Intermediate Accounting

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Intermediate Accounting (4)

operations.
Slide 4-14
ILLUSTRATION 4-2 Income Statement
CONDENSED INCOME STATEMENT
More representative of the type found in practice.
ILLUSTRATION 4-3 Condensed Income Statement
After studying this chapter, you should be able to:
1. Understand the uses and limitations of an income statement. 2. Understand the content and format of the income statement.
Company prepares supplementary schedules to support the totals.
Slide 4-15
ILLUSTRATION 4-4 Sample Supporting Schedule
9. Explain how to report other comprehensive income.
FORMAT OF THE INCOME STATEMENT
Illustration
Includes all of the
major items in
previous list, except for discontinued

outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than those relating to

中级财务会计IntermediateAccounting

4、期间费用
（3）财务费用
• 本科目核算企业为筹集生产经营所需资金等而发生的筹资费用，包括利息支出（减利息收入）、汇兑损益以及相关的手续费、企业发生的现金折扣或收到的现金折扣等； • 为购建或生产满足资本化条件的资产发生的应予资本化的借款费用，在“在建工程”、“制造费用”等科目核算。
二、费用主要项目
5、勘探费用
• 本科目核算企业（石油天然气开采）在油气勘探过程中发生的地质调查、物理化学勘探各项支出和非成功探井等支出。
6、资产减值损失
• 本科目核算企业计提各项资产减值准备所形成的损失。
7、所得税费用
• 本科目核算企业确认的应从当期利润总额中扣除的所得税费用。
4、期间费用
（2）管理费用
• 本科目核算企业为组织和管理企业生产经营所发生的管理费用，包括企业在筹建期间内发生的开办费、董事会和行政管理部门在企业的经营管理中发生的或者应由企业统一负担的公司经费（包括行政管理部门职工工资及福利费、物料消耗、低值易耗品摊销、办公费和差旅费等）、工会经费、董事会费（包括董事会成员津贴、会议费和差旅费等）、聘请中介机构费、咨询费、诉讼费、业务招待费、房产税、车船使用税、土地使用税、印花税、技术转让费、矿产资源补偿费、研究费用、排污费等； • 企业生产车间（部门）和行政管理部门等发生的固定资产修理费用等后续支出，也在本科目核算。
一、费用概述
4、确认条件
– 与费用相关的经济利益很可能流出企业；
– 经济利益流出企业的结果会导致资产的减少或
者负债的增加；
– 经济利益的流出额能够可靠地计量。
二、费用主要项目
• 主营业务成本 • 其他业务成本 • 营业税金及附加 • 期间费用 • 勘探费用 • 资产减值损失

Intermediate Accounting教科书上习题答案 (by J David Spiceland)

