... 2,475

July 13 Accounts Receivable ......................... 2,250

Sales Revenue (120 X $18.75)... 2,250
To record sales on account

Cost of Goods Sold1 ........................... 1,950

Inventory .................................... 1,950
1
([(20 X $15) + (100 X $16.50)]
To record cost of goods sold

July 20 Inventory (160 X $17).......................... 2,720

Accounts Payable ..................... 2,720

July 27 Accounts Receivable ......................... 2,000

 Sales Revenue (100 X $20) ....... 2,000
To record sales on account

Cost of Goods Sold2 ........................... 1,675

Inventory .................................... 1,675
2
[(50 X $16.50) + (50 X $17)]
To record cost of goods sold

e. Sales Revenue $5,690

Cost of goods sold
($1,200 + $1,950 +$1,675) 4,825
Gross profit $ 865

f. Since the loss can be identified, the company would be able to

identify the shortage and record it separately as in the following
entry:

Inventory Over and Short (8 X $17) .... 136

Inventory ................................ 136

LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 8.17

a. Calculations
1. 2,100 units available for sale – 1,400 units sold = 700
units in the ending inventory.
500 @ $4.58 = $2,290
200 @ 4.60 = 920
700 $3,210 Ending inventory at FIFO cost.

2. $9,240 cost of goods available for sale ÷ 2,100 units

available for sale = $4.400 weighted average unit cost.
700 units X $4.400 = $3,080 ending inventory at
weighted average cost.

b. Analysis of methods

FIFO will yield the highest ending inventory and therefore the
higher current ratio. The company has experienced rising
purchase prices and FIFO uses the most recent costs to price the
ending inventory units.

FIFO gives the higher inventory values, a lower cost of goods sold
(beginning inventory + purchases – ending inventory) and a
higher gross profit.

LO 5,6,10 BT: AP Difficulty: S Time: 15 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance
EXERCISE 8.18

a. FIFO – same as periodic in Exercise 8.17 of $3,210

Moving-average cost

Purchased Sold Balance

No. of Unit No. of Unit cost No. of Unit

Date units cost units units cost Amount
May 1 Beg. Bal. 100 $4.100 $ 410.00
6 800 $4.20 900 4.189 3,770.00
7 300 $4.189 600 4.189 2,513.40
10 300 4.189 300 4.189 1,256.70
12 400 4.50 700 4.367 3,056.70
15 200 4.367 500 4.367 2,183.50
18 300 4.60 800 4.454 3,563.50
22 400 4.454 400 4.454 1,781.60
25 500 4.58 900 4.524 4,071.60
30 200 4.524 700 4.524 3,166.80

b.

In the case of the FIFO cost flow formula, it would not matter if
the inventory system used were perpetual or periodic, as the results
would be the same. This is because the FIFO method assumes that
older goods are sold first. This flow of costs is not changed whether a
periodic or perpetual system is used.

Results between periodic and perpetual systems would be different in

the case where the weighted average and moving- average cost flow
assumptions are implemented. Under the perpetual inventory system,
the average cost is recalculated each time there is a purchase. This is
not the case for the periodic system where the average cost is
determined at the end of the accounting period. Depending on the
frequency of purchases
and the range of price changes during the accounting period, the
differences could be substantial.

LO 5,6 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
 CHAPTER 9

BRIEF EXERCISE 9.3

(a)
Other Investments1 .......................................... 13,332
Cash ........................................................ 13,332
1
[$13,200 + ($13,200 X 0.01)]

(b)
Cash ................................................................. 600
Dividend Revenue2 ................................. 600
2
(400 shares X $1.50)

(c)
Cash 3................................................................ 14,949
Gain on Disposal of Investments
- Cost/Amortized Cost…………….. 1,617
Other Investments ................................. 13,332
3
$15,100 – ($15,100 X 0.01) = $14,949

LO 2 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting
BRIEF EXERCISE 9.4
(a) Bond Discount Amortization Table
8% Bonds Sold to Yield a 10% Return
Date Cash Interest Bond Amortized
Received Income Discount Cost of
(8%) (10%) Amortization Bond
Day 1 $ 95.03
End Year 1 $8.00 $9.501 $1.50 96.53
End Year 2 8.00 9.65 1.65 98.18
End Year 3 8.00 9.82 1.82 100.00
$24.00 $28.97 $4.97
1
$95.03 X .10

(b) Bond Investment at Amortized Cost………... 95.03

Cash…………………………………………. 95.03
End of Year 1
Cash……………………………………………….. 8.00
Bond Investment at Amortized Cost………… 1.50
Interest Income……………………………. 9.50

End of Year 2
Cash……………………………………………….. 8.00
Bond Investment at Amortized Cost………… 1.65
Interest Income……………………………. 9.65

End of Year 3
Cash……………………………………………….. 8.00
Bond Investment at Amortized Cost………… 1.82
Interest Income……………………………. 9.82
To record interest collected

Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment
BRIEF EXERCISE 9.4 (CONTINUED)

(c) Discount on bond when purchased:

$100.00 – $95.03 = $4.97
Straight line discount amortization each year:
$4.97 ÷ 3 years = $1.66 each year

(d) Bond Investment at Amortized Cost……… 95.03

Cash…………………………………………. 95.03
End of Year 1
Cash………………………………………………... 8.00
Bond Investment at Amortized Cost………… 1.66
Interest Income……………………………. 9.66
End of Year 2
Cash………………………………………………... 8.00
Bond Investment at Amortized Cost………… 1.66
Interest Income……………………………. 9.66
End of Year 3
Cash………………………………………………... 8.00
Bond Investment at Amortized Cost………… 1.65
Interest Income……………………………. 9.65
To record interest collected

Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment
(e) Total interest income:
Effective interest method $9.50 + $9.65 + $9.82 = $28.97
Straight-line method $9.66 + $9.66 + $9.65 = $28.97
That is, they are the same in total.
BRIEF EXERCISE 9.4 (CONTINUED)

(f) Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $95.02629602 rounded to $95.03. The result is negative

because it represents a cash outflow to acquire the investment.
A step-by-step solution for this section of the problem can be found
in the student resources section of the online course.

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting
BRIEF EXERCISE 9.5
(a) Bond Premium Amortization Table
6% Bonds Sold to Yield a 4% Return
Date Cash Interest Bond Amortized
Received Income Premium Cost of
(6%) (4%) Amortization Bond
Day 1 $ 105.55
End Year 1 $6.00 $4.221 $1.78 103.77
End Year 2 6.00 4.15 1.85 101.92
End Year 3 6.00 4.08 1.92 100.00
$18.00 $12.45 $5.55
1
$105.55 X .04

(b) Bond Investment at Amortized Cost………... 105.55

Cash…………………………………………. 105.55
End of Year 1
Cash……………………………………………….. 6.00
Bond Investment at Amortized Cost………… 1.78
Interest Income……………………………. 4.22
End of Year 2
Cash……………………………………………….. 6.00
Bond Investment at Amortized Cost………… 1.85
Interest Income……………………………. 4.15
End of Year 3
Cash……………………………………………….. 6.00
Bond Investment at Amortized Cost………… 1.92
Interest Income……………………………. 4.08
To record interest collected
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment
BRIEF EXERCISE 9.5 (CONTINUED)
(c) Premium on bond when purchased:
$105.55 – $100.00 = $5.55
Straight line premium amortization each year:
$5.55 ÷ 3 years = $1.85 each year

(d) Bond Investment at Amortized Cost………... 105.55

Cash…………………………………………. 105.55

End of Year 1
Cash………………………………………………... 6.00
Bond Investment at Amortized Cost…… 1.85
Interest Income……………………………. 4.15

End of Year 2
Cash………………………………………………... 6.00
Bond Investment at Amortized Cost…… 1.85
Interest Income……………………………. 4.15

End of Year 3
Cash………………………………………………... 6.00
Bond Investment at Amortized Cost…… 1.85
Interest Income……………………………. 4.15
To record interest collected
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment
BRIEF EXERCISE 9.5 (CONTINUED)
(e) Total interest income:
Effective interest method $4.22 + $4.15 + $4.08 = $12.45
Straight-line method $4.15 + $4.15 + $4.15 = $12.45
That is, they are the same in total.
(f) Year Cash Flow
1 $6.00
2 $6.00
3 $106.00
=NPV(0.04,6,6,106)

Result: $105.5501821 rounded to $105.55

A step-by-step solution for this section of the problem can be found
in the student resources section of the online course.