Chapter 7 Cash and ReceivablesQUESTIONS FOR REVIEW OF KEY TOPICSAACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise and problem in Intermediate Accounting, 6e with the following AACSB learning skills:Questions AACSB Tags Exercises (cont.)AACSB Tags 7-1Reflective thinking 7-11Analytic7-2 Reflective thinking 7-12Analytic7-3Reflective thinking 7-13Analytic7-4Reflective thinking, Communications 7-14Analytic7-5Diversity, Reflective thinking 7-15Analytic7-6Reflective thinking 7-16Analytic7-7Reflective thinking 7-17Analytic7-8Reflective thinking 7-18Diversity, Analytic7-9Reflective thinking, Communications 7-19Analytic7-10Reflective thinking 7-20 Reflective thinking7-11Diversity, Reflective thinking 7-21Analytic7-12Reflective thinking 7-22Analytic7-13Reflective thinking 7-23Analytic7-14Diversity, Reflective thinking 7-24 Analytic7-15Reflective thinking, Communications 7-25Analytic7-16 Reflective thinking7-26Analytic7-17 Reflective thinking7-27 Analytic7-18 Reflective thinking7-28 Analytic7-19 Reflective thinking, Communications7-29 Analytic7-20 Diversity, Reflective thinking7-30 Reflective thinking,CommunicationsBrief Exercises 7-31 Reflective thinking,Communications 7-1Reflective thinking CPA/CMA7-2Diversity, Reflective thinking 7-1Analytic7-3Reflective thinking 7-2Analytic7-4 Analytic 7-3Reflective thinking7-5Analytic 7-4 Analytic7-6Analytic 7-5Analytic7-7Diversity, Reflective thinking 7-6Analytic7-8Analytic 7-7Analytic7-9Analytic 7-1Reflective thinking7-10Analytic 7-2Analytic7-11Analytic 7-3Analytic7-12Analytic Problems7-13 Analytic 7-1Analytic7-14Reflective thinking 7-2Analytic7-15 Diversity, Reflective thinking 7-3Analytic7-16 Analytic 7-4 Analytic7-17 Analytic 7-5 AnalyticExercises7-6 Analytic 7-1Analytic7-7Analytic 7-2Analytic 7-8Analytic 7-3 Diversity, Analytic 7-9 Diversity, Analytic 7-4Analytic 7-10Analytic 7-5Analytic 7-11Analytic 7-6 Analytic 7-12Analytic 7-7 Analytic 7-13Analytic 7-8Analytic 7-14Analytic 7-9Analytic 7-15 Analytic 7-10AnalyticQUESTIONS FOR REVIEW OF KEY TOPICSQuestion 7-1Cash equivalents usually include negotiable instruments as well as highly liquid investments that have a maturity date no longer than three months from date of purchase.Question 7-2Internal control procedures involving accounting functions are intended to improve the accuracy and reliability of accounting information and to safeguard the company’s assets. The separation of duties means that employees involved in recordkeeping should not also have physical responsibility for assets.Question 7-3Management must document the company’s internal controls and assess their adequacy. The auditors must provide an opinion on management’s assessment. The Public Company Accounting Oversight Board’s Auditing Standard No. 5, which supersedes Auditing Standard No. 2, further requires the auditor to express its own opinion on whether the company has maintained effective internal control over financial reporting.Question 7-4A compensating balance is an amount of cash a depositor (debtor) must leave on deposit in an account at a bank (creditor) as security for a loan or a commitment to lend. The classification and disclosure of a compensating balance depends on the nature of the restriction and the classification of the related debt. If the restriction is legally binding, then the cash will be classified as either current or noncurrent (investments and funds or other assets) depending on the classification of the related debt. In either case, note disclosure is appropriate. If the compensating balance arrangement is informal and no contractual agreement restricts the use of cash, note disclosure of the arrangement including amounts involved is appropriate. The compensating balance can be included in the cash and cash equivalents category of current assets.Question 7-5Yes, IFRS and U.S. GAAP differ in how bank overdrafts are treated. Under IFRS, overdrafts can be offset against other cash accounts. Under U.S. GAAP overdrafts must be treated as liabilities.Answers to Questions (continued)Question 7-6Trade discounts are reductions below a list price and are used to establish a final price for a transaction. The reduced price is the starting point for initial valuation of the transaction. A cash discount is a reduction, not in the selling price of a good or service, but in the amount to be paid by a credit customer if the receivable is paid within a specified period of time.Question 7-7The gross method of accounting for cash discounts considers discounts not taken as part of sales revenue. The net method considers discounts not taken as interest revenue, because they are viewed as compensation to the seller for allowing the buyer to defer payment.Question 7-8When returns are material and a company can make reasonable estimates of future returns, an allowance for sales returns is established. At a financial reporting date, this provides an estimate of the amount of future returns for prior sales, and involves a debit to sales returns and a credit to allowance for sales returns for the estimated amount. Allowance for sales returns is a contra account to accounts receivable. When returns actually occur in the future reporting period, the allowance for sales returns is debited.Question 7-9Even when specific customer accounts haven’t been proven uncollectible by the end of the reporting period, bad debt expense properly should be matched with sales revenue on the income statement for that period. Likewise, since it’s not expected that all accounts receivable will be collected, the balance sheet should report only the expected net realizable value of that asset. So, to record the bad debt expense and the related reduction of accounts receivable when the amount hasn’t been determined, an estimate is needed. In an adjusting entry, we record bad debt expense and reduce accounts receivable for an estimate of the amount that eventually will prove uncollectible.If uncollectible accounts are immaterial or not anticipated, or it’s not possible to reliably estimate uncollectible accounts, an allowance for uncollectible accounts is not appropriate. In these few cases, any bad debts that do arise simply are written off as bad debt expense at the time they prove uncollectible.Answers to Questions (continued)Question 7-10The income statement approach to estimating bad debts determines bad debt expense directly by relating uncollectible amounts to credit sales. The balance sheet approach to estimating future bad debts indirectly determines bad debt expense by estimating the net realizable value for accounts receivable that exist at the end of the period. In other words, the allowance for uncollectible accounts at the end of the period is estimated and then bad debt expense is determined by adjusting the allowance account to reflect net realizable value.Question 7-11A company has to separately disclose trade receivables and receivables from related parties under U.S. GAAP, but not under IFRS.Question 7-12The assignment of all accounts receivable in general as collateral for debt requires no special accounting treatment other than note disclosure of the agreement. Question 7-13The accounting treatment of receivables factored with recourse depends on whether certain criteria are met. If the criteria are met, the factoring is accounted for as a sale. If they are not met, the factoring is accounted for as a loan. In addition, note disclosure may be required. Accounts receivable factored without recourse are accounted for as the sale of an asset. The difference between the book value and the fair value of proceeds received is recognized as a gain or a loss.Question 7-14U.S. GAAP focuses on whether control of assets has shifted from the transferor to the transferee. In contrast, IFRS focuses on whether the company has transferred “substantially all of the risks and rewards of ownership,” as well as whether the company has transferred control. Under IFRS:If the company transfers substantially all of the risks and rewards of ownership, the transfer is treated as a sale.If the company retains substantially all of the risks and rewards of ownership, the transfer is treated as a secured borrowing.If neither conditions 1 or 2 hold, the company accounts for the transaction as a sale if it has transferred control, and as a secured borrowing if it has retained control.Answers to Questions (continued)Question 7-15When a note is discounted, a financial institution, usually a bank, accepts the note and gives the seller cash equal to the maturity value of the note reduced by a discount. The discount is computed by applying a discount rate to the maturity value and represents the financing fee the bank charges for the transaction.The four-step process used to account for a discounted note receivable is as follows:1. Accrue any interest revenue earned since the last payment date (or date of thenote).2. Compute the maturity value.3. Subtract the discount the bank requires (discount rate times maturity valuetimes the remaining length of time from date of discounting to maturity date) from the maturity value to compute the proceeds to be received from the bank (maturity value less discount).pute the difference between the proceeds and the book value of the noteand related interest receivable. The treatment of the difference will depend on whether the discounting is accounted for as a sale or as a loan. If it’s a sale the difference is recorded as a loss or gain on the sale; if it’s a loan the difference is viewed as interest expense or interest revenue.Question 7-16A company’s investment in receivables is influenced by several related variables, to include the level of sales, the nature of the product or service, and credit and collection policies. The receivables turnover and average collection period ratios are designed to monitor receivables.Question 7-17The items necessary to adjust the bank balance might include deposits outstanding (including undeposited cash), outstanding checks, and any bank errors discovered during the reconciliation process. The items necessary to adjust the book balance mi ght include collections made by the bank on the company’s behalf, service and other charges made by the bank, NSF (nonsufficient funds) check charges, and any company errors discovered during the reconciliation process.Answers to Questions (concluded)Question 7-18A petty cash fund is established by transferring a specified amount of cash from the company’s general checking account to an employee designated as the petty cash custodian. The fund is replenished by writing a check to the petty cash custodian for the sum of the bills paid with petty cash. The appropriate expense accounts are recorded from petty cash vouchers at the time the fund is replenished.Question 7-19When a creditor’s investment in a receivable becomes impaired, due to a troubled debt restructuring or for any other reason, the receivable is re-measured based on the discounted present value of currently expected cash flows at the loan’s original effective rate (regardless of the extent to which expected cash receipts have been reduced). The extent of the impairment is the difference between the carrying amount of the receivable (the present value of the receivable’s cash flows prior to the restructuring) and the present value of the revised cash flows discounted at the loan’s original effective rate. This difference is recorded as a loss at the time the receivable is reduced.Question 7-20No. Under both U.S. GAAP and IFRS, a company can recognize in net income the recovery of impairment losses of accounts and notes receivable.BRIEF EXERCISESBrief Exercise 7-1The company could improve its internal control procedure for cash receipts by segregating the duties of recordkeeping and the handling of cash. Jim Seymour, responsible for recordkeeping, should not also be responsible for depositing customer checks.Brief Exercise 7-2Under IFRS the cash balance would be $245,000, because they could offset the two accounts. Under U.S. GAAP the balance would be $250,000, because they could not offset the two accounts.Brief Exercise 7-3All of these items would be included as cash and cash equivalents except the U.S. Treasury bills, which would be included in the current asset section of the balance sheet as short-term investments.Brief Exercise 7-4Income before tax in 2012 will be reduced by $2,500, the amount of the cash discounts.$25,000 x 10 = $250,000 x 1% = $2,500Brief Exercise 7-5Income before tax in 2011 will be reduced by $2,500, the anticipated amount of cash discounts.