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting
BRIEF EXERCISE 9.12

(a) FV-OCI Investments ........................................ 23,400

Cash.......................................................... 23,400

(b) Cash ($3.25 per share X 300 shares) ............. 975

Dividend Revenue.................................... 975

(c) Unrealized Gain or Loss – OCI1 ...................... 1,050

FV-OCI Investments .............................. 1,050
1
($74.50 X 300 shares) - $23,400
= $22,350 – $23,400 = $1,050

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

BRIEF EXERCISE 9.14

Unrealized Gain or Loss – OCI ………… 500

FV-OCI Investments…….…………… 500
To adjust to fair value at date of disposal
($72,000 - $72,500)

Cash …………………………………………… 72,000

FV-OCI Investments …………………… 72,000
To record disposal

Loss on Disposal of Investments FV-OCI1… 2,000

Unrealized Gain or Loss – OCI……… 2,000
1
($1,500 unrealized loss + $500 unrealized loss)
To reclassify holding loss

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting
EXERCISE 9.4
a. Schedule of Interest Income
and Bond Discount Amortization
Effective Interest Method
9% Bond Purchased to Yield 12%

Bond Carrying
Cash Interest Discount Amount
Date Received Income Amortization of Bonds
01/01/23 — — — $278,384
1
12/31/23 $27,000 $33,406 $6,406 284,790
12/31/24 27,000 34,175 7,175 291,965
2
12/31/25 27,000 35,035 8,035 300,000
11
11 $278,384 X .12 = $33,406
2
Adjusted due to rounding
A step-by-step solution for this section of the problem can be found
in the student resources section of the online course.

b. December 31, 2024

Cash ....................................................... 27,000
Bond Investment at Amortized Cost .... 7,175
Interest Income .............................. 34,175

c. December 31, 2025

Cash ....................................................... 27,000
Bond Investment at Amortized Cost .... 8,035
Interest Income .............................. 35,035
To record collection of interest

Cash ....................................................... 300,000

Bond Investment at Amortized Cost 300,000
To record maturity of bond investment

Alternatively, the entries could be combined in one

compound entry:

Cash ....................................................... 327,000

Interest Income ................................. 35,035
Bond Investment at Amortized Cost 291,965
 d. Cash ……………………………………… 285,270
Loss on Disposal of Investments –
Cost/Amortized Cost………... ........... 6,695
Bond Investment at Amortized Cost 291,965

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

EXERCISE 9.7
a.
Investment Income or Loss1 ............... 1,400
FV-NI Investments ...................... 1,400
1
($50,000 – $48,600)

b.
Cash ..................................................... 9,500
Investment Income or Loss......... 500
FV-NI Investments ...................... 9,000

c.
Carrying
Securities Amount2 Fair Value
Moonstar Corp. shares $19,000 $19,300
Radius Ltd. shares 20,600 20,500
Total of portfolio $39,600 $39,800
Adjustment needed to bring portfolio
to fair value $200 Dr
2
Carrying amount for 2023 reflects the FV adjustments as at December
31, 2022
FV-NI Investments ............................... 200
Investment Income or Loss ....... 200
LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting
EXERCISE 9.11

a. January 15, 2023

FV-NI Investments (9,000 X $33.50)............. 301,500
Commission Expense .................................. 1,980
Cash....................................................... 303,480

April 1, 2023
FV-NI Investments (5,000 X $52.00)............. 260,000
Commission Expense .................................. 3,370
Cash....................................................... 263,370
September 10, 2023
FV-NI Investments (7,000 X $26.50)............. 185,500
Commission Expense .................................. 2,910
Cash....................................................... 188,410

b. May 20, 2023

Cash [(3,000 X $35) – $2,850]....................... 102,150
FV-NI Investments1 ............................... 100,500
Gain on Disposal of Investments –
FV-NI 2 ............................................... 1,650
1
(3,000/9,000 X $301,500)
2
Gain on disposal: (3,000 X $35) - $100,500 = $4,500
Transaction costs expensed (2,850)
Net investment income $1,650
EXERCISE 9.11 (CONTINUED)

Fair
c. Shares Cost Value
Nirmala Corp. (6,0003 shares) $201,000 $180,000
Oxana Corp. (5,000 shares) 260,000 275,000
WTA Corp. (7,000 shares) 185,500 196,000
Total portfolio $646,500 $651,000
3
Of the 9,000 shares purchased on January 15, 2023, 3,000 were
sold May 20, 2023.

December 31, 2023

FV-NI Investments ........................................ 4,500
Investment Income or Loss ................. 4,500

d. The total purchase price of these investments is:

Nirmala: (9,000 X $33.50) + $1,980 = $303,480
Oxana: (5,000 X $52.00) + $3,370 = $263,370
WTA: (7,000 X $26.50) + $2,910 = $188,410

The purchase entries will be:

January 15, 2023

FV-OCI Investments ..................................... 303,480
Cash....................................................... 303,480

April 1, 2023
FV-OCI Investments ..................................... 263,370
Cash....................................................... 263,370

September 10, 2023

FV-OCI Investments ..................................... 188,410
Cash....................................................... 188,410
 May 20, 2023
4
FV-OCI Investments .................................... 990
Unrealized Gain or Loss - OCI ............. 990
To adjust to fair value at date of disposal

Cash [(3,000 X $35) – $2,850]....................... 102,150

FV-OCI Investments.............................. 102,150
To record disposal

Accumulated Other Comprehensive Income 990

Retained Earnings ................................ 990
To reclassify holding gain
4
Gross selling price of 3,000 shares at $35 $105,000
Less: Brokerage commissions (2,850)
Net proceeds from sale 102,150
Carrying amount of 3,000 shares
($303,480 X 3,000/9,000) (101,160)
Gain on disposal of shares $ 990
EXERCISE 9.11 (CONTINUED)

d. (continued)

December 31, 2023

Unrealized Gain or Loss - OCI ..................... 3,100
FV-OCI Investments.............................. 3,100

Note: It would also be appropriate to make separate entries for

each investment

Unrealized
Carrying Fair Gain
Shares Amount Value (Loss)
Nirmala Corp., 6,000 shs *$202,3205 $180,000 $(22,320)
Oxana Corp., 5,000 shs 263,370 275,000 (11,630)
WTA Corp., 7,000 shs 188,410 196,000 7,590)
Total portfolio $654,100 $651,000 (3,100)
5
$303,480 + $990 – $102,150 = $202,320

e. Other comprehensive income

Items that may not be reclassified subsequently
to net income:
Holding losses arising during the year .................... $ 2,110