$25,000 x 10 = $250,000 x 1% = $2,500Brief Exercise 7-6Estimated returns = $10,600,000 x 8% = $848,000Less: Actual returns (720,000)Remaining estimated returns $128,000Brief Exercise 7-7Singletary cannot combine the two types of receivables under U.S. GAAP, as the director is a related party. Under IFRS a combined presentation would be allowed. Brief Exercise 7-8(1) Bad debt expense = $1,500,000 x 2% = $30,000(2) Allowance for uncollectible accounts:Beginning balance $25,000Add: Bad debt expense 30,000Deduct: Write-offs (16,000)Ending balance $39,000Brief Exercise 7-9(1) A llowance for uncollectible accounts:Beginning balance $ 25,000Deduct: Write-offs (16,000)Required allowance (33,400)*Bad debt expense $24,400(2) Required allowance = $334,000** x 10% = $33,400*Accounts receivable:Beginning balance $ 300,000Add: Credit sales 1,500,000Deduct: Cash collections (1,450,000)Write-offs (16,000)Ending balance $ 334,000** Brief Exercise 7-10Allowance for uncollectible accounts:Beginning balance $30,000Add: Bad debt expense 40,000Deduct: Required allowance (38,000)Write-offs $32,000Brief Exercise 7-11Credit sales $8,200,000Deduct: Cash collections (7,950,000)Write-offs (32,000)* Year-end balance in A/R (2,000,000)Beginning balance in A/R $1,782,000*Allowance for uncollectible accounts:Beginning balance $30,000Add: Bad debt expense 40,000Deduct: Required allowance (38,000)Write-offs $32,000 Brief Exercise 7-122011 interest revenue:$20,000 x 6% x 1/12 =$1002012 interest revenue:$20,000 x 6% x 2/12 =$200Brief Exercise 7-13Assets decrease by $7,000:Cash increases by $100,000 x 85% = $ 85,000Receivable from factor increases by($11,000 – $3,000 fee) 8,000Accounts receivable decrease (100,000)Net decrease in assets $ (7,000)Liabilities would not change as a result of this transaction.Income before income taxes decreases by $7,000(the loss on sales of receivables)The journal entry to record the transaction is as follows:Brief Exercise 7-14Logitech would account for the transfer as a secured borrowing. The receivables remain on the company’s books and a liability is recorded for the amount borrowed plus the bank’s fee.Brief Exercise 7-15Under IFRS, Huling would treat this transaction as a secured borrowing, because they retain substantially all of the risks and rewards of ownership. Under U.S. GAAP, Huling would treat this transaction as a sale, because they have transferred control. Note, however, that in practice we would typically expect for the entity that has the risks and rewards of ownership to also have control over the assets, so we would expect these criteria to usually lead to the same accounting.Brief Exercise 7-16Brief Exercise 7-17Receivables turnover = $320,000 = 5.33$60,000*($50,000 + 70,000) 2 = $60,000*Average collection = 365 = 68 daysperiod 5.33EXERCISESExercise 7-1Requirement 1Cash and cash equivalents includes:a. Balance in checking account $13,500Balance in savings account 22,100b. Undeposited customer checks 5,200c. Currency and coins on hand 580f. U.S. treasury bills with 2-month maturity 15,000Total $56,380Requirement 2d. The $400,000 savings account will be used for future plant expansion andtherefore should be classified as a noncurrent asset, either in other assets orinvestments.e. The $20,000 in the checking account is a compensating balance for a long-term loan and should be classified as a noncurrent asset, either in otherassets or investments.f. The $20,000 in 7-month treasury bills should be classified as a current assetalong with other temporary investments.Exercise 7-2Requirement 1Cash and cash equivalents includes:Cash in bank – checking account $22,500U.S. treasury bills 5,000Cash on hand 1,350Undeposited customer checks 1,840Total $30,690Requirement 2The $10,000 in 6-month treasury bills should be classified as a current asset along with other temporary investments.Exercise 7-3Requirement 1: U.S. GAAPCurrent Assets:Cash $175,000Current Liabilities:Bank Overdrafts $ 15,000 Requirement 2: IFRSCurrent Assets:Cash $160,000(No current liabilities with respect to overdrafts.)Exercise 7-4Requirement 1Sales price = 100 units x $600 = $60,000 x 70% = $42,000Requirement 2Exercise 7-4 (concluded)Requirement 3Requirement 1, using the net method:Requirement 2, using the net method:Exercise 7-5Requirement 1Sales price = 1,000 units x $50 = $50,000Requirement 2Exercise 7-6 Requirement 1Requirement 2Exercise 7-7Requirement 1Estimated returns = 4% x $11,500,000 = $460,000Less: Actual returns (450,000)Remaining estimated returns $10,000Note: another series of journal entries that produce the same end result would be:Exercise 7-7 (continued)Requirement 2Beginning balance in allowance account $300,000 Add: Year-end estimate 460,000 Less: Actual returns (450,000) Ending balance in allowance account $310,000Exercise 7-8Requirement 1Bad debt expense = $67,500 (1.5% x $4,500,000)Requirement 2Allowance for uncollectible accountsBalance, beginning of year $42,000 Add: Bad debt expense for 2011 (1.5% x $4,500,000) 67,500 Less: End-of-year balance (40,000) Accounts receivable written off $69,500 Requirement 3$69,500 — the amount of accounts receivable written off.Exercise 7-9Requirement 1To record the write-off of receivables.To reinstate an account previously written off and to record the collection.Allowance for uncollectible accounts:Balance, beginning of year $32,000Deduct: Receivables written off (21,000) Add: Collection of receivable previously written off 1,200Balance, before adjusting entry for 2011 bad debts 12,200Required allowance: 10% x $625,000 (62,500) Bad debt expense $50,300 To record bad debt expense for the year.Requirement 2Current assets:Accounts receivable, net of $62,500 allowancefor uncollectible accounts $562,500Exercise 7-10Using the direct write-off method, bad debt expense is equal to actual write-offs. Collections of previously written-off receivables are recorded as revenue.Allowance for uncollectible accounts:Balance, beginning of year $17,280Deduct: Receivables written off (17,100)Add: Collection of receivables previously written off 2,200Less: End of year balance (22,410)Bad debt expense for the year 2011 $20,030 Exercise 7-11($ in millions)Allowance for uncollectible accounts:Balance, beginning of year $16Add: Bad debt expense 14Less: End of year balance (18)Write-offs during the year $ 12*Accounts receivable analysis:Balance, beginning of year ($1,084 + 16)$ 1,100Add: Credit sales 4,271Less: Write-offs* (12)Less: Balance end of year ($953 + 18) (971)Cash collections $4,388Exercise 7-12Requirement 1Requirement 22011 income before income taxes would be understated by $900 2012 income before income taxes would be overstated by $900.Exercise 7-13Requirement 1Requirement 2$ 1,800 interest for 9 months÷ $28,200 sales price= 6.383% rate for 9 monthsx 12/9to annualize the rate_______= 8.511% effective interest rateExercise 7-14Requirement 1Book value of stock $16,000Plus gain on sale of stock 6,000= Note receivable $22,000Interest reported for the year $ 2,200= 10% rate Divided by value of note $ 22,000 Requirement 2To record sale of stock in exchange for note receivable.To accrue interest on note receivable for twelve months.Exercise 7-15Exercise 7-16Exercise 7-17Exercise 7-18Mountain High retains significant risks and rewards and therefore must treat the transfer as a secured borrowing. The accounts receivable stay on the balance sheet of Mountain High, and they must record a liability.Exercise 7-19Step 1: Accrue interest earned.Step 2: Add interest to maturity to calculate maturity value.Step 3: Deduct discount to calculate cash proceeds.Step 4: To record a loss for the difference between the cash proceeds and the note’s book value.Exercise 7-20List A List Bc 1. Internal control a. Restriction on cash.j 2. Trade discount b. Cash discount not taken is sales revenue.g 3. Cash equivalents c. Includes separation of duties.h 4. Allowance for uncollectibles d. Bad debt expense a % of credit sales.i 5. Cash discount e. Recognizes bad debts as they occur.l 6. Balance sheet approach f. Sale of receivables to a financial institution.d 7. Income statement approach g. Include highly liquid investments.k 8. Net method h. Estimate of bad debts.a 9. Compensating balance i. Reduction in amount paid by credit customer.m 10. Discounting j. Reduction below list price.b 11. Gross method k. Cash discount not taken is interest revenue.e 12. Direct write-off method l. Bad debt expense determined by estimating realizablevalue.f 13. Factoring m. Sale of note receivable to a financial institution.Exercise 7-21Requirement 1Step 1: To accrue interest earned for two months on note receivableStep 2: Add interest to maturity to calculate maturity value.Step 3: Deduct discount to calculate cash proceeds.Exercise 7-21 (continued)Step 4: To record a loss for the difference between the cash proceeds and the note’s book value.Exercise 7-21 (concluded)Requirement 2To accrue interest earned on note receivable.Exercise 7-22Second quarter:Receivables turnover = $16,629 = 1.62$10,244Average collection = 91 = 56 daysperiod 1.62Third quarter:Receivables turnover = $13,648 =1.36$10,068Average collection = 91 = 67 daysperiod 1.36Exercise 7-23Average collection period = 365 ÷ Accounts receivable turnover = 50 days Accounts receivable turnover = 365 ÷ 50 = 7.3Average accounts receivable = ($400,000 + 300,000) ÷ 2 = $350,000 Accounts receivable turnover = Net sales ÷ Average accounts receivable7.3 = Net sales ÷ $350,000Net sales = 7.3 x $350,000 =$2,555,000Exercise 7-24To establish the petty cash fund.To replenish the petty cash fund.Exercise 7-25Exercise 7-26Compute balance per bank statement:Balance per books $23,820 Deduct: Deposits outstanding (2,340) Add: Checks outstanding 1,890 Deduct: Bank service charges (38) Balance per bank $23,332Exercise 7-27Requirement 1Requirement 2To correct error in recording cash receipt from credit customer.To record credits to cash revealed by the bank reconciliation.Note: Each of the adjustments to the book balance required journal entries.None of the adjustments to the bank balance require entries.Exercise 7-28A NALYSISPrevious Value:Accrued 2010 interest (10% x $12,000,000)$ 1,200,000Principal 12,000,000Carrying amount of the receivable$13,200,000 New Value:Interest $1 million x 1.73554 * = $1,735,540Principal $11 million x 0.82645 ** = 9,090,950Present value of the receivable (10,826,490) Loss:$ 2,373,510* present value of an ordinary annuity of $1: n=2, i=10% (from Table 4)** present value of $1: n=2, i=10% (from Table 2)J OURNAL E NTRIESJanuary 1, 2011Loss on troubled debt restructuring (to balance) ......... 2,373,510Accrued interest receivable (account balance) ........ 1,200,000 Note receivable ($12,000,000 - 10,826,490) ........... 1,173,510 December 31, 2011Cash (required by new agreement) ................. ............ 1,000,000Note receivable (to balance) ....................... ….. ........ 82,649Interest revenue (10% x $10,826,490) ........ ............ 1,082,649December 31, 2012Cash (required by new agreement) ................. ............ 1,000,000Note receivable (to balance) ........................... ............ 90,861Interest revenue (10% x [$10,826,490 + 82,649]) ... 1,090,861*Cash (required by new agreement) ................. ............ 11,000,000Note receivable (balance) ........................... ............ 11,000,000 * rounded to amortize the note to $11,000,000 (per schedule below)Exercise 12-28 (concluded)Amortization Schedule – Not requiredCash Effective Increase in Outstanding Interest Interest Balance Balance by agreement 10% x Outstanding Balance Discount Reduction10,826,4901 1,000,000 .10 (10,826,490) = 1,082,649 82,649 10,909,1392 1,000,000 .10 (10,909,139) = 1,090,861* 90,861 11,000,0002,000,000 2,173,510 173,510* roundedExercise 7-29A NALYSISPrevious Value:Accrued 2010 interest (10% x $240,000)$ 24,000Principal 240,000Carrying amount of the receivable$264,000New Value:$11,555 + 11,555 + 11,555 + 240,000=$274,665$274,665 x 0.82645 * = (226,997) Loss:$37,003* present value of $1: n=2, i=10% (from Table 2)J OURNAL E NTRIESJanuary 1, 2011Loss on troubled debt restructuring (to balance) ......... 37,003Accrued interest receivable (10% x $240,000) ........ 24,000 Note receivable ($240,000 - 226,997) ........ ............ 13,003 December 31, 2011Note receivable (to balance) ........................... ............ 22,700Interest revenue (10% x $226,997) ............. ............ 22,700 December 31, 2012Note receivable (to balance) ........................... ............ 24,968Interest revenue (10% x [$226,997 + 22,700]) ........ 24,968* Cash (required by new agreement) ................. ............ 274,665Note receivable (balance) ........................... ............ 274,665 * rounded to amortize the note to $274,665 (per schedule below)Exercise 7-29 (concluded)Amortization Schedule – Not requiredCash Effective Increase in Outstanding Interest Interest Balance Balance by agreement 10% x Outstanding Balance Discount Reduction226,9971 0 .10 (226,997) = 22,700 22,700 249,6972 0 .10 (249,697) = 24,968* 24,968 274,66547,668 47,668* roundedExercise 7-30Requirement 1The specific citation that specifies these disclosure policies is FASB ACS 310–10–50–9: “Receivables—Overall—Disclosure—Accounting Policies for Credit Losses and Doubtful Accounts.”Requirement 2FASB ACS 310–10–50–9 reads as follows:“In addition to disclosures required by this Subsection and Subtopic 450-20, an entity shall disclose a description of the accounting policies and methodology the entity used to estimate its allowance for loan losses, allowance for doubtful accounts, and any liability for off-balance-sheet credit losses and related charges for loan, trade receivable or other credit losses in the notes to the financial statements. Such a description shall identify the factors that influenced management's judgment (for example, historical losses and existing economic conditions) and may also include discussion of risk elements relevant to particular categories of financial instruments.”。

Intermediate Accounting (10)

Retained Earnings (2014 original) $5,200,000 Less: correction for 2014 inventory 45,000 Retained Earnings (2014 restated) $5,155,000 Note: 2013 inventory error is self-corrected as it was discovered after the books for 2014 were closed
Overstated
Copyright © John Wiley & Sons Canada, Ltd.
9
Example
Given for the year 2014: COGS = $1.4 million Retained Earnings (R/E) = $5.2 million December 31st inventory errors both discovered after 2014 books were closed: 2013: inventory overstated by $110,000 2014: inventory overstated by $45,000 Calculate correct 2014 COGS and R/E at Dec. 31, 2014
Copyright © John Wiley & Sons Canada, Ltd. 10
Example
COGS (as originally stated in 2014) $1,400,000 Add: December 31, 2014 overstatement error 45,000 1,445,000 Less: December 31, 2013 overstatement error 110,000 Corrected 2014 COGS $1,335,000

Intermediate Accounting 题库Chap013

Chapter 13 Current Liabilities and ContingenciesQUESTIONS FOR REVIEW OF KEY TOPICSQuestion 13-1A liability entails the present, the future, and the past. It is a present responsibility, to sacrifice assets in the future, caused by a transaction or other event that already has happened. Specifically, ―Elements of Financial Statements,‖ Statement of Financial Accounting Concepts No. 6, par. 36, describes three essential characteristics: Liabilities–1. are probable, future sacrifices of economic benefits2. that arise from present obligations (to transfer goods or provide services) to other entities3. that result from past transactions or events.Question 13-2Liabilities traditionally are classified as either current liabilities or long-term liabilities in a classified balance sheet. Current liabilities are those expected to be satisfied with current assets or by the creation of other current liabilities. Usually, but with exceptions, current liabilities are obligations payable within one year or within the firm's operating cycle, whichever is longer.Question 13-3In concept, liabilities should be reported at their present values; that is, the valuation amount is the present value of all future cash payments resulting from the debt, usually principal and/or interest payments.In this case, the amount would be determined as the present value of $100,000, discounted for three months at an appropriate rate of interest for a debt of this type. This is proper because of the time value of money.In practice, liabilities ordinarily are reported at their maturity amounts if payable within one year because the relatively short time period makes the interest or time value component immaterial. [FASB ASC 835-30-15-3: Interest – Imputation of Interest – Scope and Scope Exceptions (previously ―Interest on Receivables and Payables,‖ Accounting Principles Board Opinion No 21, (New York, AICPA, August 1971, Par. 3))] specifically exempts from present value valuation all liabilities arising in connection with suppliers in the normal course of business and due within a year.Answers to Questions (continued)Question 13-4Lines of credit permit a company to borrow cash from a bank up to a prearranged limit at a predetermined, usually floating, rate of interest. The interest rate often is based on current rates of the prime London interbank borrowing, certificates of deposit, bankers’ acceptance, or other standard rates. Lines of credit usually must be available to support the issuance of commercial paper.Lines of credit can be noncommitted or committed. A noncommitted line of credit allows the company to borrow without having to follow formal loan procedures and paperwork at the time of the loan and is less formal, usually without a commitment fee. Sometimes a compensating balance is required to be on deposit with the bank as compensation for the service. A committed line of credit is more formal. It usually requires a commitment fee in the neighborhood of 1/4 of one percent of the unused balance during the availability period. Sometimes compensating balances also are required. Question 13-5When interest is ―discounted‖ from the face amount of a note at the time it is written, it usually is referred to as a ―noninterest-bearing‖ note. They do, of course entail interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset and included in the amount paid at maturity. In fact, the effective interest rate is higher than the stated discount rate because the discount rate is applied to the face value, but the cash borrowed is less than the face value.Question 13-6Commercial paper represents loans from other corporations. It refers to unsecured notes sold in minimum denominations of $25,000 with maturities ranging from 30 to 270 days. The firm would be required to file a registration statement with the SEC if the maturity is beyond 270 days. The name ―commercial paper‖ implies that a paper certificate is issued to th e lender to represent the obligation. But, increasingly, no paper is created because the entire transaction is computerized. Recording the issuance and payment of commercial paper is the same as for notes payable.The interest rate usually is lower than in a bank loan because commercial paper (a) typically is issued by large, sound companies (b) directly to the lender, and (c) normally is backed by a line of credit with a bank.Question 13-7This is an example of an accrued expense– an expense incurred during the current period, but not yet paid. The expense and related liability should be recorded as follows:Salaries expense 5,000Salaries payable 5,000This achieves a proper matching of this expense with the revenues it helps generate, and recognizes that a liability has been created by the employee earning wages for which she has not yet been paid.Question 13-8An employer should accrue an expense and the related liability for employees' compensation for future absences, like vacation pay, if the obligation meets each of four conditions:(1) the obligation is attributable to employees' services already performed, (2) the paid absence can be taken in a later year –the benefit vests (will be compensated even if employment is terminated) or the benefit can be accumulated over time, (3) the payment is probable, and (4) the amount can be reasonably estimated.Customary practice should be considered when deciding whether an obligation exists. For instance, whether the rights to paid absences have been earned by services already rendered sometimes depends on customary policy for the absence in question. An example is whether compensation for upcoming sabbatical leave should be accrued. Is it granted only to perform research beneficial to the employer? Or, is it customary that sabbatical leave is intended to provide unrestrained compensation for past service?Similar concerns also influence whether unused rights to the paid absences can be carried forward or expire. Although holiday time, military leave, maternity leave, and jury time typically do not accumulate if unused, if it is customary practice that one can be carried forward, a liability is accrued if it’s probable employees will be compensated in a future year. Similarly, sick pay is specifically excluded from mandatory accrual, according to GAAP regarding compensated absences, because future absence depends on future illness, which usually is not a certainty. But, if company policy or custom is that em ployees are paid ―sick pay‖ even when their absence is not due to illness, a liability for unused sick pay should be recorded.Question 13-9When a company collects cash from a customer as a refundable deposit or as an advance payment for products or services, a liability is created obligating the firm to return the deposit or to supply the products or services. When the amount is to be returned to the customer in cash, it is a refundable deposit. When the amount will be applied to the purchase price when goods are delivered or services provided (gift certificates, magazine subscriptions, layaway deposits, special order deposits, and airline tickets), it is a customer advance.Question 13-10Gift cards are a particular form of advance collection of revenues. When the payment is received, the seller debits cash and credits an unearned revenue liability. Later, unearned revenue is reduced and revenue recognized either when the customer redeems the gift card or when the probability of redemption is viewed as remote, based on an expiration date or the company’s experience. Question 13-11Examples of amounts collected for third parties that represent liabilities until remitted are sales taxes, and payroll-related deductions such as federal and state income taxes, social security taxes, employee insurance, employee contributions to retirement plans, and union dues.Question 13-121. Current liability— The requirement to classify currently maturing debt as a current liabilityincludes debt that is callable, or due on demand, by the creditor in the upcoming year even if the debt is not expected to be called.2 Long-term liability— The current liability classification includes (a) situations in which thecreditor has the right to demand payment because an existing violation of a provision of the debt agreement makes it callable and (b) situations in which debt is not yet callable, but will be callable within the year if an existing violation is not corrected within a specified grace period – unless it's probable the violation will be corrected within the grace period. In this case, the existing violation is expected to be corrected within 6 months.Question 13-13Short-term obligations can be reported as noncurrent liabilities if the company (a) intends to refinance on a long-term basis and (b) demonstrates the ability to do so by a refinancing agreement or by actual financing.Question 13-14Under U.S. GAAP, ability to finance must be demonstrated by securing financing prior to the date the balance sheet is issued; under IFRS, ability to finance must be demonstrated by securing financing prior to the balance sheet date (which typically is a couple of months earlier than the date of issuance).Question 13-15A loss contingency is an existing situation, or set of circumstances involving potential loss that will be resolved when some future event occurs or doesn’t occur. Examples: (1) a possible repair to a product under warranty, (2) a possible uncollectible receivable, (3) being the defendant in a lawsuit. Question 13-16The likelihood that the future event(s) will confirm the incurrence of the liability must be categorized as:P ROBABLE– the confirming event is likely to occur.R EASONABLY P OSSIBLE– the chance the confirming event will occur is more than remote but less than likely.R EMOTE– the chance the confirming event will occur is slight.Question 13-17A liability should be accrued if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated.Question 13-18Under U.S. GAAP, the term ―contingent liability‖ is used to refer generally to contingent losses, regardless of probability. Under IFRS, a contingent liability refers only to those contingencies that are not recognized in the financial statements; the term ―provision‖ is used to refer to those that are accrued as liabilities because they are probable and reasonably estimable.Question 13-19If one or both of the accrual criteria is not met, but there is at least a reasonable possibility that an obligation exists (the loss will occur), a disclosure note should describe the contingency. The note also should provide an estimate of the possible loss or range of loss, if possible. If an estimate cannot be made, a statement to that effect should be included.Question 13-201. Manufacturers’ product warranties —these inevitably involve expenditures, and reasonablyaccurate estimates of the total liability for a period usually are possible, based on prior experience.2. Cash rebates and other premium offers — these inevitably involve expenditures, and reasonablyaccurate estimates of the total liability for a period usually are possible, based on prior experience. Question 13-21The contingent liability for warranties and guarantees usually is accrued. The estimated warranty (guarantee) liability is credited and warranty (guarantee) expense is debited in the reporting period in which the product under warranty is sold. An extended warranty provides warranty protection beyond the manufacturer’s original warranty. A manufacturer’s warranty is offered as an integral part of the product package. By contrast, an extended warranty is priced and sold separately from the warranted product. It essentially constitutes a separate sales transaction and is recorded as such.Question 13-22Several weeks usually pass between the end of a company’s fiscal year and the date the financial statements for that year actually are issued. Any enlightening events occurring during this period should be used to assess the nature of a loss contingency existing at the report date. Since a liability should be accrued if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated, the contingency should be accrued.Question 13-23When a contingency comes into existence only after the year-end, a liability cannot be accrued because none existed at the end of the year. Yet, if the loss is probable and can be reasonably estimated, the contingency should be described in a disclosure note. The note should include the effect of the loss on key accounting numbers affected. Furthermore, even events other than contingencies that occur after the year-end but before the financial statements are issued must be disclosed in a ―subsequent events‖ disclosure note if they have a material effect on the company’s financial position. (i.e., an issuance of debt or equity securities, a business combination, or discontinued operations). Question 13-24In U.S. GAAP, the low end of the range is accrued as a liability, and the rest of the range is disclosed. In IFRS, the mid-point of the range is accrued.Question 13-25When an assessment is probable, reporting the possible obligation would be warranted if an unfavorable settlement is at least reasonably possible. This means an estimated loss and contingent liability would be accrued if (a) an unfavorable outcome is probable and (b) the amount can be reasonably estimated. Otherwise footnote disclosure would be appropriate. So, when the assessment is unasserted as yet, a two-step process is involved in deciding how it should be reported:1. Is the assessment probable? If it is not, no disclosure is warranted.2. If the assessment is probable, evaluate (a) the likelihood of an unfavorable outcome and (b)whether the dollar amount can be estimated to determine whether it should be accrued, disclosed only, or neither.Question 13-26You should not accrue your gain. A gain contingency should not be accrued. This conservative treatment is consistent with the general inclination of accounting practice to anticipate losses, but to recognize gains only at their realization. Though gain contingencies are not recorded in the accounts, they should be disclosed in notes to the financial statements. Attention should be paid that the disclosure note not give "misleading implications as to the likelihood of realization."BRIEF EXERCISESBrief Exercise 13-1Cash ............................................................... 60,000,000Notes payable .............................................. 60,000,000Interest expense ($60,000,000 x 12% x 3/12) ...... 1,800,000Interest payable .......................................... 1,800,000Brief Exercise 13-2Cash (difference) .......................................................... 54,600,000Discount on notes payable ($60,000,000 x 12% x 9/12) . 5,400,000Notes payable (face amount) .................................... 60,000,000 Interest expense ($60,000,000 x 12% x 3/12) ................. 1,800,000Discount on notes payable ................................... 1,800,000Brief Exercise 13-3a.December 31$100,000 x 12% x 6/12 = $6,000b.September 30$100,000 x 12% x 3/12 = $3,000Brief Exercise 13-4Cash (difference) .......................................................... 11,190,000Discount on notes payable ($12,000,000 x 9% x 9/12) ... 810,000Notes payable (face amount) .................................... 12,000,000 Interest expense ........................................................ 810,000Discount on notes payable........................................... 810,000 Notes payable (face amount) ........................................ 12,000,000Cash ....................................................................... 12,000,000Brief Exercise 13-5Cash (difference) .......................................................... 9,550,000Discount on notes payable ($10,000,000 x 6% x 9/12) ... 450,000Notes payable (face amount) .................................... 10,000,000Effective interest rate:Discount ($10,000,000 x 6% x 9/12)$ 450,000Cash proceeds ÷ $9,550,000Interest rate for 9 months 4.712%x 12/9___________Annual effective rate 6.3%Brief Exercise 13-6December 12Cash ....................................................................... 24,000Liability – customer advance ........................... 24,000 January 16Cash ....................................................................... 216,000Liability – customer advance ............................... 24,000Sales revenue ..................................................... 240,000Brief Exercise 13-7In 2011 Lizzie would recognize $11,500 of revenue ($4,000 + $3,000 + $2,500 + $2,000). In 2012 Lizzie would recognize the remainder of $6,500 ($18,000 -$11,500), either because gift cards were redeemed (the $1,000 in January and the $500 in February) or because they are viewed as expired.Brief Exercise 13-8Accounts receivable .............................................. 645,000Sales revenue.................................................... 600,000Sales taxes payable ([6% + 1.5%] x $600,000) ...... 45,000Brief Exercise 13-9Under U.S. GAAP, the debt would be classified as long-term for both completion dates, as what is key is that the refinancing be completed before the financialstatements are issued.Brief Exercise 13-10Under IFRS, the debt would be classified as long-term if the refinancing wascompleted by December 15, 2011, but not if completed by January 15, 2012,because for IFRS what is key is that the refinancing be completed by the balance sheet date.Brief Exercise 13-11This is a loss contingency and the estimated warranty liability is credited and warranty expense is debited in the period in which the products under warranty are sold. Right will report a liability of $130,000:Warranty Liability_________________________________________150,000Warranty expense (1% x $15,000,000) Actual expenditures20,000130,000 BalanceBrief Exercise 13-12This is a loss contingency and should be accrued because it is both probable that the confirming event will occur and the amount can be at least reasonablyestimated. Goo Goo should report a $5.5 million loss in its income statement anda $5.5 million liability in its balance sheetLoss – product recall ....................................................... 5,500,000Liability – product recall .......................................... 5,500,000A disclosure note also is appropriate.Brief Exercise 13-13This is a gain contingency. Gain contingencies are not accrued even if the gain is probable and reasonably estimable. The gain should be recognized only when realized. A carefully worded disclosure note is appropriate.Brief Exercise 13-14This is a loss contingency. A liability should be accrued if it is both probable that the confirming event will occur and the amount can be at least reasonably estimated. If one or both of these criteria is not met (as in this case), but there is at least a reasonable possibility that the loss will occur, a disclosure note should describe the contingency. That’s what Bell should do here.Brief Exercise 13-15Only the third situation’s costs should be accrued. A liability should be accrued fora loss contingency if it is both probable that the confirming event will occur andthe amount can be at least reasonably estimated. If one or both of these criteria is not met, but there is at least a reasonable possibility that the loss will occur, a disclosure note should describe the contingency. Both criteria are met only for the warranty costs.Brief Exercise 13-16Under U.S. GAAP, no liability would be recognized, because a 51% chance is less than the level of probability typically associated with ―probable‖ in the U.S. A liability would be acc rued under IFRS, as 51% is clearly ―more likely than not.‖ Ifa liability were accrued under U.S. GAAP, it would be for $10 million, the low endof the range, but under IFRS it would be for $15 million, the midpoint of the range. Brief Exercise 13-17No disclosure is required because an EPA claim is not yet asserted, and an assessment is not probable. Even if an unfavorable outcome is thought to be probable in the event of an assessment and the amount is estimable, disclosure is not required unless an unasserted claim is probable.EXERCISESExercise 13-1Requirement 1Cash ............................................................... 16,000,000Notes payable .............................................. 16,000,000 Requirement 2Interest expense ($16,000,000 x 12% x 2/12) ...... 320,000Interest payable ........................................... 320,000 Requirement 3Interest expense ($16,000,000 x 12% x 7/12) ...... 1,120,000Interest payable (from adjusting entry) ............... 320,000Notes payable (face amount) ............................. 16,000,000Cash (total) ................................................... 17,440,000 Exercise 13-21. Interest rate Fiscal year-end12% December 31$400 million x 12% x 6/12 = $24 million2. Interest rate Fiscal year-end10% September 30$400 million x 10% x 3/12 = $10 million3. Interest rate Fiscal year-end9% October 31$400 million x 9% x 4/12 = $12 million4. Interest rate Fiscal year-end6% January 31$400 million x 6% x 7/12 = $14 millionExercise 13-32011Jan. 13No entry is made for a line of credit until a loan actually is made. It would be described in a disclosure note.Feb. 1Cash .......................................................................... 5,000,000Notes payable ........................................................ 5,000,000 May 1Interest expense ($5,000,000 x 10% x 3/12)................... 125,000Notes payable (face amount) ........................................ 5,000,000Cash ($5,000,000 + 125,000)...................................... 5,125,000 Dec. 1Cash (difference) .......................................................... 9,325,000Discount on notes payable ($10,000,000 x 9% x 9/12) ... 675,000Notes payable (face amount) .................................... 10,000,000 Dec. 31The effective interest rate is 9.6515% ($675,000 ÷ $9,325,000) x 12/9. So, properly, interest should be recorded at that rate times the outstanding balance timesone-twelfth of a year:Interest expense ($9,325,000 x 9.6515% x 1/12)............. 75,000Discount on notes payable ................................... 75,000 However the same results are achieved if interest is recorded at the discountrate times the maturity amount times one-twelfth of a year:Interest expense ($10,000,000 x 9% x 1/12)................... 75,000Discount on notes payable ................................... 75,000Exercise 13-3 (concluded)2012Sept. 1Interest expense ($10,000,000 x 9% x 8/12)* ................. 600,000Discount on notes payable ................................... 600,000 Notes payable (balance)............................................... 10,000,000Cash (maturity amount) ............................................. 10,000,000 * or, ($9,325,000 x 9.6515% x 8/12) = $600,000Exercise 13-4Wages expense (increases wages expense to $410,000) ........... 6,000Liability – compensated future absences.................... 6,000** ($404,000 - 4,000] = $400,000 non-vacation wagesx 1/40 = $10,000 vacation pay earned(4,000) vacation pay taken= $ 6,000 vacation pay carried overExercise 13-5Requirement 1Wages expense (700 x $900) .............................................. 630,000Liability – compensated future absences............ 630,000 Requirement 2Liability – compensated future absences................. 630,000Wages expense ($31 million + [5% x $630,000]) .............. 31,031,500Cash (or wages payable) (total) ............................ 31,661,500Exercise 13-6Requirement 1Cash ............................................................................. 5,200Liability – gift certificates...................................... 5,200Cash ($2,100 + 84 - 1,300) (884)Liability – gift certificates ......................................... 1,300Sales revenue ........................................................... 2,100Sales taxes payable (4% x $2,100) (84)Requirement 2Gift certificates sold$5,200Gift certificates redeemed(1,300)Liability to be reported at December 31 $3,900 Requirement 3The sales tax liability is a current liability because it is payable in January.The liability for gift certificates is part current and part noncurrent:Gift certificates sold$5,200x 80% Estimated current liability$4,160Gift certificates redeemed (1,300)Current liability at December 31 $2,860Noncurrent liability at December 31 ($5,200 x 20%) 1,040Total $3,900Exercise 13-7Requirement 1Deposits CollectedCash .................................................................. 850,000Liability – refundable deposits ................... 850,000Containers ReturnedLiability – refundable deposits ....................... 790,000Cash .............................................................. 790,000Deposits ForfeitedLiability – refundable deposits ....................... 35,000Revenue – sale of containers ....................... 35,000Cost of goods sold ........................................... 35,000Inventory of containers ............................... 35,000 Requirement 2Balance on January 1$530,000Deposits received850,000Deposits returned (790,000)Deposits forfeited (35,000)Balance on December 31 $555,000Exercise 13-8Requirement 1Cash ....................................................................... 7,500Liability – customer advance ........................... 7,500 Requirement 2Cash ....................................................................... 25,500Liability – refundable deposits......................... 25,500 Requirement 3Accounts receivable .............................................. 856,000Sales revenue.................................................... 800,000Sales taxes payable ([5% + 2%] x $800,000)......... 56,000Exercise 13-9Requirement 1The entire $10,000 sold in January will be recognized as revenue during2011. $6,000 because of gift card redemption; $4,000 because of gift cardbreakage.Requirement 2January Gift Card SalesCash .................................................................. 10,000Liability – unearned gift card revenue ......... 10,000 Redemption of January Gift CardsLiability – unearned gift card revenue............ 6,000Revenue – gift cards ..................................... 6,000 Expiration of January Gift CardsLiability – unearned gift card revenue............ 4,000Revenue – gift cards ..................................... 4,000 Requirement 3Of the $16,000 sold in March, $10,000 will be recognized as revenue:$4,000 because of gift card redemption; $6,000 of the remaining $12,000because of gift card expiration. To calculate the amount of gift cardbreakage, consider that, if March sales all occurred on the first day of themonth, all would have been outstanding for 10 months during 2011 andtherefore all $12,000 of non-redeemed gift cards would be viewed asexpired. On the other hand, if March sales all occurred on the last day ofthe month, none would have been outstanding for 10 months during 2011and therefore none of the $12,000 of non-redeemed gift cards would beviewed as expired. Assuming that sales of gift cards occur on average onMarch 15 gets us to the average of ($12,000 + $0) / 2 = $6,000 from giftcard expiration.Requirement 4The only liability at 12/31/2011 would be the $6,000 of unexpired March giftcards (see answer to requirement 3).。