Fair value adjustment May 20

On Nirmala Corp. shares sold ................................... $ 990
Year-end fair value adjustment for portfolio ............ (3,100)
Total ......................................................................... $(2,110)

f. Balance of Accumulated Other Comprehensive Income:

Beginning balance ..................................................... $0
Other comprehensive income for 2023 (part e.) ...... (2,110)
Less Reclassification adjustment............................. (990)
Ending balance December 31, 2023 ......................... $(3,100)
LO 3,4,8 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: CPA: cpa-t001 Reporting
EXERCISE 9.14

a. July 1, 2023
FV-OCI Investments ................................. 103,585
Cash................................................... 103,585
b. Schedule of Interest Revenue and
Bond Premium Amortization
Effective-Interest Method
6% Bonds Sold to Yield 5%
Amortized
Cash Interest Premium
Cost of
Received Revenue Amortized
Date Bonds
July 1, 2023 — — — $103,585
Dec. 31, 2023 $3,000 $2,590 $410 103,175
June30, 2024 3,000 2,579 421 102,754
Dec. 31, 2024 3,000 2,569 431 102,323

c. December 31, 2023

Cash ............................................................. 3,000

FV-OCI Investments............................. 410
Interest Income .................................... 2,590
To record collection of interest

December 31, 2023

FV-OCI Investments .................................... 225
Unrealized Gain or Loss – OCI............ 225
To record fair value adjustment
($103,400 - $103,175)
 June 30, 2024
Cash ............................................................. 3,000
FV-OCI Investments............................. 421
Interest Income .................................... 2,579
To record collection of interest

December 31, 2024

Cash ............................................................. 3,000
FV-OCI Investments............................. 431
Interest Income .................................... 2,569
To record collection of interest

d. December 31, 2024

Unrealized Gain or Loss – OCI ................... 348
FV-OCI Investments............................. 348
To record fair value adjustment to date of disposal
[$102,200 - ($103,400 - $421 - $431)]

December 31, 2024

Cash ............................................................. 102,200
FV-OCI Investments............................. 102,200
To record disposal of the bond

December 31, 2024

Loss on Disposal of Investments – FV-OCI 123
Unrealized Gain or Loss – OCI .................. 123
To reclassify accumulated unrealized gains
and losses from OCI to net income
($225 - $348) = $(123)
LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting
 CHAPTER 10

BRIEF EXERCISE 10.6

Vehicles........................................................ 58,802
Notes Payable ..................................... 58,802

Using tables:
Present value of the single payment
$80,000 X .73503 $58,802.40

Using a financial calculator:

PV ? Yields $58.802.39
I 8%
N 4
PMT $0
FV $(80,000)
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $58,802.39

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

BRIEF EXERCISE 10.7

Vehicles ....................................................... 80,000

Notes Payable ..................................... 80,000

LO 3 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 10.8

Fair % of Recorded
Value Total Cost Amount
Land $ 95,000 95/455 $406,000 $ 84,769
Building 250,000 250/455 406,000 223,077
Equipment 110,000 110/455 406,000 98,154
$455,000 $406,000

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

BRIEF EXERCISE 10.10

Vehicles (new) ............................................... 2,600

Accumulated Depreciation - Vehicles .......... 20,700
Vehicles (old) ........................................ 23,000
Cash ...................................................... 300

The transaction is nonmonetary because the amount of cash is not

significant and it lacks commercial substance, so no gain is
recognized.

LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 10.11

Equipment1 .................................................... 7,000

Accumulated Depreciation – Machinery ...... 2,000
Loss on Disposal of Machinery .................... 4,000
Machinery ............................................. 9,000
Cash ...................................................... 4,000

The consideration paid is fair value of machinery plus cash

1
$3,000 + $4,000 = $7,000
The consideration received: the equipment will be the same fair value.
The transaction has commercial substance.

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

BRIEF EXERCISE 10.12

Vehicles (new)1 .............................................. 33,000

Loss on Disposal of Vehicles ....................... 1,000
Accumulated Depreciation - Vehicles .......... 27,000
Vehicles (used) ..................................... 30,000
Cash ...................................................... 31,000

The consideration paid is fair value of used vehicle plus cash paid
1
$2,000 + $31,000
Spencer assumes that the amount of cash paid is significant and
therefore the transaction is monetary. In addition, the transaction has
commercial substance as the asset obtained will have different future
cash flows than the asset given up. Spencer expects the performance
of the asset to be much improved compared to the old asset, since the
vehicle obtained is new.

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

BRIEF EXERCISE 10.13

The trade-in allowance is not representative of the fair value of the used
vehicle given up in the exchange. The trade-in allowance of $5,000 is
essentially used to change the new vehicle’s selling price without
reducing its list price. The $5,000 represents a combination of the fair
value of the used vehicle of $2,000 and a discount on the list price of
the new vehicle of $3,000.

Before Spencer negotiated the trade, they would have realized that
there was a loss to be recognized on the disposal of the used vehicle.
The carrying amount of the used vehicle was $30,000 - $27,000 = $3,000
and the fair value was $2,000. The loss of $1,000 must be recorded.
The price of the new vehicle is the list price of $36,000 less the discount
of $3,000 or $33,000. This is the fair value of the new vehicle.

Vehicles (new) ............................................... 33,000

Loss on Disposal of Vehicles ....................... 1,000
Accumulated Depreciation - Vehicles .......... 27,000
Vehicles (used) ..................................... 30,000
Cash ...................................................... 31,000

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 10.2

a. Machinery:

Cash paid for machinery, including sales tax of $107,000

$7,000
Freight and insurance while in transit 2,000
Cost of moving machinery into place at factory 3,100
Wage cost for technicians to test machinery 4,000
Materials cost for testing 500
Special plumbing fixtures required for new
machinery 8,000
Provincial government grant (25,000)
Total cost $99,600

The GST of $5,000 paid on the purchase of the machinery should be

reported as GST Receivable. The insurance premium paid during the
first year of operations should be reported as insurance expense.
Repair costs incurred in the first year of operations should be reported
as repairs and maintenance expense. The insurance and repair costs
relate to periods subsequent to purchase. The government grant could
alternatively be credited to a deferred revenue account rather than to
the machinery account.

b. Equipment (Self-Constructed):

Material and purchased parts ($200,000 X .98) $196,000

Labour costs for manufacturing the equipment 190,000
 Overhead costs (only variable portion 30,000
capitalized)
Cost of installing equipment 4,400
Total cost $420,400

Note that the cost of material and purchased parts is reduced by the
amount of cash discount not taken because the equipment should be
reported at its cash equivalent price. The imputed interest on funds
used during construction is related to share financing and should not
be capitalized or expensed. This item is an opportunity cost that is not
reported.

The standards for manufactured inventories require that a portion of all

production overhead costs be applied to an inventory asset, however
the standard for PP&E assets is different. For PP&E assets, only the
directly attributable costs are capitalized. Since fixed overhead is
generally not directly attributable, but rather allocated on some rational
basis, the fixed overhead is generally expensed rather than capitalized.
(Note: Care must be taken to determine whether the assets are made
for resale or for the entity’s own use, as the treatment of the fixed
overhead is different under each of these circumstances.)

Profit on self-construction should not be recorded. Profit should only

be reported when the asset is sold.

LO 2,3 BT: C Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 10.11

a.

1. Vehicles (#1) ..................................... 23,900

Cash ......................................... 23,900
To record purchase of Truck #1

2. Vehicles (#2) ..................................... 25,636

Cash ......................................... 2,000
Notes Payable ......................... 23,636
To record purchase of Truck #2

Using tables:
Present value of the single payment
$26,000 X .90909 $23,636.34

Using a financial calculator:

PV ? Yields $23,636.36
I 10%
N 1
PMT $0
FV $(26,000)
Type 0
Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $23,636.36

3. Vehicles (#3) ..................................... 21,000

Sales Revenue ......................... 21,000
To record purchase of Truck #3

Cost of Goods Sold .......................... 16,500

Inventory .................................. 16,500
To record cost of goods sold
 In this example, the nonmonetary asset exchange has
commercial substance and fair values are reliably measurable,
therefore the exchange is recorded at the fair value of the
asset(s) (the computer) given up. If the fair value of what is
acquired is more reliably measurable, the exchange would be
recorded at the fair value of Truck #3.

4. Vehicles (#4) (1,000 shares X $23) .. 23,000

Common Shares ..................... 23,000
To record purchase of Truck #4

Under IFRS, the fair value of the asset acquired should be used to
measure its acquisition cost, unless that fair value cannot be
estimated reliably. In this case, the fair value of the shares appears
to be a better gauge of the fair value of the truck received. Vehicles
are very often sold at a price well below the list price.

b.
Transaction 4 involves a share-based payment. Under ASPE,
the more reliable of the fair value of the asset received or the
equity instruments given up should be used to measure the
acquisition cost of the asset. If Jackson prepares financial
statements in accordance with ASPE, it would be a private
company, and its shares would not be actively traded. The fair
value of its common shares would likely not be more reliable
than the fair value of the truck, therefore the fair value of the
truck (as determined by a reliable, independent appraiser, for
example or from negotiating a cash purchase) would be used
to measure the acquisition cost.

LO 3,7 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
 EXERCISE 10.15

a. Equipment .......................................... 682,342

Notes Payable ........................... 682,342

Using tables:
Present value of annuity @ 10% for 5 years
$180,000 X 3.79079 $682,342.20

Using a financial calculator:

PV ? Yields $682,341.62
I 10%
N 5
PMT $(180,000)
FV $0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $682,341.62

b. Interest Expense1 ............................... 68,234

Notes Payable ($180,000 – $68,234) .. 111,766
Cash ........................................... 180,000
1
(10% X $682,342)

Note 10% Reduction

Year Payment Interest of Principal Balance
1/2/20 $682,342
12/31/20 $180,000 $68,234 $111,766 570,576
12/31/21 180,000 57,058 122,942 447,634

c. Interest Expense ................................ 57,058

 Notes Payable ($180,000 – $57,068) .. 122,942
Cash ........................................... 180,000

d. Depreciation Expense1 ...................... 85,293

Accumulated Depreciation -
Equipment .............................
85,293
1
($682,342 ÷ 8)

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

EXERCISE 10.17

Depreciation Expense1 ........................................ 700

Accumulated Depreciation—Equipment .. 700
1
($11,200 – $700 = $10,500;
$10,500 ÷ 5 = $2,100;
$2,100 X 4/12 = $700)
To record depreciation expense to date of
exchange

Equipment (New)2 ................................................ 15,200

Accumulated Depreciation—Equipment............ 7,000
Gain on Disposal of Equipment3 ............... 1,000
Equipment (Old) ......................................... 11,200
Cash ............................................................ 10,000
 To record equipment exchange

3
Cost of old asset $11,200
Accum. depr. ($6,300 + $700) (7,000 )
Carrying amount 4,200
Fair market value of old asset (5,200 )
Gain on disposal of equipment $ 1,000

2
Cash paid $10,000
Fair value of old melter 5,200
Cost of new melter $15,200

The transaction is monetary since there is significant cash involved.

Cash makes up 66% ($10,000 / [$10,000 + $5,200]) of the fair value of
the transaction. A gain is recognized because the earnings process is
complete and the company’s economic circumstances have changed
due to this transaction.

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

EXERCISE 10.18

a. The exchange has commercial substance:

Stacey Limited:
Equipment (New)1 ........................................ 28,000
Accumulated Depreciation – Equipment ... 31,250
Equipment (Old) ................................. 50,000
 Cash .................................................... 3,000
Gain on Disposal of Equipment2 ....... 6,250

1 2
Valuation of new equipment: Calculation of
gain:
Fair value of $25,000 Fair value of old
equip. given equipment $25,000
Cash 3,000 Carrying value of
old equipment (18,750)
New equip. $28,000 Gain on disposal $ 6,250

Note: Since little cash is involved, the transaction is considered

nonmonetary.

Chokar Limited:
Cash ............................................................... 3,000
Equipment (New) ........................................... 25,000
Accumulated Depreciation – Equipment ..... 22,000
Loss on Disposal of Equipment1 .................. 5,000
Equipment (Old) ................................... 55,000

1
Calculation of loss:
Carrying value of old $33,000
equipment
Fair value of old equipment 28,000
Loss on exchange $ 5,000
b. The exchange does not have commercial substance:

Stacey Limited:
Equipment (New)1 ........................................ 21,750
Accumulated Depreciation – Equipment ... 31,250
Equipment (Old) ................................. 50,000
Cash .................................................... 3,000

1
Valuation of new equipment:
Carrying value of old
equipment $18,750
Cash paid 3,000
New equipment $21,750

Chokar Limited:
Cash ............................................................... 3,000
Equipment (New)1 .......................................... 25,000
Accumulated Depreciation - Equipment ...... 22,000
Loss on Disposal of Equipment2 .................. 5,000
Equipment (Old) ................................... 55,000

2
Fair value of new
equipment + cash $28,000
received ($3,000)
Carrying value of old
 equipment (33,000)
Loss on disposal $ (5,000)

1
The new equipment cannot be recorded at cost exceeding its fair
value of $25,000.

c. In determining whether the transaction has commercial substance

the two companies would need to determine if they remain in the
same economic position after the exchange as before. If the
amount, timing, or risk of future cash flows associated with the
equipment received is different from the configuration of cash
flows for the equipment given up, or if the specific value of the part
of the entity affected by the transaction has changed as a result,
the transaction has commercial substance.