Intermediate Accounting Chapter10 课后习题答案

Chapter 10 Property, Plant, and Equipment and Intangible Assets: Acquisition and Disposition QUESTIONS FOR REVIEW OF KEY TOPICSQuestion 10-1The difference between tangible and intangible long-lived, revenue-producing assets is that intangible assets lack physical substance and they primarily refer to the ownership of rights. Question 10-2The cost of property, plant, and equipment and intangible assets includes the purchase price (less any discounts received from the seller), transportation costs paid by the buyer to transport the asset to the location in which it will be used, expenditures for installation, testing, legal fees to establish title, and any other costs of bringing the asset to its condition and location for use. Question 10-3The cost of a developed natural resource includes the acquisition costs for the use of land, the exploration and development costs incurred before production begins, and the restoration costs incurred during or at the end of extraction.Question 10-4Purchased intangibles are valued at their original cost to include the purchase price and all other necessary costs to bring the asset to condition and location for use. Research and development costs incurred to internally develop an intangible asset are expensed in the period incurred. Filing and legal costs for both purchased and developed intangibles are capitalized.Question 10-5Goodwill represents the unique value of the company as a whole over and above all identifiable tangible and intangible assets. This value results from a company’s clientele and reputation, its trained employees and management team, its unique business location, and any other unique features of the company that can’t be associated with a specific asset.Because goodwill can’t b e separated from a company, it is not possible for a buyer to acquire it without also acquiring the whole company or a substantial portion of it. Goodwill will appear as an asset in a balance sheet only when it was paid for in connection with the acquisition of another company. The capitalized cost of goodwill equals the purchase price of the acquired company less the fair value of the net assets acquired. The fair value of the net assets equals the fair value of all identifiable tangible and intangible assets less the fair value of any liabilities of the selling company assumed by the buyer.Answers to Questions (continued)Question 10-6A lump-sum purchase price generally is allocated based on the relative fair values of the individual assets. The relative fair value percentages are multiplied by the lump-sum purchase price to arrive at the initial valuation of each of the separate assets.Question 10-7Assets acquired in exchange for deferred payment contracts are valued at their fair value or the present value of payments using a realistic interest rate. Theoretically, both alternatives should lead to the same valuation.Question 10-8Assets acquired through the issuance of equity securities are valued at the fair value of the securities if known; if not known, the fair value of the assets received is used.Question 10-9Donated assets are valued at their fair values.Question 10-10When an item of property, plant, and equipment is sold, a gain or loss is recognized for the difference betwee n the consideration received and the asset’s book value. Retirements and abandonments are handled in a similar fashion. The only difference is that there will be no monetary consideration received. A loss is recorded for the remaining book value of the asset.Question 10-11The basic principle used to value assets acquired in a nonmonetary exchange is to use the fair value of asset(s) given up plus (minus) monetary consideration - cash - paid (received).Question 10-12The two exceptions are (1) when fair value is not determinable and (2) when the exchange lacks commercial substance.Question 10-13GAAP require the capitalization of interest incurred during the construction of assets for a company’s own use as well as for assets constructed for sale or lease. Assets qualifying for capitalization exclude inventories that are routinely manufactured in large quantities on a repetitive basis and assets that are in use or ready for their intended purpose. Only assets that are constructed as discrete projects qualify for interest capitalization.Answers to Questions (continued)Question 10-14Average accumulated expenditures for a period is an approximation of the average amount of debt the company would have had outstanding if it borrowed all of the funds necessary for construction. If construction expenditures are incurred equally throughout the period, the average accumulated expenditures for the period can be estimated by adding the accumulated expenditures at the beginning of the period to the accumulated expenditures at the end of the period and dividing by two. If expenditures on the project are unequal throughout the period, individual expenditures, perhaps expenditures grouped by month, should be weighted by the amount of time outstanding until the end of the construction period or the end of the company’s fiscal year, whichever comes first. Question 10-15Applying the specific interest method, the interest rate on any construction related debt is used up to the amount of the construction debt and any excess average accumulated expenditures is multiplied by a weighted-average interest rate of all other debt. The weighted-average method multiplies average accumulated expenditures by the weighted-average interest rate of all debt, including any construction-related debt.Question 10-16GAAP defines research and development as follows:Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product or process.Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.Question 10-17GAAP specifically excludes from current R&D expense the cost of property, plant, and equipment and intangible assets that have “alternative future uses” beyond the current R&D project. However, the depreciation or amortization of these assets will be included as R&D expenses in the future periods the assets are used for R&D activities. If the asset has no alternative future use, its cost is expensed as R&D immediately.Question 10-18GAAP requires the capitalization of software development costs incurred after technological feasibility is established. Technological feasibility is established “when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements.” Costs incurred after technological feasibility but before the product is available for general release to customers are capitalized as an intangible asset. These costs include coding and testing costs and the production of product masters. Costs incurred after commercial production begins usually are not R&D expenditures.Answers to Questions (concluded)Question 10-19The cost of developed technology is capitalized and expensed over its expected useful life. Developed technology relates to those projects that have reached technological feasibility. Before 2009, the cost of in-process R&D was expensed in the period of the acquisition. Now, the cost of in-process R&D is capitalized and treated as an indefinite life intangible asset and not amortized. If the R&D project is completed successfully, we switch to the way we account for developed technology and amortize the capitalized amount over the estimated period the product or process developed will provide benefits. If the project instead is abandoned, we expense the entire balance immediately. Research and development costs incurred after the acquisition to complete the project are expensed as incurred, consistent with the treatment of any other R&D not acquired in an acquisition. Question 10-20Other than software development costs incurred after technological feasibility has been established, U.S. GAAP requires all research and development expenditures to be expensed in the period incurred. IAS No. 38draws a distinction between research activities and development activities. Research expenditures are expensed in the period incurred. However, development expenditures that meet specified criteria are capitalized as an intangible asset.Question 10-21The periodic amortization percentage for capitalized computer software development costs under U.S. GAAP is the greater of (1) the ratio of current revenues to current and anticipated revenues or (2) the straight-line percentage over the useful life of the software. This approach is allowed under IFRS, but not required.Question 10-22The successful efforts method allows companies to capitalize only exploration costs resulting in successful wells. The full-cost method allows companies to capitalize all exploration costs incurred within a geographical area.BRIEF EXERCISESBrief Exercise 10-1Capitalized cost of the machine:Purchase price $35,000Freight 1,500Installation 3,000Testing 2,000Total cost $41,500Note: Personal property taxes on the machine for the period after acquisition are not part of acquisition cost. They are expensed in the period incurred.Brief Exercise 10-2Capitalized cost of land:Purchase price $600,000Broker’s commission30,000Title insurance 3,000Miscellaneous closing costs 6,000Demolition of old building 18,000Total cost $657,000All of the expenditures, including the costs to demolish the old building, are included in the initial cost of the land.Brief Exercise 10-3Cost of land and building:Purchase price $600,000Broker’s commission30,000Title insurance 3,000Miscellaneous closing costs 6,000Total cost $639,000The total must be allocated to the land and building based on their relative fair values:Brief Exercise 10-4Cost of silver mine:Acquisition, exploration, and development $5,600,000Restoration costs 429,675 †$6,029,675† $500,000 x 20% = $100,000550,000 x 45% = 247,500650,000 x 35% = 227,500$575,000 x .74726* = $429,675*Present value of $1, n = 5, i = 6% (from Table 2)Brief Exercise 10-5After one year, the liability will increase to $455,456.($429,675† + ($429,675 x 6%) = $455,456)† $500,000 x 20% = $100,000550,000 x 45% = 247,500650,000 x 35% = 227,500$575,000 x .74726* = $429,675*Present value of $1, n = 5, i = 6% (from Table 2)Actual restoration costs $596,000Less: Asset retirement liability (575,000)Loss on retirement $ (21,000)Brief Exercise 10-6Calculation of goodwill:Consideration exchanged $14,000,000 Less fair value of net assets:Book value of assets $8,300,000Plus: Excess of fair value over book valueof intangible assets 2,500,000 (10,800,000) Goodwill $ 3,200,000Brief Exercise 10-7The initial value of machinery and note will be the present value of the note payment:PV = $60,000 (.85734* ) = $51,440*P resent value of $1: n = 2, i = 8% (from Table 2)Interest expense for July 1 to December 31, 2011:$51,440 x 8% x 6/12= $2,058Brief Exercise 10-8The cost of the patent equals the fair value of the stock given in exchange: 50,000 x $22 = $1,100,000Brief Exercise 10-9Average PP&E for 2011 = ($740,000 + 940,000) ÷ 2 = $840,000Net sales ÷ Average PP&E = Fixed-asset turnover ratio? ÷ $840,000 = 3.25Average PP&E x Fixed-asset turnover ratio = Net sales$840,000 x 3.25 = $2,730,000Brief Exercise 10-10Proceeds $16,000Less book value: $80,000(71,000) 9,000Gain on sale of equipment $ 7,000Journal entry (not required):Cash ................................................................................ 16,000Accumulated depreciation (account balance) .................... 71,000Gain (difference) ........................................................... 7,000 Equipment(account balance).......................................... 80,000Brief Exercise 10-11Pickup trucks = Fair value of machinery plus cash paid$17,000 + 8,000 = $25,000Loss on exchange = $20,000 (book value) – 17,000 (fair value) = $3,000 Journal entry (not required):Pickup trucks (determined above) ..................................... 25,000Accumulated depreciation (account balance) .................... 45,000Loss (difference)................................................................ 3,000Cash ........................................................................... 8,000 Machinery(account balance).......................................... 65,000 Brief Exercise 10-12Pickup trucks = Fair value of machinery plus cash paid$24,000 + 8,000 = $32,000Gain on exchange = $24,000 (fair value) – 20,000 (book value ) = $4,000 Journal entry (not required):Pickup trucks (determined above) ..................................... 32,000Accumulated depreciation (account balance) .................... 45,000Cash ........................................................................... 8,000 Gain (difference) ........................................................... 4,000 Machinery(account balance).......................................... 65,000Brief Exercise 10-13Pickup trucks = Book value of machinery plus cash paid$20,000 + 8,000 = $28,000No gain is recognized in this situation.Journal entry (not required):Pickup trucks (determined above) ..................................... 28,000Accumulated depreciation (account balance) .................... 45,000Cash ........................................................................... 8,000 Machinery(account balance).......................................... 65,000Brief Exercise 10-14Average accumulated expenditures:January 1$500,000 x 12/12 = $ 500,000March 31 600,000 x 9/12 = 450,000June 30400,000 x 6/12 = 200,000 October 30 600,000 x 2/12 = 100,000$1,250,000 Interest capitalized:$1,250,000- 700,000 x 7% = $49,000$ 550,000 x 6.75%* = 37,125$ 86,125 = interest capitalized * Weighted-average rate of all other debt:$3,000,000 x 8% = $240,0005,000,000 x 6% = 300,000$8,000,000 $540,000$540,000= 6.75% weighted average$8,000,000Brief Exercise 10-15Average accumulated expenditures:January 1, 2011 $500,000 x 12/12 = $ 500,000March 31, 2011 600,000 x 9/12 = 450,000June 30, 2011 400,000 x 6/12 = 200,000October 30, 2011 600,000 x 2/12 = 100,000$1,250,000Interest capitalized:$1,250,000 x 6.77%* = $84,625* Weighted-average rate of all other debt:$ 700,000 x 7% = $ 49,0003,000,000 x 8% = 240,0005,000,000 x 6% = 300,000$8,700,000 $589,000$589,000= 6.77% weighted average$8,700,000Brief Exercise 10-16Research and development:Salaries $220,000Depreciation on R & D facilities and equipment 125,000Utilities and other direct costs 66,000Payment to another company 120,000Total R & D expense $531,000 Note: The patent filing and related legal costs and the costs of adapting the product to a particular customer’s needs are not included as research and development expense.EXERCISESExercise 10-1Capitalized cost of land:Purchase price $60,000Demolition of old building $4,000Less: Sale of materials (2,000) 2,000Legal fees for title investigation 2,000Total cost of land $64,000Capitalized cost of building:Construction costs $500,000Architect's fees 12,000Interest on construction loan 5,000Total cost of building $517,000Note: Property taxes on the land for the period after acquisition are not part ofacquisition cost. They are expensed in the period incurred.Exercise 10-2To record the purchase of a machine.To record prepaid insurance for the machine.Exercise 10-3Requirement 1Cost of land and building:Purchase price $4,000,000Title search and insurance 16,000Legal fees 5,000State transfer fees 4,000Total cost $4,025,000Note: The pro-rated property taxes for the period after acquisition are not included in the initial valuation of the land and building. They arerecorded instead as prepaid taxes and expensed over the related period.The total is allocated to the land and building based on their relative fair values:Assets:Land $3,018,750Building 1,006,250Land improvements:Parking lot 82,000Landscaping 40,000Exercise 10-3 (concluded)Requirement 2Cost of land:Purchase price $4,000,000Title search and insurance 16,000Legal fees 5,000State transfer fees 4,000Demolition of old building $250,000Less: Sale of materials (6,000) 244,000 Clearing and grading costs 86,000 Total cost of land $4,355,000 Land improvements:Parking lot 82,000 Landscaping 40,000Exercise 10-4Requirement 1Cost of copper mine:Mining site $1,000,000Development costs 600,000Restoration costs 303,939 †$1,903,939† $300,000 x 25% = $ 75,000400,000 x 40% = 160,000600,000 x 35% = 210,000$445,000 x .68301* = $303,939*Present value of $1, n = 4, i = 10% (from Table 2) Requirement 2Exercise 10-6Calculation of goodwill:Consideration exchanged $17,000,000 Less fair value of net assets:Assets $23,000,000Less: Liabilities assumed (9,500,000) (13,500,000) Goodwill $ 3,500,000 Exercise 10-7Calculation of goodwill:Consideration exchanged $11,000,000 Less fair value of net assets:Book value of net assets $7,800,000Plus: Fair value in excess of book value:Property, plant, and equipment 1,400,000Intangible assets 1,000,000Less: Book value in excess of fair value:Receivables (200,000) 10,000,000 Goodwill $ 1,000,000Exercise 10-8Exercise 10-9Requirement 1† Present value of note payment:PV = $25,000 (.75131* ) = $18,783*P resent value of $1: n = 3, i = 10% (from Table 2) Requirement 22011: Interest expense ($18,783 x 10%) = $1,878 2012: Interest expense [($18,783 + 1,878) x 10%] = 2,066 Requirement 32011: $25,000 – ($6,217 – 1,878) = $20,6612012: $25,000 – ($6,217 – 1,878 – 2,066) = 22,727Exercise 10-10Land:Purchase price $1,200,000Demolition and removal of old building 80,000Clearing and grading 150,000Closing costs 42,000 Total cost of land $1,472,000 Building:Architect’s fees$ 50,000Construction costs 3,250,000 Total cost of building $3,300,000 Machinery:Purchase price $860,000Freight charges 32,000Special platforms and wire installation 12,000Cost of trial runs 7,000 Total cost of machinery $911,000 Land improvements:Landscaping $45,000Sprinkler system 5,000 Fork lifts:PV = $16,000 + 70,000 (.93458* ) = $81,421 *P resent value of $1: n = 1, i = 7% (from Table 2)Prepaid insurance:$24,000Exercise 10-11To record the acquisition of land in exchange for common stock.To record the acquisition of a building through purchase and donation.Exercise 10-12Requirement 1($ in millions)Average PP&E for 2009 = ($4,043 + 4,151) ÷ 2 = $4,097Net sales ÷ Average PP&E = Fixed-asset turnover ratio$36,117 ÷ $4,097 = 8.82Requirement 2The fixed-asset turnover ratio indicates the level of sales generated by the company’s investment in fixed assets.Cisco is able to generate $8.82 in sales for every $1 invested in property, plant, and equipment.Exercise 10-13 Requirement 1Requirement 2Exercise 10-14Exercise 10-15Exercise 10-16Requirement 1Fair value of land + Cash given = F air value of equipment$150,000 + 10,000 = $160,000Requirement 2Exercise 10-17Requirement 1Fair value of land - Cash received = F air value of equipment $150,000 - 10,000 = $140,000Requirement 2Exercise 10-18Requirement 1Fair value of old land + Cash given = F air value of new land $72,000 + 14,000 = $86,000Requirement 2Requirement 3Exercise 10-191.To record the purchase of equipment on account.2.To record the acquisition of equipment in exchange for a note.PV = $27,000 (.90909* ) = $24,545*P resent value of $1: n=1, i=10% (from Table 2)3. To record the exchange of old equipment for new equipment.4. To record the acquisition of equipment by the issuance of stock.Exercise 10-20Requirement 1The Codification topic number for nonmonetary transactions is FASB ASC 845: “Nonmonetary Transactions.”Requirement 2The specific citations that describe the required disclosures for nonmonetary transactions are FASB ASC 845–10–50–1 to 2: “Nonmonetary Transactions–Overall–Disclosure.”Requirement 3An entity that engages in one or more nonmonetary transactions during a period shall disclose in financial statements for the period all of the following:a.The nature of the transactionsb.The basis of accounting for the assets transferredc.Gains or losses recognized on transfers.In accordance with paragraph 845-10-50-1, entities shall disclose, in each period's financial statements, the amount of gross operating revenue recognized as a result of nonmonetary transactions.Exercise 10-21The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:1.The disclosure requirements in the notes to the financial statements fordepreciation on property, plant, and equipment:FASB ASC 360–10–50–1: “Property, Plant, and Equipment–Overall–Disclosure.”Because of the significant effects on financial position and results of operations of the depreciation method or methods used, all of the following disclosures shall be made in the financial statements or in notes thereto:a. Depreciation expense for the periodb. Balances of major classes of depreciable assets, by nature or function, at the balance sheet datec. Accumulated depreciation, either by major classes of depreciable assets or in total, at the balance sheet dated. A general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets.Exercise 10-21 (continued)2.The criteria for determining commercial substance in a nonmonetaryexchange:FASB ASC 845–10–30–4: “Nonmonetary Transactions–Overall–Initial Measurement.”A nonmonetary exchange has commercial substance if the entity's future cashflows are expected to significantly change as a result of the exchange. The entity's future cash flows are expected to significantly change if either of the following criteria is met:a. The configuration (risk, timing, and amount) of the future cash flows of theasset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred. The configuration of future cash flows iscomposed of the risk, timing, and amount of the cash flows. A change in any one of those elements would be a change in configuration.b. The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant inrelation to the fair values of the assets exchanged. An entity-specific value(referred to as an entity-specific measurement in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements) is different from a fair value measurement. As described in paragraph 24(b) ofConcepts Statement No. 7, an entity-specific value attempts to capture the value of an asset or liability in the context of a particular entity. For example, an entity computing an entity-specific value of an asset would use its expectations about its use of that asset rather than the use assumed by marketplace participants. If it is determined that the transaction has commercial substance, the exchange would be measured at fair value, rather than at the entity-specific value.A qualitative assessment will, in some cases, be conclusive in determining that theestimated cash flows of the entity are expected to significantly change as a result of the exchange.Exercise 10-21 (continued)3.The disclosure requirements for interest capitalization:FASB ASC 835–20–50–1: “Interest Capitalization–Overall–Disclosure.”An entity shall disclose the following information with respect to interest cost in the financial statements or related notes:a. For an accounting period in which no interest cost is capitalized, the amount ofinterest cost incurred and charged to expense during the periodb. For an accounting period in which some interest cost is capitalized, the totalamount of interest cost incurred during the period and the amount thereof that has been capitalized.Exercise 10-21 (concluded)4.The elements of costs to be included as R&D activities:FASB ASC 730–10–25–2: “Research & Development–Overall–Recognition.”Elements of costs shall be identified with research and development activities as follows:a. Materials, equipment, and facilities. The costs of materials (whether from the entity'snormal inventory or acquired specially for research and development activities) andequipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs.However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separateeconomic values are research and development costs at the time the costs are incurred.b. Personnel. Salaries, wages, and other related costs of personnel engaged in researchand development activities shall be included in research and development costs.c. Intangible assets purchased from others. The costs of intangible assets that arepurchased from others for use in research and development activities and that havealternative future uses (in research and development projects or otherwise) shall beaccounted for in accordance with Topic 350. The amortization of those intangible assets used in research and development activities is a research and development cost. However, the costs of intangibles that are purchased from others for a particular research anddevelopment project and that have no alternative future uses (in other research anddevelopment projects or otherwise) and therefore no separate economic values areresearch and development costs at the time the costs are incurred.d. Contract services. The costs of services performed by others in connection with theresearch and development activities of an entity, including research and development conducted by others in behalf of the entity, shall be included in research and development costs.e. Indirect costs. Research and development costs shall include a reasonable allocation ofindirect costs. However, general and administrative costs that are not clearly related to research and development activities shall not be included as research and development costs.。

intermediate accounting-ch15

4. To share proportionately in any new issues of stock of
the same class—called the preemptive right.
Chap characteristics of the corporate form of organization.
Chapter 15-8
LO 3 Explain the accounting procedures for issuing shares of stock.
Corporate Capital
No-Par Stock
Reasons for issuance: Avoids contingent liability. Avoids confusion over recording par value versus fair market value.
The Corporate Form of Organization
State Corporate Law
Corporation must submit articles of incorporation
to the state in which incorporation is desired.
Chapter 15-4
LO 1 Discuss the characteristics of the corporate form of organization.
The Corporate Form of Organization
Capital Stock or Share System
In the absence of restrictive provisions, each share carries the following rights:

Intermediate Accounting (10)

► “Used in operations” and not
Includes: Land, Building structures
(offices, factoห้องสมุดไป่ตู้ies, warehouses), and
for resale.
► Long-term in nature and
usually depreciated.
10-5
ACQUISITION OF PROPERTY, PLANT, AND EQUIPMENT (PP&E)
Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.
h. Land
i. Land
j.
k.
Cost of razing and removing building
Installation of fences around property
j.
Land
k. Land Improvements
LO 2
10-13
ACQUISITION OF PP&E
g. Architect’s fee on building
g. Buildings
h. Cost of real estate purchased as a plant site (land €200,000 and building €50,000)
i. Commission fee paid to real estate agency

Intermediate Accounting Chapter10 课后习题答案

intermediate accounting ifrs (3)

2. Identify the key components of equity.
3. Explain the accounting procedures for issuing shares. 4. Describe the accounting for treasury shares.
15-8
EQUITY
15-1
PREVIEW OF CHAPTER
15
Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield
15-2
15
Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
15-6
LO 1
CORPORATE FORM OF ORGANIZATION
Variety of Ownership Interests
Ordinary shares represent the residual corporate interest.