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

EXERCISE 10.19

a. Equipment (New)1............................... 50,100

Accumulated Depreciation—
Equipment ....................................... 20,000
Equipment (Old) ........................ 65,000
Cash ........................................... 5,100

1
Valuation of new equipment:
Cash $4,000
Installation cost
(cash) 1,100
Carrying value of
old equipment 45,000
New equipment $50,100
 Since little cash is involved, the transaction is considered
nonmonetary. The transaction does not have commercial
substance; therefore, the exchange is recorded at the carrying
amount of the asset(s) given up, which is adjusted for the
inclusion of any cash or other monetary assets.
b. Equipment (New)1..................................... 55,900
Accumulated Depreciation—Equipment 20,000
Gain on Disposal of Equipment2 5,800
Equipment (Old) .............................. 65,000
Cash ................................................. 5,100

1 2
Valuation of new equipment: Calculation of gain:
Cash $4,000
Installation cost Fair value of old
(cash) 1,100 equipment $50,800
Fair value of Carrying value of
old equipment 50,800 old equipment (45,000)
New equipment $55,900 Gain on disposal $ 5,800

The transaction has commercial substance, therefore the exchange is

recorded at the fair value of the asset(s) given up.
 CHAPTER 11

EXERCISE 11.2

a. Total cost of property = $220,000 + $3,000 + $1,500

= $224,500

Cost of the building = $224,500 X 75% = $168,375

b. Depreciable amount = Cost – Residual Value

= $168,375 – $115,000 = $53,375

c. Useful life is limited to 10 years. This is the number of

years the building will contribute economic benefits to the
company.

d. Depreciation expense 2020 (straight-line)

= ($168,375 – $115,000) / 10 X 3.5 months/12 = $1,557

e. Depreciation expense 2020 (double-declining)

= $168,375 X 20%1 X 3.5 months/12 = $9,822

Depreciation expense 2021 = ($168,375 – $9,822) X 20%1

= $31,711
 1
Rate = (1 ÷ 10) X 2 = 20%

f. Carrying amount = $168,375 – $9,822 – $31,711 = $126,842

g. Under ASPE, depreciation expense is the higher of two amounts:

(1) cost less salvage value over the life of the asset, and (2) cost
less residual value over the asset’s useful life.

Under ASPE, depreciation expense 2020 (straight-line)

= ($168,375 - $0) / 20 X 3.5 months/12 = $2,455
LO 2,3 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.3

$769,000 – $300,000
a. = $23,450 per year
20 years

2020: $23,450 X 9/12 = $17,588

2021: $23,450

100%
b. = 5%; 5% X 2 = 10%
20

9/12 X 10% X $769,000 = $57,675 for 2020

10% X ($769,000 – $57,675) = $71,133 for 2021

OR
 3/12 X 10% X $769,000 = $19,225
+ 9/12 X 10% X ($769,000 – $76,900) = 51,908
$71,133 for 2021

These two approaches will always yield the same result.

$769,000 – $0
c. = $25,633 per year
30 years

2020: $25,633 X 9/12 = $19,225

2021: $25,633

Under ASPE, depreciation expense is the higher of two amounts: (1)

cost less salvage value over the life of the asset, and (2) cost less
residual value over the asset’s useful life.
(1) ($769,000 - $0) / 30 = $25,633
(2) ($769,000 - $300,000) / 20 = $23,450

a. It might be more appropriate to select the straight-line method if the

benefits of the asset are expected to flow to the entity evenly over
time, and if the decline in usefulness of the asset is expected to be
constant from period to period. It might be more appropriate to
select the double-declining-balance method if the greatest benefits
of the asset are expected to be yielded in the early years.

b. Under IFRS, depreciation expense is computed as follows:

Component 1:
 $400,000 – $100,000 = $12,000 per year
25 years
2020: $12,000 X 9/12 = $9,000
2021: $12,000
Component 2:
$254,000 – $154,000 = $5,000 per year
20 years
2020: $5,000 X 9/12 = $3,750
2021: $5,000

Component 3:
$115,000 – $46,000 = $2,300 per year
30 years
2020: $2,300 X 9/12 = $1,725
2021: $2,300

c. Under ASPE, the practice has been not to recognize asset

components to the same extent as under IFRS. Consequently, the
depreciation expense would be the same as calculated in c.

LO 3 BT: AP Difficulty: S Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 11.4

$315,000 – $15,000
a. 2021 Straight-line = $30,000/year
10 years

$315,000 – $15,000
b. 2021 Output = $1.25/output unit
240,000 total units

25,500 units X $1.25 = $31,875

$315,000 – $15,000
c. 2021 Working hours = $12.00/hour
25,000 total hours

2,650 hours X $12.00 = $31,800

d. Declining balance 2020: 1/10 X 2 = 20%.

2020: 20% X $315,000 X 8/12 = $42,000

2021: 20% X ($315,000 – $42,000) = $54,600

OR

1st full year (20% X $315,000) = $63,000

2nd full year [20% X ($315,000 – $63,000)] = $50,400

 2020 Depreciation 8/12 X $63,000 = $42,000

2021 Depreciation 4/12 X $63,000 = $21,000

8/12 X $50,400 = 33,600
$54,600

10 + 9 + 8 + 7 + 6
e.
+ 5 + 4 + 3 + 2 + 1 = 55

n (n + 1) 10 (11)
OR = = 55
2 2

Allocated to
Sum-of-the-years’-digits Total 2020 2021
Year 1 10/55 X $300,0001 = $54,545 $36,363 $18,182
2 9/55 X $300,000 = $49,091 _______ _32,727
$36,363 $50,909

2021: $50,909 = (4/12 of 1st year of machine’s life plus 8/12 of 2nd
year of machine’s life).

1
Cost of $315,000 less residual value of $15,000

f. CCA 2020: $315,000 X ½ X 20% = $31,500

CCA 2021: ($315,000 - $31,500) X 20% = $56,700

g. For the straight-line method, under ASPE, depreciation expense is
the higher of two amounts: (1) cost less salvage value over the life
of the asset, and (2) cost less residual value over the asset’s useful
life.

(1) ($315,000 - $3,000) / 15 = $20,800

(2) ($315,000 - $15,000) / 10 = $30,000
In this case, since (2) is the higher of the two amounts, the
straight-line depreciation is the same under both ASPE and IFRS.

h. Since the capital cost allowance approach is required for tax

purposes, for simplicity and for cost-purposes (not having to
maintain records for accounting and taxation), it is not unusual for
smaller companies to use the capital cost allowance approach for
financial reporting purposes as well. A potential investor would
want to base their investment decision on relevant and faithfully
representative information. The capital cost allowance approach is
based on the rules as defined in the Income Tax Act, and may not
necessarily reflect the expected usage or pattern in which the
asset benefits are expected to be consumed, rendering financial
statements not as relevant to a potential investor. However, the
capital cost allowance approach requires no estimates of residual
value, salvage value, useful life, or physical life. As a result,
calculation of depreciation expense may be more neutral and free
from bias.

LO 3,5,10 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 11.16

a. No correcting entry is necessary because changes in estimate are

handled in the current and prospective periods.

b. Original annual charge: ($56,000 – $4,000) ÷ 8 = $6,500

Revised annual charge:
Carrying amount as of 1/1/2020 [$56,000 – ($6,500 X 5)] =
= $23,500
Remaining useful life = 5 years (10 years – 5 years)
Revised residual value = $4,500
($23,500 – $4,500) ÷ 5 = $3,800

Depreciation Expense ................................ 3,800

Accumulated Depreciation—
Machinery .................................... 3,800

c. Under ASPE, depreciation expense is the higher of : (1) cost less

salvage value over the life of the asset, and (2) cost less residual
value of the asset’s useful life.
(1) ($56,000 – $0) / 8.5 = $6,588
(2) ($56,000 - $4,000) / 8 = $6,500

Since (1) is the higher depreciation amount, annual depreciation

expense under ASPE would be $6,588.

Carrying amount as of 1/1/2020 is $23,060 [$56,000 – ($6,588 x 5)]

= $23,060.
Remaining useful life = 6 years (11 years – 5 years)
In 2020, depreciation expense is re-computed as per the formula
above:
(1) ($23,060 - $100)/6 = $3,827
(2) ($23,060 - $4,500)/5 = $3,712

Therefore, depreciation expense is $3,827.