Bears ultimate risks of loss.
5. Explain the accounting for and reporting of preference shares.
6. Describe the policies used in distributing dividends. 7. Identify the various forms of dividend distributions. 8. Explain the accounting for share dividends and share splits. 9. Indicate how to present and analyze equity.

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Exercise 12-1Requirement 1($ in millions) Investment in bonds (face amount) ....................... 240.0Discount on bond investment (difference)........ 40.0Cash (price of bonds).......................................... 200.0 Requirement 2Cash (3% x $240 million) ....................................... 7.2Discount on bond investment (difference)............ .8Interest revenue (4% x $200)............................. 8.0 Requirement 3Tanner-UNF reports its investment in the December 31, 2011, balance sheet at its amortized cost – that is, its book value:Investment in bonds ............................................ $240.0Less: Discount on bond investment ($40 – .8 million) 39.2Amortized cost ................................................ $200.8If sale before maturity isn’t an alternative, increases and decreases in themarket value between the time a debt security is acquired and the day it matures to a prearranged maturity value are relatively unimportant. For this reason, if an investor has the ―positive intent and ability‖ to hold the securities to maturity,investments in debt securities are classified as ―held-to-maturity‖ and reported at amortized cost rather than fair value in the balance sheet.Requirement 4($ in millions) Cash (proceeds from sale)....................................... 190.0Discount on bond investment (balance, determined above)39.2Loss on sale of investments (to balance)............... 10.8Investment in bonds (face amount).................... 240.0Exercise 12-2November 1($ in millions) Cash ................................................................ 2.4Investment revenue ..................................... 2.4 December 1Investment in Facsimile Enterprises bonds (30)Cash (30)December 31Investment in U.S. Treasury bills .................. 8.9Cash ............................................................. 8.9 December 31Investment revenue receivable–Conveniencebonds ($48 million x 10% x 2/12) ....................... 0.8Investment revenue receivable–FacsimileEnterprises bonds ($30 million x 12% x 1/12).... 0.3 Investment revenue ................................... 1.1 Note: Securities held-to-maturity are not adjusted to fair value.Exercise 12-3Investment in GM common shares ................ 41,200Cash ([800 shares x $50] + $1,200)................... 41,200 Cash ([800 shares x $53] – $1,300)....................... 41,100Loss on sale of investments (100)Investment in GM common shares ............ 41,200Exercise 12-4Requirement 12011December 17Investment in Grocers’ Supply preferred shares ................ 350,000Cash ................................................................................. 350,000 December 28Cash ..................................................................................... 2,000Investment revenue .......................................................... 2,000 December 31Fair value adjustment .......................................................... 50,000Net unrealized holding gains and losses—I/S([$4 x 100,000 shares] – $350,000)......................................... 50,000 2012January 5Cash (selling price) ................................................................. 395,000Gain on investments (to balance)....................................... 45,000Investment in Grocers’ Supply preferredshares (account balance)................................................. 350,000 Assuming no other trading securities, the 2012 adjusting entry to remove the fair value adjustment associated with the sold securities would be:December 31Net unrealized holding gains and losses—I/S ..................... 50,000Fair value adjustment (account balance)............................. 50,000Exercise 12-4 (concluded)Requirement 2Balance Sheet(short-term investment):Trading securities ................................................... $400,000Income Statement:Investment revenue (dividends).......................................... $ 2,000 Net unrealized holding gains and losses (from adjusting entry)50,000 N ote: Unlike for securities available-for-sale, unrealized holding gains andlosses for trading securities are included in income.Exercise 12-5Requirement 1.Net unrealized holding gains and losses–OCI 25,000Fair value adjustment ($45,000 – 20,000) 25,000 Requirement 2None. Accumulated net holding gains and losses for securities available-for-sale are reported as a component of shareholders’ equity (in accumulated other comprehensive income), and changes in the balance are reported as other comprehensive income or loss in the statement of comprehensive income rather than as part of earnings. This statement can be reported either (a) as an extension of the income statement, (b) as part of the statement of shareholders’ equity, or (c) as a separate statement in a disclosure note.Exercise 12-6Requirement 1Securities ―held-to-maturity‖ are debt securities that an investor has the ―positive intent and ability‖ to hold to maturity. Actively traded investments in debt or equity securities acquired principally for the purpose of selling them in the near term are classified as ―trading securities.‖ The IBM shares are neither. They are classified as ―available-for-sale‖ since all investments in debt and equity securities that don’t fit the definitions of the other reporting categories are classified this way. Of course, the equity method isn’t appropriate either because 10,000 shares of IBM certainly don’t constitute ―significant influence.‖Investments in securities available-for-sale are reported at fair value, and holding gains or losses are not included in the determination of income for the period.Instead, they are reported as other comprehensive income or loss in the statement of comprehensive income. This statement can be reported either (a) as an additional section of the income statement, (b) as part of the statement of shareholders’ equity, or (c) as a separate statement in a disclosure note. Accumulated net holding gains and losses for securities available-for-sale are reported as a separate component of shareholders’ equity in the balance sheet.Requirement 2December 31, 2011Net unrealized holding gains and losses–OCI(10,000 shares x [$58 – 60]) ......................................................... 20,000Fair value adjustment ........................................................... 20,000Exercise 12-6 (concluded)Requirement 3December 31, 2012Accumulated ($ in 000s)UnrealizedAvailable-for-Sale Securities Cost Fair Value Gain (Loss)IBM shares – Dec. 31, 2012 $600 $610 $10Moving from a negative $20 (2011) to a positive $10 (2012) requires an increase of $30:Fair ValueAdjustmentBalance needed in fair value adjustment $10Existing balance in fair value adjustment: ($20)Increase (decrease) needed in fair value adjustment: $30---------------------------------------------------------20 0 +10+30 ----------------------------->Fair value adjustment 10,000 shares x [$61 – 58])............................ 30,000Net unrealized holding gains and losses–OCI (-$20 less $10)... 30,000Exercise 12-7Requirement 12011March 2($ in millions) Investment in Platinum Gauges, Inc. shares (31)Cash (31)April 12Investment in Zenith bonds (20)Cash (20)July 18Cash (2)Investment revenue (2)October 15Cash (1)Investment revenue (1)October 16Cash (21)Investment in Zenith bonds (20)Gain on sale of investments (1)November 1Investment in LTD preferred shares (40)Cash (40)Exercise 12-7(continued)December 31Accumulated ($ in millions)UnrealizedAvailable-for-Sale Securities Cost Fair Value Gain (Loss)Platinum Gauges, Inc. shares $31 $32* $1LTD preferred shares 40 37** (3)Totals $71 $69 $(2)* $32 x 1 million shares** $74 x 500,000 sharesAdjusting entry:Net unrealized holding gains and losses–OCI ($71 – 69) (2)Fair value adjustment ($71 – 69) (2)2012January 23($ in millions) Cash ([1 million shares x 1/2] x $32) ................................................ 16.0Gain on sale of investments (difference) ................................... 0.5 Investment in Platinum Gaugesshares ($31 million cost x 1/2)................................................... 15.5 March 1Cash ($76 x 500,000 shares) (38)Loss on sale of investments (difference) (2)Investment in LTD preferred (cost) (40)Note: As part of the process of recording the normal, period-end fair value adjusting entry at 12/31/2012, Construction would debit Fair value adjustment and credit Net unrealized gains and losses—OCI for the $2.5 million associated with the sold investments to remove their effects from the financial statements. (Construction sold only half the Platinum investments so only half of the Platinum fair value adjustment should be removed. The 2.5 amount comes from 3.0 LTD - 0.5 Platinum.)Exercise 12-7 (concluded)Requirement 22011 Income Statement($ in millions)Investment revenue (from July 18; Oct. 15)..................................... $3Gain on sale of investments (from Oct. 16) (1)Other comprehensive income:*Net unrealized holding gains and losses on investments** . $2**Assuming Construction Forms chooses to report Other comprehensive income as an additional section of the income statement. Alternatively, it can report this (a) as part of the statement of shareholders’ equity or (b) as a separate statement in a disclosure note.Note: Unlike for trading securities, unrealized holding gains and losses are not included in income for securities available-for-sale. Rather, they are included in other comprehensive income, and accumulated in shareholders’ equity inaccumulated other comprehensive income.Exercise 12-8Requirement 1Purchase($ in millions) Investment in Jackson Industry shares (90)Cash (90)Net incomeNo entryDividendsCash (5% x $60 million) (3)Investment revenue (3)Adjusting entryFair value adjustment ($98 – 90 million) (8)Net unrealized holding gains and losses–OCI (8)Requirement 2Investment revenue .......................... $3 millionNote: An unrealized holding gain is not included in income for securitiesavailable-for-sale. Rather, it is included in other comprehensive income, and accumul ated in shareholders’ equity in accumulated other comprehensiveincome.Exercise 12-91. Investments reported as current assets.Security A $ 910,000Security B 100,000Security C 780,000Security E 490,000Total $2,280,0002. Investments reported as noncurrent assets.Security D $ 915,000Security F 615,000$1,530,0003. Unrealized gain (or loss) component of income before taxes.Trading Securities:Cost Fair value Unrealizedgain (loss) Security A $ 900,000 $ 910,000 $10,000B 105,000 100,000 (5,000) Totals $1,005,000 $1,010,000 $ 5,0004. Unrealized gain (or loss) component of AOCI in shareholders’ equity. Securities Available-for-Sale:Cost Fair value Unrealizedgain (loss) Security C $ 700,000 $ 780,000 $80,000D 900,000 915,000 15,000 Totals $1,600,000 $1,695,000 $95,000Exercise 12-10Requirement 1Accumulated ($ in 000s)UnrealizedAvailable-for-Sale Securities Cost Fair Value Gain (Loss)IBM shares – Dec. 31, 2011 $1,345 $1,175 $(170)Moving from a negative $145 (Jan.1) to a negative $170 requires a reduction of $25:Fair ValueAdjustmentBalance needed in fair value adjustment ($170)Existing balance in fair value adjustment: ($145)Increase (decrease) needed in fair value adjustment: ($ 25)---------------------------------------------------------170 -145 0<---------------- – 25Net unrealized holding gains and losses–OCI ........................ 25,000 Fair value adjustment ($1,175,000 – 1,200,000)................... 25,000Requirement 2Accumulated ($ in 000s)UnrealizedAvailable-for-Sale Securities Cost Fair Value Gain (Loss)IBM shares – Dec. 31, 2011 $1,345 $1,275 $(70)Moving from a negative $145 (Jan.1) to a negative $70 requires an increase of $75:Fair ValueAdjustmentBalance needed in fair value adjustment ($ 70)Existing balance in fair value adjustment: ($145)Increase (decrease) needed in fair value adjustment: $ 75--------------------------------------------------------------------------------------------145 -70 0+75 ---------------------->Fair value adjustment ($1,275,000 – 1,200,000) ....................... 75,000 Net unrealized holding gains and losses–OCI ................. 75,000Requirement 3Accumulated ($ in 000s)UnrealizedAvailable-for-Sale Securities Cost Fair Value Gain (Loss)IBM shares – Dec. 31, 2011 $1,345 $1,375 $30Moving from a negative $145 (Jan.1) to a positive $30 requires an increase of $175:Fair ValueAdjustmentBalance needed in fair value adjustment $ 30Existing balance in fair value adjustment: ($145)Increase (decrease) needed in fair value adjustment: $175--------------------------------------------------------------------------------------------145 -70 0 +30+175 -------------------------------------------------------->Fair value adjustment ($1,375,000 – 1,200,000) ........................ 175,000 Net unrealized holding gains and losses–OCI ................. 175,000Exercise 12-11Requirement 1The sale of the A Corporation shares decreased Harlon’s pretax earnings by $5 million. The purchase of the C Corporation shares had no effect on Harlon’s 2012 earnings (because the shares are classified as available-for-sale investments, any unrealized gains or losses occurring after purchase during 2012 would not affect 2012 earnings). Here are the entries used to record those two transactions:June 1, 2012($ in millions)Cash 15Loss on sale of investments (difference) 5Investment in A Corporation shares(cost)20September 12, 2012Investment in C Corporation shares 15Cash 15Exercise 12-11 (concluded)Requirement 2Harlon’s securities available-for-sale portfolio should be reported in its 2012 balance sheet at its fair value of $101 million:December 31, 2012($ in millions)Cost, Dec. 31 Fair Value, Dec. 31Securities Available-for-Sale 2011 2012 2011 2012A Corporation shares $20 na $14 naB Corporation bonds 35 $35 35 $ 37C Corporation shares na 15 na 14D Industries shares 45 45 46 50Totals $100 $95 $95 $101In 2011, Harlon would have had a net unrealized loss of $5 (cost of $100 – fair value of $95). Moving from a negative $5 (2011) to a positive $6 requires an increase of $11:Fair ValueAdjustmentAllowanceBalance needed in fair value adjustment $ 6Existing balance in fair value adjustment: (5)Increase (decrease) needed in fair value adjustment: $11----------------------------------------------------------5 0 +6+11 ----------------------------->Fair value adjustment ($5credit to $6debit)11Net unrealized holding gains and losses–OCI 11The adjustment has no effect on earnings. Unlike for trading securities,unrealized holding gains and losses are not included in income for securities available-for-sale. Rather, they are included in other comprehensive income, and accumulated in shareholders’ equity in accumulated other comprehensive income.Exercise 12-12Requirement 1The investment would be accounted for as an available-for-sale investment:PurchaseInvestment in AMC common shares ................................... 480,000 Cash ............................................................................... 480,000Net incomeNo entryDividendsCash (20% x 400,000 shares x $0.25) ........................................ 20,000 Investment revenue ......................................................... 20,000Adjusting entryFair value adjustment ($505,000 – 480,000)............................ 25,000 Net unrealized holding gains and losses–OCI ............... 25,000 Requirement 2The investment would be accounted for using the equity method:PurchaseInvestment in AMC common shares ................................... 480,000 Cash ............................................................................... 480,000 Net incomeInvestment in AMC common shares (20% x $250,000) ........ 50,000 Investment revenue ......................................................... 50,000 DividendsCash (20% x 400,000 shares x $0.25) ........................................ 20,000 Investment in AMC common shares .............................. 20,000 Adjusting entryNo entryExercise 12-13Purchase($ in millions)Investment in Nursery Supplies shares (56)Cash (56)Net incomeInvestment in Nursery Supplies shares (30% x $40 million) (12)Investment revenue (12)DividendsCash (30% x 8 million shares x $1.25) (3)Investment in Nursery Supplies shares (3)Adjusting entryNo entryExercise 12-14Requirement 1($ in millions) Investment in equity securities ($48 million – 31 million) (17)Retained earnings (investment revenue from the equity method).17 Requirement 2Financial statements would be recast to reflect the equity method for each year reported for comparative purposes. A disclosure note also should describe the change, justify the switch, and indicate its effects on all financial statement items. Requirement 3When a company changes from the equity method, no adjustment is made to the carrying amount of the investment. Instead, the equity method is simply discontinued, and the new method is applied from then on. The balance in the investment account when the equity method is discontinued would serve as the new ―cost‖ basis for writing the investment up or down to fair value in the next set of financial statements. There also would be no revision of prior years, but the change should be described in a disclosure note.Exercise 12-15Requirement 1: Error discovered before the books are adjusted or closed in 2011.The journal entry the company made is:Cash ............................................................. 100,000Investments .............................................. 100,000 The journal entry the company should have made is:Cash ............................................................. 100,000Investments .............................................. 80,000Gain on sale of investments ($100,000 – 80,000)20,000 Therefore, to get from what was done to what should have been done, the following entry is needed:Investments ($100,000 – 80,000)..................... 20,000Gain on sale of investments ..................... 20,000 Requirement 2: Error not discovered until early 2012.Investments ($100,000 – 80,000)..................... 20,000Retained earnings .................................... 20,000Exercise 12-16Purchase($ in millions) Investment in Carne Cosmetics shares (68)Cash (68)Net incomeInvestment in Carne Cosmetics shares (25% x $40 million) .. 10Investment revenue (10)DividendsCash (4 million shares x $1) (4)Investment in Carne Cosmetics shares (4)Depreciation AdjustmentInvestment revenue ($8 million [calculation below‡] ÷ 8 years). 1Investment in Carne Cosmetics shares (1)‡Calculations:Investee Net Assets DifferenceNet Assets Purchased Attributed to:⇓⇓⇓Cost$68⎬Goodwill:$12Fair value:$224*x 25% = $56⎬UndervaluationBook value:$192 x 25% = $48 of assets: $8*[$192 + 32] = $224Adjusting entryNo entry to adjust for changes in fair value as this investment is accounted for under the equity method.Exercise 12-17Requirement 1Purchase($ in millions) Investment in Lake Construction shares (300)Cash (300)Net incomeInvestment in Lake Construction shares (20% x $150 million) 30Investment revenue (30)DividendsCash (20% x $30 million) (6)Investment in Lake Construction shares (6)Adjustment for depreciationInvestment revenue ($10 million [calculation below‡] ÷ 10 years) 1Investment in Lake Construction shares (1)‡ calculation:Investee Net Assets DifferenceNet Assets Purchased Attributed to:⇓⇓⇓Cost$300⎬Goodwill: $120 Fair value:$900 x 20% = $180⎬UndervaluationBook value:$800 x 20% = $160 of buildings ($10) and land ($10): $20 Requirement 2a. Investment in Lake Construction shares________________________________________($ in millions)Cost 300Share of income 306 Dividends1 Depreciation adjustment_________________Balance 323Exercise 12-17 (concluded)b. As investment revenue in the income statement.$30 million (share of income) – $1 million (depreciation adjustment) =$29 millionc. Among investing activities in the statement of cash flows.$300 millionactivities. If Cameron reports cash flows using the indirect method, theoperations section of its statement of cash flows would include an adjustmentof ($23 million) to get from the net income figure that includes $29 million ofrevenue to a cash flow number that should only include $6 million of cashflow.]Exercise 12-18Requirement 1First we need to identify the amount of difference between book value and fair value associated with goodwill, buildings and land:Investee Net Assets DifferenceNet Assets Purchased Attributed to:⇓⇓⇓Cost$750⎬Goodwill: $300 Fair value:$900 x 50% = $450⎬UndervaluationBook value:$800 x 50% = $400 of buildings ($25) and land ($25): $50a. January 1, 2011 effect on BuildingsBecause h alf of the fair value of Lake’s individual net assets are buildings,and Lake would be consolidated with Cameron, Cameron’s Buildingsaccount would increase by 1/2 x $450 = $225 million.b. January 1, 2011 effect on LandBecause half of the fair value of Lake’s individual net assets is land, and Lakewould be consolidated with Cameron, Cameron’s Land account wouldincrease by 1/2 x $450 = $225 million.c. January 1, 2011 effect on GoodwillBecause Lake would be consolidated with Cameron, Cameron’s Goodwil laccount would increase by $300 million.d. January 1, 2011 effect on Equity method investmentsBecause Lake would be consolidated with Cameron, there would be no effectof this investment on Cameron’s Equity method investment account.Exercise 12-18 (concluded)Requirement 2a. December 31, 2011 effect on BuildingsBecause half of the fair value of Lake’s individual net assets are buildings,and Lake would be consolidated with Cameron, Cameron’s Buildingsaccount would increase by 1/2 x $450 = $225 million. Cameron woulddepreciate those buildings over their remaining 10 year life, so Lake wouldrecognize $22.5 million of depreciation expense per year ($225 million ÷ 10years). Therefore, at December 31, 2011, the buildings associated with theLake investment would have a carrying value of $202.5 million ($225million cost - $22.5 million accumulated depreciation).b. December 31, 2011 effect on LandLand is not amortized, so its carrying value would not change from its valueon January 1, 2011.c. December 31, 2011 effect on GoodwillGoodwill is not amortized, so its carrying value would not change from itsvalue on January 1, 2011.d. December 31, 2011 effect on Equity method investmentsBecause Lake would be consolidated with Cameron, there would be no effectof this investment on Cameron’s Equity method investment account atDecember 31, 2011.Requirement 3The effect of the investment on Cameron’s December 31, 2011 retainedearnings would not differ between the equity method and proportionateconsolidation treatments. Under the equity method, Cameron wouldrecognize investment revenue based on its share of Lake’s net income, whileunder proportionate consolidation, Cameron would include its share ofLake’s revenue and expenses on those lines of the consolidated incomestatement. Regardless, the same total amount would be included inCameron’s net income and closed to Cameron’s retained earnings.Exercise 12-19Requirement 1Electing the fair value option for held-to-maturity securities simply requiresreclassifying those securities as trading securities. Therefore, this investment would be classified as a trading security on Tanner-UNF’s balance sheet. Requirement 2($ in millions) Investment in bonds (face amount) (240)Discount on bond investment (difference) (40)Cash (price of bonds) (200)Requirement 3Cash (3% x $240 million) ....................................... 7.2Discount on bond investment (difference)............ .8Interest revenue (4% x $200) .................................. 8.0 Requirement 4The carrying value of the bonds is $240 – ($40 – $0.8) = $200.8. Therefore, to adjust to fair value of $210, Tanner-UNF would need the following journal entry: Fair value adjustment ......................................... 9.2Net unrealized holding gains and losses—I/S ($210 – 200.8)9.2 Requirement 5Tanner-UNF reports its investment in the December 31, 2011, balance sheet at fair value of $210 million.Requirement 6($ in millions) Cash (proceeds from sale)....................................... 190.0Loss on sale of investments (to balance)............... 10.8Discount on bond investment (account balance).... 39.2Investment in bonds (account balance)............... 240.0 Assuming no other trading securities, the 2012 adjusting entry would be: Net unrealized holding gains and losses—I/S .... 9.2Fair value adjustment (account balance) ........... 9.2Exercise 12-20Requirement 1Electing the fair value option for available-for-sale securities simply requires reclassifying those securities as trading securities. Therefore, this investment would be classified as a trading security on Sanborn’s balance sheet. Requirement 2Purchase($ in millions) Investment in Jackson Industry shares (90)Cash (90)Net incomeNo entryDividendsCash (5% x $60 million) (3)Investment revenue (3)Adjusting entryFair value adjustment ($98 – 90 million) (8)Net unrealized holding gains and losses—I/S (8)Requirement 3Investment revenue (dividends).......................................... $ 3,000Net unrealized holding gains and losses (from adjusting entry)8,000Total effect on 2011 net income before taxes 11,000Exercise 12-21Requirement 1Electing the fair value option for significant-influence investments requires use of the same basic accounting approach that is used for trading securities. However, the investments will still be classified as significant-influence investments and shown either on the same line of the balance sheet as equity-method investments (but with the amount at fair value indicated parenthetically) or on a separate line of the balance sheet.Requirement 2Purchase($ in millions) Investment in Nursery Supplies shares (56)Cash (56)Net incomeNo entry.DividendsCash (30% x 8 million shares x $1.25) (3)Investment revenue (3)Adjusting entry ......................................................................................Net unrealized holding gains and losses—I/S ($56 – 52 million) 4Fair value adjustment (4)。