 Depreciation Expense ................................ 3,827
Accumulated Depreciation—
Machinery .................................... 3,827

d. Revised annual charge:

Old depreciation rate = (100% ÷ 8) X 2 = 25%
Carrying amount as of 1/1/2020 =
= [$56,000 X (1 – 25%)5] = $13,289
Remaining useful life = 5 years
Revised depreciation rate = (100% ÷ 5) X 2 = 40%
$13,289 X 40% = $5,316

Depreciation Expense ................................ 5,316

Accumulated Depreciation—
Machinery .................................... 5,316

LO 5 BT: AP Difficulty: S Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 11.17

a. 1992-2001: ($1,800,000 – $400,000) ÷ 40 = $35,000/yr.

b. 2002-2019:
Building ($1,800,000 – $400,000) ÷ 40 = $35,000/yr.
Addition ($750,000 – $150,000) ÷ 30 = 20,000/yr.
$55,000/yr.

c. No entry required because changes in estimate are handled in the

current and prospective periods.

d. Revised annual depreciation

Building:
Carrying amount: ($1,800,000 – $980,0001) $820,000
Remaining useful life 2 years
Annual depreciation $410,000

Addition:
Carrying amount: ($750,000 – $360,0002) $390,000
Remaining useful life 2 years
Annual depreciation $195,000

1
$35,000 X 28 years = $980,000
2
$20,000 X 18 years = $360,000
Note: 30 years total useful life; 28 years have lapsed so the
unamortized balance is charged off over the two years of
remaining expected useful life. Despite the amount, this is
treated prospectively.
Annual depreciation expense:
Building ($410,000 + $195,000) = $605,000
e. The original useful life estimate would have been management’s
best estimate based on the information that was available.
However, an investor who purchased shares in Lincoln in 2019
would have based his or her investment decision on financial
statements that show annual building depreciation expense of
$55,000/yr., when annual building depreciation expense would
have been $76,667/yr. [($1,800,000 - $400,000) ÷ 30 + ($750,000 -
$150,000) ÷ 20] based on an original useful life of 30 years. Annual
building depreciation expense of $46,667 for the first 10 years and
$76,667 for 18 years would have amounted to $1,864,676 in
accumulated depreciation at end of 2019, whereas the financial
statements at end of 2019 reported accumulated depreciation of
$1,340,000. Also, the investor would have invested based on the
information that the building would be useful for another 12 years
(until 2031), although Lincoln will likely need to invest in a new
building within 2 years, if the company intends to occupy a
building within the same district. The investor should also be
concerned that the building should be tested for impairment,
since the value of the building on the SFP is likely overstated (it
is based on an original useful life of 40 years), and there are now
only 2 years of useful life remaining. Review of asset useful life at
least at each year end helps to ensure that financial statements
are prepared based on the most relevant information available.

f. For 1992 – 2001 was computed as the higher of:

(1) ($1,800,000 - $216,000) / 44 = $36,000/yr.
(2) ($1,800,000 - $400,000) / 40 = $35,000/yr.

Therefore, depreciation expense was $36,000/yr.

For 2002 – 2019:

Building ($1,800,000 – $216,000) ÷ 44 = $36,000/yr.
Revised annual depreciation
Building:
Carrying amount: ($1,800,000 –$1,008,0001) $792,000
Remaining useful life 2 years
Annual depreciation $396,000

1
$36,000 X 28 years = $1,008,000

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

EXERCISE 11.20

a.

When the recoverable amount of an individual asset cannot be

determined, the asset is identified with a cash-generating unit (CGU),
and the CGU’s cash flows are tested for impairment. An individual
asset is identified with a CGU only when it does not generate cash
inflows that are largely independent of cash flows from other assets or
groups of assets, or when its fair value less selling costs is not
considered representative of its value in use. The allocation of assets
to CGU’s often involves professional judgement.

The recoverable amount of a CGU, like the recoverable amount of an

individual asset, is the higher of its value in use and fair value less
costs of disposal (or fair value less costs to sell). Because the
recoverable amount is compared with the CGU's carrying amount to
determine if there is an impairment loss, it is reasonable to include the
same assets in both measures.

Therefore the carrying amount of a CGU includes the carrying amount

of only those assets that are used to generate the relevant stream of
cash flows. These assets can be assets that are directly involved in the
CGU, or assets that can be allocated to the CGU on a reasonable and
consistent basis. Where liabilities are needed to calculate the
recoverable amount, they are also deducted in determining the
carrying amount of the CGU.
The road system's fair value less costs of disposal is almost negligible;
certainly far less than its value in use. Because its recoverable amount
cannot be determined independently, the road system is assigned to
the smallest identifiable group of assets that generates independent
cash inflows.

b. Machinery:

The asset’s recoverable amount is $4,500,000 (the higher of its

value in use (i.e. discounted future net cash flows) ($4,500,000)
and its fair value less costs to sell ($3,800,000).

The impairment test indicates that impairment has not occurred

since the carrying amount does not exceed the recoverable
amount.

Therefore, there is no impairment loss to record on the machinery.

Mine in the Development Phase:

The asset’s recoverable amount is $9,350,000 (the higher of its

value in use (i.e. discounted future net cash flows) ($9,000,000)
and its fair value less costs to sell ($9,350,000)).

The impairment test indicates that impairment has occurred since

the carrying amount exceeds the recoverable amount. The
impairment loss is calculated as follows:

Carrying amount 9,500,000

Recoverable amount 9,350,000
Loss on Impairment $150,000
 June 30, 2020
Loss on Impairment ......................... 150,000
Accumulated Impairment
Losses—Mine ......................
150,000

LO 6 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 11.21
a.

Under IFRS, the recoverable amount of the cash-generating unit (CGU)

is the higher of (1) value in use and (2) fair value less costs to sell. The
recoverable amount of the CGU is $108,000, which is lower than the
carrying amount of the CGU ($120,000), therefore the CGU is impaired.
The impairment loss is $12,000 ($120,000 - $108,000).

The impairment loss is allocated to the individual assets in the unit, but
no individual asset is reduced to below the highest of (1) its value in
use, (2) its fair value less costs to sell, or (3) zero.

Allocation of impairment loss to assets in cash-generating unit (CGU):

Carrying
Amount
Carrying
(before
Amount (after
impairment) Loss
impairment)
Allocation
Proportion
Land $25,000 25/120 $2,500 $22,500
Building 50,000 50/120 5,000 45,000
Equipment 30,000 30/120 3,000 27,000
Vehicles 15,000 15/120 1,500 13,500
$120,000 $12,000 $108,000
The journal entry to recognize the impairment loss is:
Loss on Impairment ................................... 12,000
Land ................................................... 2,500
Accumulated Impairment Losses—
Buildings ...................................... 5,000
Accumulated Impairment Losses—
Equipment .................................... 3,000
Accumulated Impairment Losses—
Vehicles ........................................ 1,500

b.

Since the recoverable amount of the building is determined to be

$46,000, the building cannot be reduced to below $46,000 (note that
from part a., a true proportionate allocation would result in building
carrying amount of less than $46,000).

Allocation of impairment loss to assets in cash-generating unit (CGU):

Carrying Carrying
Amount Amount
(before (after
impairment) Loss impairment)
Allocation
Proportion
1 2
Land $25,000 25/70 $2,857 $22,143
Buildings 50,000 4,000 46,000
Equipment 30,000 30/70 3,429 26,571
Vehicles 15,000 15/70 1,714 13,286
$120,000 $12,000 $108,000
1
Allocation base = $25,000 + $30,000 + $15,000 = $70,000
2
Loss on impairment to allocate = $12,000 total – $4,000 allocated to
buildings = $8,000; $8,000 loss on impairment to allocate X 25/70 =
$2,857 allocated to land

The journal entry to recognize the impairment loss is:

Loss on Impairment .................................... 12,000
Land .................................................... 2,857
Accumulated Impairment Losses—
Buildings ...................................... 4,000
Accumulated Impairment Losses—
Equipment .................................... 3,429
Accumulated Impairment Losses—
Vehicles........................................ 1,714

c.

Under ASPE, the asset group is impaired if its undiscounted future net
cash flows are less than its carrying amount. The undiscounted future
net cash flows are $144,000, which is higher than the asset group’s
carrying amount of $120,000. Therefore the asset group is not impaired
and no entry is necessary.
LO 6 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 11.26

a. Situation 1
Depreciation Expense1 ................................ 2,700
Accumulated Depreciation—
Equipment ........................................ 2,700
1
($120,000 – $12,000) ÷ 10 X 3/12 = $2,700
To record depreciation on equipment
Cash .............................................................. 28,000
Loss on Disposal of Equipment .................. 13,700
Accumulated Depreciation—Equipment
($75,600 + $2,700) ......................................... 78,300
Equipment ........................................... 120,000
To record disposal of equipment

Situation 2
Depreciation Expense2 ................................ 1,750
Accumulated Depreciation—
Machinery ......................................... 1,750
2
($38,000 – $2,000) ÷ 12 X 7/12 = $1,750
To record depreciation on machinery
Cash .............................................................. 10,000
Loss on Disposal of Machinery................... 2,250
Accumulated Depreciation—Machinery
($24,0003 + $1,750) ....................................... 25,750
Machinery ............................................ 38,000
3
Accumulated depreciation to December
31, 2019 is ($38,000 – $2,000) ÷ 12 X 8 yrs
= $24,000
To record disposal of machinery
Situation 3
Cash .............................................................. 5,200
Accumulated Depreciation— Equipment ... 8,500
Equipment ........................................... 12,000
Gain on Disposal of Equipment 1,700

b. The treatment for the above journal entries would be the same
under both ASPE and IFRS.

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

EXERCISE 11.27

a. Depreciation Expense1........................... 40,000

Accumulated Depreciation—
Machinery ................................... 40,000
1
(8/12 X $60,000)
To record depreciation on machinery

Cash ........................................................ 430,000

Accumulated Depreciation—
Machinery2 ...........................................
400,000
Loss on Disposal of Machinery ............. 470,000
Machinery ...................................... 1,300,000
2
($360,000 + $40,000)
To record disposal of machinery
 The treatment for the above journal entries would be the
same under both ASPE and IFRS. Under both ASPE and
IFRS, the loss might be classified as unusual, and would be
included in profit or loss for the period.

b. Depreciation Expense3........................... 15,000

Accumulated Depreciation—
Machinery ................................... 15,000
3
(3/12 X $60,000)
To record depreciation on machinery

Cash .................................................... 1,040,000

Accumulated Depreciation—
Machinery4..........................................
375,000
Machinery ...................................... 1,300,000
Gain on Disposal of Machinery .... 115,000
4
($360,000 + $15,000)
To record disposal of machinery

c. Depreciation Expense 5.......................... 35,000

Accumulated Depreciation—
Machinery .................................. 35,000
5
(7/12 X $60,000)
 To record depreciation on machinery

Contribution Expense ........................ 1,100,000

Accumulated Depreciation—
Machinery6 ...........................................
395,000
Machinery ...................................... 1,300,000
Gain on Disposal of Machinery .... 195,000
6
($360,000 + $35,000)
To record disposal of machinery

d. The treatment for the above journal entries would be the same
under both ASPE and IFRS.
LO 7 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
 CHAPTER 12

BRIEF EXERCISE 12.2

a. This should not be an intangible asset because, while the software

lacks physical substance and is nonmonetary, it cannot be
identifiable as a separate component from the manufacturing
machine. Generally, if the software is needed for the physical
component to operate, it is treated as an item of property, plant,
and equipment.

b. This software fulfills the three criteria because it is identifiable and

separable from the related computer hardware, it lacks physical
substance, and is nonmonetary.

c. Expenditures on this software would be subject to the criteria for

internally developed intangible assets. All expenditures incurred
during the research phase would be expensed. Only expenditures
incurred after the six required conditions are met in the
development phase can be recognized as an intangible asset –
software product development costs. These costs would meet the
three criteria for intangible assets as opposed to property, plant,
and equipment since they lack physical substance, are
nonmonetary, and are identifiable. When the software product
enters the production process, the development costs that met the
capitalization criteria are amortized into Inventory, most likely over
the number of units produced.

d. This item represents inventory, not an intangible asset. Remember,

as discussed in Chapter 8, items purchased for resale to
customers are inventory. Intangible assets are not held for sale,
but rather are used by the business to facilitate its operations.
LO 1,2,3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.4

Copyright No. 1 for $36,000 should be capitalized. Its carrying value on

the December 31, 2020 statement of financial position would be $30,000
[$36,000 - ($36,000 X 1/3 X 6/12)].

Copyright No. 2 for $54,000 should be capitalized. Although it seems to

have an indefinite useful life, it may still need to be amortized. For
example, if it is not updated on a regular basis, it would have a
maximum life of 50 years. However, if the text is regularly updated (for
example, if it has multiple editions, and multiple authors), it could be
argued that it has an indefinite life. In that case, it could be reflected on
the December 31, 2020 statement of financial position at its cost of
$54,000, without amortization.

LO 2,3,4 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 12.6

Amort.
Carrying Life in Per Months
Amount Months Month Amort.
Patent (1/1/20) $365,000 961 $3,802 12
Legal cost (12/1/20) 106,000 85 $1,247 1
$471,000
1
(8 X 12)

Carrying amount $471,000

Less: Amortization Patent (12 X $3,802) (45,624)
Legal costs (1 X $1,247) (1,247)
Carrying amount 12/31/20 $424,129

The accounting for the research expense of $140,000 is very clear in

that no costs incurred on research or in the research phase of an
internal project meet the criteria for recognition as an asset.

An intangible asset can only be recognized from the development

phase of an internal project when the six criteria for capitalization are
met.

Therefore, the research costs of $140,000 must be expensed in the

period, because they were incurred before the required criteria for
capitalization were fulfilled.

LO 2,3,5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 12.3

a. Development phase activities 29,000

Trademarks 17,500
Total intangible assets $46,500

b. Excess of cost over fair value of net assets of acquired subsidiary

– Goodwill, $81,000, should be shown as a separate line item on
the statement of financial position.

Deposits with advertising agency for ads to promote goodwill of

company, $8,000, should be reported either as an expense or as
prepaid advertising in the current assets section. Advertising
costs in general are expensed when incurred or when first used.

Cost of equipment acquired for research and development

projects, $125,000, should be reported with property, plant, and
equipment. Even if it was to be used only with a specific project,
because it would be used over a number of periods, it would be
capitalized and depreciated as a research and development
expense over the period of use.

Costs of researching a secret formula for a product that is

expected to be marketed for at least 20 years ($75,000) should be
expensed as part of Research and Development Expense.
Development expenses are expensed unless all six criteria for
capitalization are met.

The payment for a favourable lease is a long-term prepayment and

should be shown in the non-current assets section and
subsequently amortized over the benefiting periods.
 Organization costs of $34,000 are a period cost and expensed in
the income statement.

c. If ASPE is followed, then the development phase activities of

$29,000 can be expensed if the company’s policy choice is to
expense all costs directly attributable to the development of an
intangible asset even when the six criteria are met.

LO 2,3,5,7,10 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 12.8

a.
Depreciation of equipment acquired
for use in research and development
projects over the next 5 years ($240,000 ÷ 5) $ 48,000
Materials consumed in research projects 61,000
Consulting fees paid to outsiders for research and
development projects ($95,000 - $4,500) 90,500
Personnel costs of persons involved in research and
development projects 108,000
Indirect costs reasonably allocable to research and
development projects 25,000
Total to be expensed in 2020 for Research and
Development $332,500
 Note that the cost of the materials consumed in the development
of a product committed for manufacturing in the first quarter of
2021 and the consulting fees related to the materials are likely
costs incurred after the six development phase criteria have been
met. As such, they would be charged to an intangible asset
account such as Product Development Costs that would be
amortized over the benefiting periods.

b. Treatment of training costs and borrowing costs incurred after

the six development phase criteria are met:
• Training costs relate to selling activities and should not be
categorized as research and development activities. If these costs
were incurred after the six development phase criteria for
capitalization were met, they would not be capitalized because they
are not direct costs of creating, producing, and preparing the asset
to operate in the way intended by management.

• Under IFRS, borrowing costs that are directly attributable to the

acquisition, construction, or development of a qualifying intangible
asset are capitalized once the required capitalization criteria are
fulfilled.

c. Under ASPE, the cost of the materials consumed in the

development of a product committed for manufacturing in the first
quarter of 2021 and the consulting fees related to the materials
might be expensed if the company’s policy is to expense amounts
that meet the six criteria for capitalization (under the same
assumption that these are costs incurred after the six criteria have
been met).

Under ASPE, interest costs directly attributable to the acquisition,

construction, or development of an intangible asset may be
capitalized or expensed depending on the entity’s accounting
policy for internally generated assets and the entity`s policy on
capitalization of interest costs.
LO 3,4, 10 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 12.10

a. Tennessee Corp.
INTANGIBLES SECTION OF
STATEMENT OF FINANCIAL POSITION
December 31, 2020
Patent, net of accumulated amortization
$864,000
(Schedule 1)
Franchise, net of accumulated amortization
261,000
(Schedule 2)
Total intangibles $1,125,000

Schedule 1: Calculation of Patent from Marvin Inc.

Cost of patent at date of purchase $1,200,000
Amortization of patent for 2019 ($1,200,000/10) (120,000)
1,080,000
Amortization of patent for 2020 ($1,080,000/5) (216,000)
Patent balance $864,000

Schedule 2: Calculation of Franchise from Burr Ltd.

Cost of franchise at date of purchase $ 290,000
Amortization of franchise for 2020 ($290,000 ÷ 10) (29,000)
Franchise balance $ 261,000
b. Tennessee Corp.
Income Statement Effect
For the Year Ended December 31, 2020
Revenue from franchise $1,400,000
Expenses:
Patent from Marvin Inc.:
Amortization of patent for 2020
(Schedule 1) 216,000
Franchise from Burr Ltd.:
Amortization of franchise for 2020
(Schedule 2) $ 29,000
Payment to Burr Ltd.
($1,400,000 X 5%) 70,000 99,000
Research and development expense 247,000
Net increase in income $838,000

c. If Tennessee is a public company, the accounting would remain

consistent with that provided above. Tennessee would have
additional options under IFRS to use the revaluation model to
measure intangible asset(s) after acquisition. However, this would
only be possible if there is an active market for the intangible
asset(s). In addition, under IFRS, an assessment of estimated
useful life is required at each reporting date.

Under IFRS, costs associated with the development of internally

generated intangible assets that meet the six development phase
 criteria for capitalization are capitalized (no policy choice). Under
ASPE, costs associated with the development of internally
generated intangible assets that meet the six development phase
criteria for capitalization may be capitalized or expensed,
depending on the entity’s accounting policy.

LO 2,3,4,5,10 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 12.1

1. Such costs are prohibited from being capitalized as an intangible asset.

The dealer relations program cost of $3,000,000 should be expensed in
the current period because it would be difficult to match and measure
the future benefits. Advertising (marketing) costs must be expensed as
incurred or when the advertising takes place for the first time. In either
case, advertising expense would be charged in the current period.

2. Pilot plant cost of $5,500,000 is a research and development cost that

should be expensed as incurred. The pilot plant will not be reused after
the experimental work is completed. If any property, plant, or equipment
was purchased, it would be capitalized and depreciated over its useful
life.

3. The reception cost of $12,700 and training costs of $64,400 would be

expensed in the current period.

The wheelchair ramp of $100,000 would be considered an addition to

the building and would be capitalized as part of the building cost. It would
be depreciated over the useful life of the building (or a shorter period if
the ramp is expected to last fewer years).

The uniform cost of $41,600 would be expensed in the current period

since it would have a period of expected benefit of approximately one
year.
4. To record the purchase of Eagle Company, $5,200,000 should be
capitalized to identifiable net assets and $800,000 should be capitalized
to goodwill. This transaction represents the acquisition of a company
that should provide future benefits. The goodwill would not be amortized.
The goodwill would be assigned to a cash-generating unit in order to be
tested for impairment. The cash-generating unit would be reviewed for
impairment on an annual basis and any decline in carrying amount of
the cash-generating unit below recoverable amount would be written off
as a loss on impairment.

5. All advertising costs would be expensed.

6. The legal fees for the patent application of $400,000 should be

capitalized as an intangible asset. Amortization of the patent would be
over the patent’s 10-year economic life, or $40,000 annually. The
amount of amortization expense for the patent for the six-month period
November 1, 2019 to April 30, 2020, would be $20,000 ($40,000 X 6/12).
The net amount of the patent would be $380,000 ($400,000 – $20,000)
on the April 30, 2020 statement of financial position.

LO 2,3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 12.12

a. Goodwill calculation
Fair value of consideration transferred $763,000
Fair value of assets $1,080,000
Fair value of liabilities 430,000
Fair value of net assets 650,000
Value assigned to goodwill $113,000
b. The recoverable amount of the CGU is compared with the carrying
amount of the CGU to determine if there is any impairment.

Based on the information provided, the recoverable amount is the

higher of:
- FV – selling costs = $4,250,000
- VIU = $3,850,000
Recoverable amount of CGU $4,250,000
Carrying value of CGU 4,613,000
Loss on impairment 363,000

The loss on impairment of $363,000 exceeds the amount of goodwill.

Therefore, the loss on impairment should be allocated to reduce the
CGU’s carrying amount in the following order: first to goodwill, then the
remainder to the other assets in the CGU on a proportionate basis,
based on relative carrying amount.
After recording the loss on impairment, the CGU’s carrying amount will be
as follows:

Plant A CGU Adjusted

Loss on
carrying carrying
amount Impairment amount

Assets (other than

goodwill) $4,500,000 $(250,000) $4,250,000

Goodwill 113,000 (113,000) 0

Total carrying amount of

CGU $4,613,000 $(363,000) $4,250,000
c. If there is a subsequent reversal of impairment, the goodwill loss on
impairment cannot be reversed; any future reversal will be limited to the
writedown of the other assets ($250,000).

LO 7,8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting