CHAPTER 13

Current Liabilities, Provisions, and Contingencies

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Brief Concepts
Topics Questions Exercises Exercises Problems for Analysis

1. Concept of liabilities; 1, 2, 3, 1, 5 1, 2 1
definition and classification of 4, 6, 8
current liabilities.

2. Accounts and notes payable; 7, 11 1, 2, 3 2 1, 2 1, 2

dividends payable.

3. Short-term obligations 9, 10 4, 5 3, 4, 5 3
expected to be refinanced.

4. Deposits and advance 5, 12 6 2

payments.

5. Compensated absences and 13, 14, 15 10, 11 6, 7

bonuses.

6. Collections for third parties. 16, 17 7, 8, 9 8, 9, 10, 11, 3, 4

22

7. Provisions and contingent 18, 19, 20, 12, 13 17, 20, 10, 11, 13 4, 5, 6
liabilities (General). 21, 22, 24, 21, 22
26

8. Warranties. 23, 25 15, 16 12, 13, 5, 6, 7, 6, 7

22, 21 12, 14

9. Consideration Payables 17 14, 19, 22 8, 9,

12, 14

10. Self-insurance, litigation, 27, 28, 29, 12, 13, 14, 15, 16, 17, 2, 10, 5, 6
claims, assessments, 30 18, 19, 20 18, 20 11, 13
restructurings, and
environmental liabilities.

11. Presentation and analysis. 31, 32, 33 1, 23, 24, 9 3

25

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief Concepts
Learning Objectives Exercises Exercises Problems for
Analysis
1, 2, 3,
1. Describe the nature, valuation, 4, 5, 6, 7, 1, 2, 3, 4, 5, 1, 2, 3, 4 1, 2, 3
and reporting of current 8, 9, 10, 11 6, 7, 8, 9, 10,
liabilities. 11
12, 13, 14,
2. Explain the accounting for 15, 16, 17, 18, 12, 13, 14, 2, 5, 6, 7, 8, 5, 6, 7
different types of provisions. 19, 15, 16, 17, 9, 10, 11, 12,
18, 19, 13, 14
20, 21

3. Explain the accounting for loss 12, 13, 18 17 10, 11, 13 4

and gain contingencies.

4. Indicate how to present and 22, 23, 9, 13

analyze liability-related 24, 25
information.

13-2 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
Item Description Difficulty (minutes)
E13.1 Statement of financial position classification. Simple 10–15
E13.2 Accounts and notes payable. Moderate 15–20
E13.3 Refinancing of short-term debt. Simple 10–12
E13.4 Refinancing of short-term debt. Simple 10–15
E13.5 Debt classifications Simple 15-20
E13.6 Compensated absences. Moderate 25–30
E13.7 Compensated absences. Moderate 25–30
E13.8 Adjusting entry for sales tax and VAT. Simple 5–7
E13.9 Adjusting entry for sales tax and VAT. Simple 10
E13.10 Payroll tax entries. Simple 10–15
E13.11 Payroll tax entries. Simple 15–20
E13.12 Warranties. Simple 10–15
E13.13 Warranties. Moderate 15–20
E13.14 Premium entries. Simple 15–20
E13.15 Restructuring issues. Simple 15–20
E13.16 Restructuring. Simple 15–20
E13.17 Provisions and contingencies. Moderate 20–30
E13.18 Environmental liability. Moderate 25–30
E13.19 Premiums. Moderate 25-35
E13.20 Provisions. Moderate 20–30
E13.21 Provisions. Moderate 20–30
E13.22 Financial statement impact of liability transactions. Moderate 20–25
E13.23 Ratio computations and discussion. Simple 10–15
E13.24 Ratio computations and analysis. Simple 20–25
E13.25 Ratio computations and effect of transactions. Moderate 15–25

P13.1 Current liability entries and adjustments. Simple 25–30

P13.2 Liability entries. Simple 25–35
P13.3 Payroll tax entries. Moderate 20–30
P13.4 Payroll tax entries. Simple 20–25
P13.5 Warranties. Simple 15–20
P13.6 Extended warranties. Simple 10–20
P13.7 Warranties. Moderate 25–35
P13.8 Premium entries. Moderate 15–25
P13.9 Premium entries and financial statement presentation. Moderate 30–45
P13.10 Litigation claim: entries and essay. Simple 25–30

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-3
Assignment Characteristics Table (Continued)
Level of Time
Item Description Difficulty (minutes)
P13.11 Contingencies: entries and essays. Moderate 35–45
P13.12 Warranties and premiums. Moderate 20–30
P13.13 Liability errors. Moderate 25–35
P13.14 Warranty and coupon computation. Moderate 20–25

CA13.1 Nature of liabilities. Moderate 20–25

CA13.2 Current versus non-current classification. Moderate 15–20
CA13.3 Refinancing of short-term debt. Moderate 30–40
CA13.4 Contingencies. Simple 15–20
CA13.5 Possible environmental liability. Simple 15–20
CA13.6 Warranties and litigation provisions. Simple 15–20
CA13.7 Ethics of Warranties. Moderate 20–25

13-4 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 ANSWERS TO QUESTIONS

1. Current liabilities are obligations reasonably expected to be settled within the normal operating cycle or
within twelve months after the reporting date. Non-current liabilities consist of all liabilities not properly
classified as current liabilities.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

2. You might explain to your friend that the IASB defines a liability as part of its conceptual framework. The
formal definition of liabilities is a present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
A liability has three essential characteristics: (1) it is a present obligation; (2) it arises from past events and
(3) it results in an outflow of resources.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

3. As a lender of money, the banker is interested in the priority his/her claim has on the company’s assets
relative to other claims. Close examination of the liability section and the related footnotes discloses
amounts, maturity dates, collateral, subordinations, and restrictions of existing contractual obligations, all of
which are important to potential creditors. The assets and earning power are likewise important to a banker
considering a loan.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

4. By definition, current liabilities are obligations reasonably expected to be settled within its normal operating
cycle or within twelve months after the reporting date.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

5. Unearned revenue is a liability that arises from current sales but for which some future services or products
are owed to customers in the future. At the time of a sale, customers pay not only for the delivered product,
but they also pay for future products or services (e.g., another plane trip, hotel room, or software upgrade). In
this case, the company recognizes revenue from the current product and part of the sale proceeds is recorded
as a liability (unearned revenue) for the value of future products or services that are “owed” to customers.
Market analysts indicate that an increase in the unearned revenue liability, rather than raising a red flag,
often provides a positive signal about sales and profitability. When the sales are growing, its unearned
revenue account should grow. Thus, an increase in a liability may be good news about company
performance. In contrast, when unearned revenues decline, the company owes less future amounts but this
also means that sales of new products may have slowed.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

6. Payables and receivables generally involve an interest element. Recognition of the interest element (the cost of
money as a factor of time and risk) results in valuing future payments at their current value. The present
value of a liability represents the debt exclusive of the interest factor.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

7. A zero-interest-bearing note is initially recorded at the amount of cash received (or the present value of the
note). The present value of the note equals the face value of the note at maturity less the interest charged by
the lender for the term of the note. As time passes, interest is accrued as an increase to the note payable.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-5
Questions Chapter 13 (Continued)

8. Liabilities that are due on demand (callable by the creditor) should be classified as a current liability.
Classification of the debt as current is required because it is a reasonable expectation that existing working
capital will be used to satisfy the debt. Liabilities often become callable by the creditor when there is a
violation of the debt agreement. Only if the creditor agrees before the reporting date to provide a grace
period that extends at least twelve months past the reporting date can the debt be classified as non-current.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

9. A company should exclude a short-term obligation from current liabilities only if (1) it intends to refinance
the obligation on a long-term basis, and (2) it has an unconditional right to defer settlement of the liability for
at least twelve months after the reporting date.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

10. The ability to defer settlement of short-term debt may be demonstrated by entering into a financing agreement
that clearly permits the company to refinance the debt on a long-term basis on terms that are readily
determinable before the next reporting date.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

11. A cash dividend formally authorized by the board of directors would be recorded by a debit to Retained
Earnings and a credit to Dividends Payable. The Dividends Payable account should be classified as a current
liability.

An accumulated but undeclared dividend on cumulative preference shares is not recorded in the accounts as
a liability until declared by the board, but such arrearages should be disclosed either by a footnote to the
statement of financial position or parenthetically in the share capital section.

A share dividend distributable, formally authorized and declared by the board, does not appear as a liability
because a share dividend does not require future outlays of assets or services and is revocable by the board
prior to issuance. Even so, an undistributed share dividend is generally reported in the equity section since it
represents retained earnings in the process of transfer to share capital.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

12. Unearned revenue arises when a company receives cash or other assets as payment from a customer before
conveying (or even producing) the goods or performing the services which it has committed to the customer.

Unearned revenue is assumed to represent the obligation to the customer to refund the assets received in the
case of nonperformance or to perform according to the agreement and thus earn the unrestricted right to the
assets received. While there may be an element of unrealized profit included among the liabilities when
unearned revenues are classified as such, it is ignored on the grounds that the amount of unrealized profit is
uncertain and usually not material relative to the total obligation.

Unearned revenues arise from the following activities:

(1) The sale by a transportation company of tickets or tokens that may be exchanged or used to pay for
future fares.
(2) The sale by a restaurant of meal tickets that may be exchanged or used to pay for future meals.
(3) The sale of gift certificates by a retail store.
(4) The sale of season tickets to sports or entertainment events.
(5) The sale of subscriptions to magazines.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

13-6 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 13 (Continued)

13. Compensated absences are employee absences such as vacation, illness, maternity, paternity, and jury leaves
for which it is expected that employees will be paid.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

14. A liability should be accrued for the cost of compensated absences if the employer has an obligation to make
payment to an employee even after terminating his or her employment (vested rights) or if the employees can
carry forward the rights to future periods if not used in the period in which earned (accumulated rights).
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

15. Vested rights with respect to compensated absences exist if the employer has an obligation to make payment
to an employee even after terminating his or her employment. Accumulated rights are those that employees
can carry forward to future periods if not used in the period in which earned. Non-accumulated rights do not
carry forward, but lapse if not used within the period earned. Vested and accumulated rights are accrued by
the employer as these are earned by the employee. Non-accumulated rights are recognized only when the
absence commences.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

16. Employers generally hold back from each employee’s wages amounts to cover income taxes (withholding),
the employee’s share of social security taxes, and other items such as union dues or health insurance. In
addition, the employer must set aside amounts to cover the employer’s share of social security taxes. These
latter amounts are recorded as payroll expenses and will lower Battle’s income. In addition, the amount set
aside (both the employee and the employer share) will be reported as current liabilities until they are remitted
to the appropriate third party.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

17. Value-added taxes (VAT) are used by tax authorities more than sales taxes (over 100 countries require that
companies collect a value-added tax). A value-added tax is a consumption tax. This tax is placed on a
product or service whenever value is added at a stage of production and at final sale. A VAT is a cost to the
end user which is normally a private individual similar to a sales tax.

However, a VAT should not be confused with a sales tax. A sales tax is collected only once at the
consumer's point of purchase. No one else in the production or supply chain is involved in the collection of
the tax. In a VAT taxation system, the VAT is collected every time a business purchases products from
another business in the product's supply chain.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

18. A provision is defined as a liability of uncertain timing or amount and is sometimes referred to as an estimated
liability. Common types of provisions are obligations related to litigation, warranties, product guarantees,
business restructurings, and environmental damage.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

19. A provision should be recorded and a charge accrued to expense only if:

(a) the company has a present obligation (constructive or legal) as a result of a past event,
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation, and
(c) a reliable estimate can be made of the amount of the obligation.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-7
Questions Chapter 13 (Continued)

20. A current liability such as accounts payable is susceptible to precise measurement because the date of payment,
the payee, and the amount of cash needed to discharge the obligation are reasonably certain. There is nothing
uncertain about (1) the fact that the obligation has been incurred and (2) the amount of the obligation.

A provision is a liability of uncertain timing or amount and has greater uncertainty about the timing or
amount of the future expenditure required to settle the obligation.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

21. In determining whether a provision should be recognized, in addition to assessing whether a past event has
occurred and a reliable estimate can be developed, a company must also assess whether the outflow of
resources is probable. The term probable is defined as “more likely than not” to occur. This phrase is
interpreted to mean the probability of occurrence is greater than 50 percent. If the probability is 50 percent or
less, the provision is not recognized.

With respect to contingencies, Illustrations 13-16 and 13-18 in the text summarize the general guidelines for
the accounting and reporting of contingent liabilities and assets. As indicated there, virtually certain
corresponds to a high probability of occurrence (at least 90%). Thus, a provision would be recorded under
these circumstances. Contingent assets are not recognized on the statement of financial position unless
realization of the contingent asset is virtually certain—that is, it is no longer considered a contingent asset
and is recognized as an asset. Again, virtually certain is generally interpreted to be at least a probability of 90
percent or more. Disclosure related to a contingent asset is required when probable (more likely than not).
No disclosure is required when the probability of inflow of economic benefits is less the 50%.
LO: 2,4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

22. A legal obligation generally results from a contract or legislation. A constructive obligation is an obligation
derived from the company’s actions where (a) by an established pattern of past practice, published policies,
or a sufficiently specific current situation, the company has indicated to other parties that it will accept
certain responsibilities; and (b) as a result, the company has created a valid expectation on the part of those
other parties that it will discharge those responsibilities.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

23. Assurance-type warranties guarantee that the product meets agreed–upon specifications in the contract at the
time the product is sold. This type of warranty is included in the sales price of the company's product and
does not create a separate performance obligation. At each financial statement date, a company accrues
warranty expense for expected costs under the assurance warranty.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

24. Under IFRS, companies may not record provisions for future operating losses. Such provisions do not meet
the definition of a liability, since the amount is not the result of a past transaction (the losses have not yet
occurred). Therefore, the liability has not been incurred. Furthermore, operating losses reflect general
business risks for which a reasonable estimate of the loss could not be determined. Note that use of
provisions in this way is one of the examples of earnings management discussed in Chapter 4. By reducing
income in good years through the use of contingencies, companies can smooth out their income from year-
to-year.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: International, AICPA FC: Reporting, AICPA PC: Communication

13-8 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
Questions Chapter 13 (Continued)

25. Assurance-type warranties guarantee that the product meets agreed–upon specifications in the contract at the
time the product is sold. This type of warranty is included in the sales price of the company's product and
does not create a separate performance obligation. Warranties that provide an additional service beyond the
assurance-type warranty are referred to as service-type warranty. This warranty is not included in the sales
price of the product. As a consequence, it is recorded as a separate performance obligation.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

26. Onerous contracts are ones in which the unavoidable costs of meeting the obligations exceed the economic
benefits expected to be received. Examples include a loss to be recognized on an unfavorable non-
cancellable purchase commitment for inventory, and a lease cancellation fee for a facility that is no longer
being used.
LO: 2,3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

27. A restructuring is a program that is planned and controlled by management and materially changes either (1)
the scope of a business undertaken by the company; or (2) the manner in which the business is conducted.
Costs that should not be included in a restructuring provision include investment in new systems, lower
utilization of facilities, costs of training or relocating staff, costs of moving assets or operations,
administration or marketing costs, allocation of corporate overhead, and expected future operating costs or
expected operating losses unless they relate to an onerous contract.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

28. An environmental provision must be recognized when a company has an existing legal obligation associated
with the retirement of a long-lived asset and when the amount can be reasonably estimated.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: Legal, AICPA FC: Reporting, AICPA PC: Communication

29. The absence of insurance does not mean that a liability has been incurred at the date of the financial statements.
Until the time that an event occurs there can be no diminution in the value of property or incurrence of a
liability. If an event has occurred which exposes an enterprise to risks of injury to others and/or damage to the
property of others, then a contingent liability exists. Expected future injury, damage, or loss resulting from
lack of insurance need not be recorded or disclosed if no contingent liability exists. A contingent liability exists
only if an uninsurable event which causes probable loss has occurred. Lack of insurance is not in itself a basis
for recording a liability or loss.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

30. In determining whether or not to record a liability for pending litigation, the following factors must be
considered:

(a) The time period in which the underlying cause for action occurred.
(b) The probability of an unfavorable outcome.
(c) The ability to make a reliable estimate of the amount of loss.

Before recording a liability for threatened litigation, the company must determine:

(a) The degree of probability that a suit may be filed or a claim or assessment may be asserted, and
(b) The probability of an unfavorable outcome.

If both are probable, the loss reliably estimable, and the cause for action dated on or before the date of the
financial statements, the liability must be accrued.
LO: 3,4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

Questions Chapter 13 (Continued)

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-9
31. There are several defensible recommendations for listing current liabilities: (1) in order of maturity, (2) in
descending order of amount, (3) in order of liquidation preference. The authors’ recent review of published
financial statements disclosed that a significant majority of the published financial statements examined listed
“notes payable” first, regardless of relative amount, followed most often by “accounts payable,” and ending the
current liability section with “current portion of long-term debt.”
LO: 1,4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

32. The acid-test ratio and the current ratio are both measures of the short-term debt-paying ability of the
company. The acid-test ratio excludes inventories and prepaid expenses on the basis that these assets are
difficult to liquidate in an emergency. The current ratio and the acid-test ratio are similar in that both
numerators include cash, short-term investments, and net receivables, and both denominators include current
liabilities.
LO: 1,4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

33. (a) A liability for goods purchased on credit should be recorded when title passes to the purchaser. If the
terms of purchase are f.o.b. destination, title passes when the goods purchased arrive; if f.o.b. shipping
point, title passes when shipment is made by the vendor.

(b) A provision for an onerous contract is recorded when it is determined that the corporation is a party to a
contract that is considered onerous and as a result has a present obligation, it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation, and a reliable
estimate of the obligation can be made.

(c) A special bonus to employees should be recorded when approved by the board of directors or person
having authority to approve, if the bonus is for a period of time and that period has ended at the date of
approval.

(d) A provision for warranties should be recorded when it is probable that customers will make warranty
claims and the corporation can reasonably estimate the costs involved.

(e) Profit-sharing payments are considered additional wages and the liability should be recorded in the year
the profit-sharing relates to.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

13-10 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13.1

July 1
Purchases ................................................................................... 60,000
Accounts Payable ............................................................ 60,000

Freight-In .................................................................................. 1,200

Cash ........................................................................ Cash 1,200

July 3
Accounts Payable ...................................................................... 6,000
Purchase Returns and Allowances ................................. 6,000

July 10
Accounts Payable ...................................................................... 54,000
Cash (€54,000 X 98%) .................................................... 52,920
Purchase Discounts ......................................................... 1,080
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.2

November 1, 2018
Cash ........................................................................................... 40,000
Notes Payable .................................................................. 40,000

December 31, 2018

Interest Expense ........................................................................ 600
Interest Payable
($40,000 X 9% X 2/12) ................................................. 600

February 1, 2019
Notes Payable ............................................................................ 40,000
Interest Payable ........................................................................ 600
Interest Expense ........................................................................ 300
Cash [($40,000 X 9%
X 3/12) + $40,000]........................................................ 40,900
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-11
BRIEF EXERCISE 13.3

November 1, 2018
Cash ...........................................................................................
60,000,000
Notes Payable .................................................................. 60,000,000

December 31, 2018

Interest Expense ........................................................................ 900,000
Notes Payable (¥1,350,000 X 2/3) ................................... 900,000

February 1, 2019
Interest Expense ........................................................................ 450,000
Notes Payable .................................................................. 450,000

Notes Payable ............................................................................

61,350,000
Cash ................................................................................. 61,350,000
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.4

(a) While Burr has the intent to refinance, Burr did not have the unconditional right
to defer payment as of December 31. The entire amount would be reported as
current liability.

(b) While Burr has the intent to refinance, Burr did not have the unconditional right
to defer payment as of December 31. The entire amount would be reported as
current liability.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.5

The debt becomes payable on demand because of the breach of a covenant and
therefore should be reported as a current liability. The agreement with the lender to
provide a waiver of the breach is after the financial reporting date and does not
affect the classification of the debt obligation as of December 31.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-12 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 13.6

8/1/19 Cash ...........................................................................................

216,000
Unearned Subscription Revenue
(12,000 X €18) ............................................................... 216,000

12/31/19 Unearned Subscription Revenue ..............................................

90,000
Subscription Revenue
(€216,000 X 5/12 = £90,000) ......................................... 90,000
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.7

(a) Accounts Receivable .................................................................31,800

Sales Revenue .................................................................. 30,000
Value-Added Taxes Payable
(€30,000 X 6% = €1,800) .............................................. 1,800

(b) Cash ...........................................................................................20,670

Sales Revenue (€20,670 ÷ 1.06 = €19,500) ...................... 19,500
Value-Added Taxes Payable ........................................... 1,170
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.8

Cash (€5,000 + €750) ................................................................. 5,750

Sales Revenue .................................................................. 5,000
Value-Added Taxes Payable
(€5,000 X 15%) 750
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.9

Salaries and Wages Expense .................................................... 24,000

Social Security Taxes Payable ........................................ 1,920
Withholding Taxes Payable ............................................ 2,990
Insurance Premiums Payable ......................................... 250
Cash ................................................................................. 18,840
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-13
BRIEF EXERCISE 13.10

Salaries and Wages Expense .................................................... 42,000

Salaries and Wages Payable (30 X 2 X €700) ................ 42,000
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.11

December 31, 2018

Salaries and Wages Expense .................................................... 350,000
Salaries and Wages Payable ........................................... 350,000

February 15, 2019

Salaries and Wages Payable ..................................................... 350,000
Cash ................................................................................. 350,000
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.12

(a) Lawsuit Loss ..............................................................................

900,000
Lawsuit Liability ............................................................. 900,000

(b) No entry is necessary. The loss is not accrued because it is not

probable that a liability has been incurred at December 31, 2019.
LO: 2,3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.13

Buchanan should record a litigation accrual on the patent case, since the amount is
both reliably estimable and probable. This entry will reduce income by $300,000 and
Buchanan will report a litigation liability of $300,000. The $100,000 self-insurance
allowance has no impact on income or liabilities.
LO: 2,3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-14 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 13.14

Oil Platform .............................................................................. 450,000

Environmental Liability ................................................. 450,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.15

During 2019

Warranty Expense ....................................................................

70,000
Inventory ................................................................................... 70,000

2019

Cash 1,000,000
Sales ........................................................................................... 1,000, 000

12/31/19
Warranty Expense ....................................................................
55,000
Warranty Liability .................................................................. 55,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 13.16

(a) Cash ...........................................................................................

1,980,000
Unearned Warranty Revenue
(20,000 X €99) ............................................................... 1,980,000

(b) Warranty Expense ....................................................................

180,000
Inventory ......................................................................... 180,000

(c) Unearned Warranty Revenue .................................................. 495,000

Warranty Revenue
(€1,980,000 ÷ 4)............................................................. 495,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-15
BRIEF EXERCISE 13.17

Premium Expense ...................................................................... 96,000

Premium Liability ............................................................ 96,000*

*Box top codes expected to be sent in (30% X 1,200,000) ........ 360,000

Box top codes already redeemed .............................................. 120,000
Estimated future redemptions .................................................. 240,000
Cost of estimated claims outstanding
(240,000 ÷ 3) X ($1.10 + $0.60 – $0.50) .................................. $ 96,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

BRIEF EXERCISE 13.18

Cargo Company’s lawsuit claim represents a contingent asset because the odds of
winning the case are 75% (probable, but not virtually certain). Contingent assets are
not recognized on the statement of financial position.
LO: 2,3, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.19

Costs that should not be included in a restructuring provision include marketing

costs to rebrand the company image and expected future losses for keeping the plant
open for another year.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

BRIEF EXERCISE 13.20

Loss on Lease Contract.............................................................. 1,450,000

Lease Contract Liability .................................................. 1,450,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-16 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 SOLUTIONS TO EXERCISES

EXERCISE 13.1 (10–15 minutes)

(a) Current liability.

(b) Current liability.
(c) Current liability or non-current liability depending on term of warranty.
(d) Current liability.
(e) Footnote disclosure (assume possible not probable).
(f) Current liability.
(g) Current or non-current liability depending upon the time involved.
(h) Current liability.
(i) Current liability.
(j) Current liability.
(k) Current liability.
(l) Current liability.
(m) Current liability.
(n) Current liability.
(o) Footnote disclosure.
(p) Separate presentation in either current or non-current liability section.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.2 (15–20 minutes)

(a) September 1, 2019

Purchases ...................................................................................
50,000
Accounts Payable ............................................................ 50,000

October 1, 2019
Accounts Payable ......................................................................
50,000
Notes Payable .................................................................. 50,000

Cash ...........................................................................................
75,000
Notes Payable .................................................................. 75,000

(b) December 31, 2019

Interest Expense ........................................................................
1,000
Interest Payable
($50,000 X 8% X 3/12) ................................................. 1,000

Interest Expense ........................................................................

1,500
Notes Payable ($6,000 X 3/12) ........................................ 1,500
Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-17
EXERCISE 13.2 (Continued)

(c) 1. Notes payable ....................................... $50,000

Interest payable ................................... 1,000
$51,000

2. Notes payable ($75,000 + $1,500)........ $76,500

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.3 (10–12 minutes)

ALEXANDER AG
Partial Statement of Financial Position
December 31, 2018
Current liabilities:
Notes payable (Note 1) ............................................................... €1,200,000

NOTE 1:
Short-term debt refinanced. As of December 31, 2018, the company had notes payable
totaling €1,200,000 due on February 2, 2019. These notes were refinanced on their
due date to the extent of €900,000 received from the issuance of ordinary shares on
January 21, 2019. The balance of €300,000 was liquidated using current assets.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-12, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.4 (10–15 minutes)

Short-term obligation A. While the maturity of the obligation was extended to

March 1, 2021, the agreement was not reached with the lender until
February 1, 2019. Since the agreement was not in place as of the reporting date
(December 31, 2018), the obligation should be reported as a current liability.

Short-term obligation B. The maturity of the obligation was extended to February 1,

2020 and the agreement with the lender was signed on
December 18, 2018. Since the agreement was in place as of the reporting date
(December 31, 2018), the obligation is reported as a non-current liability.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.5 (15–20 minutes)

13-18 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
1. Debt that is callable on demand by the lender at any time should be classified as
a current liability. The callable on demand feature overrides the stated maturity
of December 31, 2021.

2. When there is a breach of a debt covenant, the debt is normally classified as a

current liability. However, if the company is able to obtain a period of grace
from the lender prior to the reporting date as Mckee did (the agreement was
reached on December 8, 2018), the debt should be classified as non-current.

3. Mckee should classify £100,000 of the obligation as a current maturity of long-

term debt (current liability) and the £300,000 balance as a non-current
liability.

4. While the maturity of the obligation was extended to February 15, 2021, the
agreement was not reached with the lender until January 15, 2019. Since the
agreement was not in place as of the reporting date (December 31, 2018), the
obligation should be reported as a current liability.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.6 (25–30 minutes)

(a) 2018
To accrue expense and liability for compensated absences

Salaries and Wages Expense ....................................... 13,824

Salaries and Wages Payable (Vacation) ........... 8,640 (1)
Salaries and Wages Payable (Sick Pay) ............ 5,184 (2)

To record payment for compensated time when used by employees

Salaries and Wages Payable (Sick Pay) ...................... 3,456 (3)

Cash .................................................................... 3,456

EXERCISE 13.6 (Continued)

2019

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-19
 To accrue expense and liability for compensated absences

Salaries and Wages Expense ....................................... 14,976

Salaries and Wages Payable (Vacation) ........... 9,360 (4)
Salaries and Wages Payable (Sick Pay) ............ 5,616 (5)

To record payment for compensated time when used by employers

Salaries and Wages Expense ....................................... 792

Salaries and Wages Payable (Vacation) ..................... 7,776 (6)
Salaries and Wages Payable (Sick Pay) ...................... 4,536 (7)
Cash .................................................................... 13,104 (8)

(1) 9 employees X €12.00/hr. X 8 hrs./day X 10 days = €8,640

(2) 9 employees X €12.00/hr. X 8 hrs./day X 6 days = €5,184
(3) 9 employees X €12.00/hr. X 8 hrs./day X 4 days = €3,456
(4) 9 employees X €13.00/hr. X 8 hrs./day X 10 days = €9,360
(5) 9 employees X €13.00/hr. X 8 hrs./day X 6 days = €5,616
(6) 9 employees X €12.00/hr. X 8 hrs./day X 9 days = €7,776
(7) 9 employees X €12.00/hr. X 8 hrs./day X (6–4) days = €1,728
9 employees X €13.00/hr. X 8 hrs./day X (5–2) days = +2,808 = €4,536
(8) 9 employees X €13.00/hr. X 8 hrs./day X 9 days = €8,424
9 employees X €13.00/hr. X 8 hrs./day X 5 days = +4,680 = €13,104

NOTE: Vacation days and sick days are paid at the employee’s current wage. Also, if
employees earn vacation pay at different pay rates, a consistent pattern of recognition
(e.g., first-in, first-out) could be employed to recognize liabilities that have been paid.

13-20 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.6 (Continued)

(b) Accrued liability at year-end:

2018 2019
Vacation Sick Pay Vacation Sick Pay
Payable Payable Payable Payable
Jan. 1 balance € 0 € 0 € 8,640 €1,728
+ accrued 8,640 5,184 9,360 5,616
– paid (0) (3,456) (7,776) (4,536)
Dec. 31 balance €8,640(1) €1,728(2) €10,224(3) €2,808(4)

(1) 9 employees X €12.00/hr. X 8 hrs./day X 10 days = € 8,640

(2) 9 employees X €12.00/hr. X 8 hrs./day X (6–4) days = € 1,728

(3) 9 employees X €12.00/hr. X 8 hrs./day X (10–9) days = € 864

9 employees X €13.00/hr. X 8 hrs./day X 10 days = +9,360
€10,224

(4) 9 employees X €13.00/hr. X 8 hrs./day X (6 + 6 – 4 – 5)

days € 2,808
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.7 (25–30 minutes)

(a) 2018
To accrue the expense and liability for vacations

Salaries and Wages Expense ........................ 9,288 (1)

Salaries and Wages Payable ............... 9,288

To record sick leave paid

Salaries and Wages Expense ........................ 3,456 (2)
Cash ..................................................... 3,456

To record vacation time paid

No entry, since no vacation days were used.

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-21
EXERCISE 13.7 (Continued)
2019
To accrue the expense and liability for vacations
Salaries and Wages Expense ........................ 9,864 (3)
Salaries and Wages Payable ............... 9,864
To record sick leave paid
Salaries and Wages Expense ........................ 4,680 (4)
Cash ..................................................... 4,680
To record vacation time paid
Salaries and Wages Expense ........................ 65
Salaries and Wages Payable ......................... 8,359 (5)
Cash ..................................................... 8,424 (6)

(1) 9 employees X €12.90/hr. X 8 hrs./day X 10 days = €9,288

(2) 9 employees X €12.00/hr. X 8 hrs./day X 4 days = €3,456

(3) 9 employees X €13.70/hr. X 8 hrs./day X 10 days = €9,864

(4) 9 employees X €13.00/hr. X 8 hrs./day X 5 days = €4,680

(5) 9 employees X €12.90/hr. X 8 hrs./day X 9 days = €8,359

(6) 9 employees X €13.00/hr. X 8 hrs./day X 9 days = €8,424

(b) Accrued liability at year-end:
2018 2019
Jan. 1 balance € 0 € 9,288
+ accrued 9,288 9,864
– paid (0) (8,359)
Dec. 31 balance €9,288(1) €10,793(2)

(1) 9 employees X €12.90/hr. X 8 hrs./day X 10 days .............. € 9,288

(2) 9 employees X €12.90/hr. X 8 hrs./day X 1 day ................. € 929

9 employees X €13.70/hr. X 8 hrs./day X 10 days .............. 9,864
€10,793
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-22 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.8 (5–7 minutes)

(a) June 30
Sales Revenue .................................................................... 23,700
Sales Taxes Payable............................................... 23,700
Computation:
Sales plus sales tax (R$265,000
+ R$153,700) .................................................... R$418,700
Sales exclusive of tax (R$418,700
÷ 1.06) .............................................................. (395,000)
Sales tax ..............................................................
R$ 23,700

(b) If the adjusting entry related to a VAT rather than sales tax, it would be
recorded as follows:

Sales Revenue ...........................................................................

23,700
Value Added Taxes Payable ........................................... 23,700
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.9 (10 minutes)

(a) Cash (€40,000 + €6,000) ............................................................ 46,000

Sales Revenue .................................................................. 40,000
Value Added Taxes Payable (€40,000 X 15%) .............. 6,000

(b) Eastwood Ranchers does not have a net cash outlay related to the VAT.
Eastwood Ranchers collected €4,500 of VAT, and then remitted this amount to
the tax authority.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-23
EXERCISE 13.10 (10–15 minutes)

Salaries and Wages Expense .................................................... 340,000

Withholding Taxes Payable ............................................ 80,000
Social Security Taxes Payable* ...................................... 27,200
Union Dues Payable ........................................................ 9,000
Cash ................................................................................. 223,800

*[¥340,000 X 8% = ¥27,200]

Payroll Tax Expense ................................................................. 27,200

Social Security Taxes Payable ........................................ 27,200
(See previous computation.)
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.11 (15–20 minutes)

(a) Computation of taxes

Factory
Wages ............................................. €140,000
Social security taxes ....................... 11,200 (8% X €140,000)
Total cost ........................................ €151,200

Sales
Wages ............................................. €32,000
Social security taxes ....................... 2,560 (8% X €32,000)
Total cost ........................................ €34,560

Administrative
Wages ............................................. €36,000
Social security taxes ....................... 2,880 (8% X €36,000)
Total cost ........................................ €38,880

13-24 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.11 (Continued)

Schedule

Total Factory Sales Administrative

Wages €208,000 €140,000 €32,000 €36,000
Social Security 16,640 11,200 2,560 2,880
Total Cost €224,640 €151,200 €34,560 €38,880

(b)
Factory Payroll:
Salaries and Wages Expense ................................ 140,000
Withholding Taxes Payable......................... 16,000
Social Security Taxes Payable ..................... 11,200
Cash .............................................................. 112,800

Payroll Tax Expense ............................................. 11,200

Social Security Taxes Payable ..................... 11,200

Sales Payroll:
Salaries and Wages Expense ................................ 32,000
Withholding Taxes Payable......................... 7,000
Social Security Taxes Payable ..................... 2,560
Cash .............................................................. 22,440

Payroll Tax Expense ............................................. 2,560

Social Security Taxes Payable ..................... 2,560

Administrative Payroll:
Salaries and Wages Expense ................................ 36,000
Withholding Taxes Payable......................... 6,000
Social Security Taxes Payable ..................... 2,880
Cash .............................................................. 27,120

Payroll Tax Expense ............................................. 2,880

Social Security Taxes Payable ..................... 2,880
LO: 1, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-25
EXERCISE 13.12 (10–15 minutes)
July 10, 2019
Cash (200 X £4,000) ..................................................................
800,000
Sales Revenue .................................................................. 800,000

During 2019
Warranty Expense ....................................................................17,000
Inventory ......................................................................... 17,000
December 31, 2019

Warranty Expense ....................................................................49,000

Warranty Liability (£66,000-£17,000)............................ 49,000
LO: 2, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 13.13 (15–20 minutes)

At Sale
(a) Cash ...........................................................................................
3,000,000
Sales Revenue .................................................................. 3,000,000

During 2019
Warranty Expense ....................................................................
20,000
Cash, Supplies, Wages Payable ...................................... 20,000

December 31, 2019

35,000
Warranty Expense ....................................................................
Warranty Liability (€55,000 − €20,000) ......................... 35,000

At Sale
(b) Cash ...........................................................................................
3,000,000
Sales Revenue .................................................................. 2,944,000
Unearned Warranty Revenue ........................................ 56,000

During 2019
Warranty Expense ....................................................................
20,000
Cash, Supplies, Wages Payable ...................................... 20,000

13-26 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.13 (Continued)
December 31, 2019
Unearned Warranty Revenue ..................................................28,000
Warranty Revenue .......................................................... 28,000
(€56,000 ÷ 2)
LO: 2, Bloom: AP, Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 13-14 (15–20 minutes)

Inventory of Premiums (8,800 X $.80) ..................................... 7,040

Cash ................................................................................. 7,040

During 2019
Cash (110,000 X $3.30) ............................................................. 363,000
Sales Revenue .................................................................. 363,000

Premium Expense ..................................................................... 3,520

Inventory of Premiums [(44,000 ÷ 10) X $.80]............... 3,520

December 31, 2019

Premium Expense ..................................................................... 1,760*
Premium Liability ........................................................... 1,760

*[(110,000 X 60%) – 44,000] ÷ 10 X $.80 = 1,760

LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-27
 EXERCISE 13.15 (15–20 minutes)

(1) Lease termination penalties are included. The ¥400,000 penalty to break the
lease should therefore be included.

(2) Allocations of overhead are excluded.

(3) Costs of training staff are excluded.

(4) Use of an outplacement firm to assist with the terminations are employee
termination costs directly related to the restructuring and should be included.

(5) Termination costs directly related to the restructuring are included.

(6) Costs of moving assets to other divisions are excluded.

LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-28 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.16 (15–20 minutes)

(a) A restructuring is a program that is planned and controlled by management and

materially changes either (1) the scope of a business undertaken by the company;
or (2) the manner in which that business is conducted.

Examples include sale of a line of business, eliminating a layer of management,

and closure of operation in a country.

(b) The two provisions are described that the company (1) has a detailed formal
plan for the restructuring; and (2) raises a valid expectation to those affected by
implementation or announcement of the plan.

(c) Dolman may include the following costs as part of the restructuring provision:
employee termination costs related to closing the division; and onerous
contract provisions related to the closing.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

EXERCISE 13.17 (20–30 minutes)

1. The IASB requires that, when some amount within the range of expected loss
appears at the time to be a better estimate than any other amount within the
range, that amount is accrued. When no amount within the range is a better
estimate than any other amount, the expected value (midpoint of the range)
should be used. In this case, therefore, Maverick ASA. would report a liability
of €1,100,000 at December 31, 2019.

2. The loss should be accrued for €6,000,000. The potential insurance recovery is
a contingent asset—it is not recorded until received. According to IFRS, claims
for recoveries may only be recorded if the recovery is deemed virtually certain.

3. This is a contingent asset because the amount to be received will be in excess of

the book value of the plant. Contingent assets are not recorded and are
disclosed only when the probabilities are high (virtually certain) that a
contingent asset will become reality.
LO: 2,3, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-29
EXERCISE 13.18 (25–30 minutes)

(a) January 1, 2019

Depot ..........................................................................................
600,000
Cash ................................................................................. 600,000

Depot 39,087
Environmental Liability ................................................. 39,087

(b) December 31, 2019

Depreciation Expense ...............................................................
60,000
Accumulated Depreciation—Depot ............................... 60,000

Depreciation Expense ...............................................................3,909

Accumulated Depreciation—Depot ............................... 3,909*

Interest Expense ........................................................................2,345

Environmental Liability ................................................. 2,345**

*$39,087/10
**$39,087 X .06

(c) December 31, 2028

Environmental Liability ........................................................... 70,000
Loss on Settlement of Environmental Liability ....................... 10,000
Cash ................................................................................. 80,000

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-30 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.19 (25–35 minutes)

1. Liability for stamp redemptions, 12/31/18 $13,000,000

Cost of redemptions redeemed in 2019 (6,000,000)
7,000,000
Cost of redemptions to be redeemed in 2020
(5,200,000 X 80%) 4,160,000
Liability for stamp redemptions, 12/31/19 $11,160,000

2. Total coupons issued $800,000

Redemption rate 60%
To be redeemed 480,000
Handling charges ($480,000 X 10%) 48,000
Total cost $528,000

Total cost $528,000

Total payments to retailers 330,000
Liability for unredeemed coupons $198,000

3. Boxes 700,000
Redemption rate 70%
Total redeemable 490,000

Coupons to be redeemed (490,000 – 250,000) 240,000

Cost ($6.50 – $4.00) $2.50
Liability for unredeemed coupons $600,000
LO: 2, Bloom: AP, Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-31
EXERCISE 13.20 (20–30 minutes)

1. The present value of the major overhaul payments (£3,200,000) should be

included as part of the cost of the ship. The ship should be recorded at
£23,200,000.

January 1, 2019
Ship ..........................................................................................
23,200,000
Cash ................................................................................. 20,000,000
Environmental Liability ................................................. 3,200,000

December 31, 2019

Depreciation Expense ...............................................................
580,000
Accumulated Depreciation—Ship .................................. 580,000

Note: Bruegger would also accrue interest at the effective rate on the
Environmental Liability.

2. The lease is considered an onerous contract because the unavoidable costs of

meeting the obligations under the lease exceed the benefits (facilities will no
longer be used). The expected costs to satisfy the onerous contract (the £62,000
penalty for non-payment) are accrued.

December 31, 2019

Loss on Lease Contract.............................................................
62,000
Lease Contract Liability ................................................. 62,000

3. The company should recognize the costs associated with dismantling the plant
upon building the plant as it has a legal obligation associated with its retirement.

January 2, 2020
Nuclear Power Plant .................................................................
40,000,000
Cash ................................................................................. 40,000,000

Nuclear Power Plant .................................................................

1,000,000
Environmental Liability ................................................. 1,000,000
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-32 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.21 (20–30 minutes)

1. Total warranty liability at December 31, 2019 is $5,000,000 as computed

below

*Expected warranty costs

% Units Cost per Unit Total Costs

No defects 60% 600,000 $ 0 $ 0
Major defects 30% 300,000 15 4,500,000
Minor defects 10% 100,000 5 500,000
Total 100% 1,000,000 $5,000,000

2. The expected amount of $400,000 should be reported as income taxes payable

at December 31, 2019.

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-33
EXERCISE 13.22 (20–25 minutes)

# Assets Liabilities Equity Net Income

1. I I NE NE

2. NE NE NE NE

3. NE I D D

4. I I NE NE

5. NE I D D

6. I I I I

7. D I D D

8. NE I D D

9. NE I D D

10. I I NE NE

11. NE I D D

12. I I I I

13. D D NE NE

14. NE I D D

15. D NE D D

16. NE D I I

LO: 4, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-34 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.23 (10–15 minutes)

Current Assets ¥210,000

(a) Current ratio = = = 3.00 times
Current Liabilities ¥70,000

Current ratio measures the short-term ability of the company to meet its
currently maturing obligations.

Cash + Short-term Investments + Net Receivables

(b) Acid-test ratio =
Current Liabilities
¥115,000
= = 1.64 times
¥70,000

Acid-test ratio also measures the short-term ability of the company to meet its
currently maturing obligations. However, it eliminates assets that might be
slow moving, such as inventories and prepaid expenses.

Total Liabilities ¥210,000

(c) Debt to assets = = = 48.84%
Total Assets ¥430,000

This ratio provides the creditors with some idea of the corporation’s ability to
withstand losses without impairing the interests of creditors.

Net Income ¥25,000

(d) Return on assets = = = 5.81%
Average Total Assets ¥430,000

This ratio measures the return the company is earning on its average total
assets and provides one indication related to the profitability of the enterprise.

LO: 4, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-35
EXERCISE 13.24 (20–25 minutes)

¥733,000
(a) (1) Current ratio = = 3.05
¥240,000

¥52,000 + ¥158,000 + ¥80,000

(2) Acid-test ratio = = 1.21
¥240,000

(3) Accounts receivable turnover =

¥80,000 + ¥158,000
¥1,640,000 ÷ = 13.8 times (or approximately
2
every 26 days)

(4) Inventory turnover =

¥360,000 + ¥440,000
¥800,000 ÷ = 2 times (or approximately
2
every 183 days)

(5) Return on assets =

¥1,400,000 + ¥1,630,000
¥320,000 ÷ = 21.12%
2

(6) Profit margin on sales =

¥320,000 ÷ ¥1,640,000 = 19.51%

(b) Financial ratios should be evaluated in terms of industry peculiarities and

prevailing business conditions. Although industry and general business
conditions are unknown in this case, the company appears to have a relatively
strong current position. The main concern from a short-term perspective is
the apparently low inventory turnover. The return on assets and profit
margin on sales are extremely good and indicate that the company is
employing its assets advantageously.

LO: 4, Bloom: AP, Difficulty: Simple, Time: 20-25, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-36 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 13.25 (15–25 minutes)

(a) (1) €318,000 ÷ €87,000 = 3.66 times

€200,000 + €170,000
(2) €820,000 ÷ = 4.43 times
2 (or approximately 82 days).

(3) €1,400,000 ÷ $95,000 = 14.74 times (or approximately 25 days).

(4) €210,000 ÷ 52,000 (€260,000 ÷ €5) = €4.04

(5) €210,000 ÷ €1,400,000 = 15.0%

(6) €210,000 ÷ €488,000 = 43.03%

(b) (1) No effect on current ratio, if already included in the allowance for
doubtful accounts.

(2) Weaken current ratio by reducing current assets.

(3) Improve current ratio by reducing current assets and current liabilities
by a like amount.

(4) No effect on current ratio.

(5) Weaken current ratio by increasing current liabilities.

(6) No effect on current ratio.

LO: 4, Bloom: AP, Difficulty: Moderate, Time: 15-25, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-37
 TIME AND PURPOSE OF PROBLEMS
Problem 13.1 (Time 25–30 minutes)
Purpose—to present the student with an opportunity to prepare journal entries for a variety of situations related to
liabilities. The situations presented are basic ones including purchases and payments on account, and borrowing
funds by giving a note. The student is also required to prepare year-end adjusting entries.

Problem 13.2 (Time 25–35 minutes)

Purpose—to present the student with the opportunity to prepare journal entries for several different situations
related to liabilities. The situations presented include accruals and payments related to sales, use, and
environmental liabilities.
Problem 13.3 (Time 20–30 minutes)
Purpose—to present the student with an opportunity to prepare journal entries for four weekly payrolls. The
student must compute income tax to be withheld, and social security tax.
Problem 13.4 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to prepare journal entries for a monthly payroll. The student
must compute income tax to be withheld, and social security tax.

Problem 13.5 (Time 15–20 minutes)

Purpose—to provide the student with an opportunity to prepare journal entries and statement of financial position
presentations for warranty costs. Entries in the sales year and one subsequent year are required. While the
problem is basic in nature it does test the student’s ability to understand and apply the sales warranty method.
Problem 13.6 (Time 10–20 minutes)
Purpose—to provide the student with a basic problem covering the sales-warranty method. The student is required
to prepare journal entries in the year of sale and in subsequent years when warranty costs are incurred. Also
required are statement of financial position presentations for the year of sale and one subsequent year. The
problem highlights the differences between assurance and service-type warranties in the accounts and on the
statement of financial position.
Problem 13.7 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to prepare journal entries for warranty costs. The student is
also required to indicate the proper statement of financial position disclosures for the year of sale.
Problem 13.8 (Time 15–25 minutes)
Purpose—to provide the student with a basic problem in accounting for premium offers. The student is required to
prepare journal entries relating to sales, the purchase of the premium inventory, and the redemption of coupons.
The student must also prepare the year-end adjusting entry reflecting the estimated liability for premium claims
outstanding. A very basic problem.

13-38 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
Time and Purpose of Problems (Continued)

Problem 13.9 (Time 30–45 minutes)

Purpose—to present the student with a slightly complicated problem related to accounting for premium offers.
The problem is more complicated in that coupons redeemed are accompanied by cash payments, and in addition to
the cost of the premium item postage costs are also incurred. The student is required to prepare journal entries for
various transactions including sales, purchase of the premium inventory, and redemption of coupons for two
years. The second year’s entries are more complicated due to the existence of the liability for claims outstanding.
Finally the student is required to indicate the amounts related to the premium offer that would be included in the
financial statements for each of two years. This very realistic problem challenges the student’s ability to account
for all transactions related to premium offers.

Problem 13.10 (Time 25–30 minutes)

Purpose—to present the student with the problem of determining the proper amount of and disclosure for a
contingent liability due to lawsuits. The student is required to prepare a journal entry and a footnote. The student
is also required to discuss any liability incurred by a company due to the risk of loss from lack of insurance
coverage. A straightforward problem dealing with contingent liabilities.

Problem 13.11 (Time 35–45 minutes)

Purpose—to provide the student with a comprehensive problem dealing with contingent liabilities. The student is
required to prepare journal entries for each of five independent situations. For each situation the student must also
discuss the appropriate disclosure in the financial statements. The situations presented include a lawsuit, an
expropriation, and a self-insurance situation. This problem challenges the student not only to apply the guidelines
set forth in IFRS, but also to develop reasoning as to how
the guidelines relate to each situation.

Problem 13.12 (Time 20–30 minutes)

Purpose—to provide the student with a problem to calculate warranty expense, warranty liability, premium expense,
inventory of premiums, and estimated premium liability.

Problem 13.13 (Time 25–35 minutes)

Purpose—to present the student with a comprehensive problem in determining various liabilities and present
findings in writing. Issues addressed relate to contingencies, warranties, and litigation.

Problem 13.14 (Time 20–25 minutes)

Purpose—to present the student with a comprehensive problem in determining the amounts of various liabilities.
The student must calculate (for independent situations) the estimated liability for warranties, and an estimated
liability for premium claims outstanding. Journal entries are not required. This problem should challenge the better
students.

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-39
 SOLUTIONS TO PROBLEMS

PROBLEM 13.1

(a) February 2
Purchases (€70,000 X 98%) ............................................ 68,600
Accounts Payable ................................................. 68,600

February 26
Accounts Payable ............................................................ 68,600
Purchase Discounts Lost ................................................. 1,400
Cash ...................................................................... 70,000

April 1
Trucks .............................................................................. 50,000
Cash ...................................................................... 4,000
Notes Payable ....................................................... 46,000

August 1
Retained Earnings (Dividends Declared) ...................... 300,000
Dividends Payable ................................................ 300,000

September 10
Dividends Payable ........................................................... 300,000
Cash ...................................................................... 300,000

(b) December 31
1. No adjustment necessary

2. Interest Expense (€46,000 X 12% X 9/12)................. 4,140

Interest Payable ..................................................... 4,140

3. No adjustment necessary
LO: 1, Bloom: AP, Difficulty: Simple, Time: 25-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-40 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 13.2

December 5
1. Cash ..........................................................................................
500
Returnable Deposit (Liability) ....................................... 500

December 1–31
2. Cash ..........................................................................................
798,000
Sales Revenue (€798,000 ÷ 1.05) ....................................760,000
Value-Added Taxes Payable
(€760,000 X .05) ........................................................... 38,000

December 10
3. Trucks (€120,000 X 1.05) .........................................................
126,000
Cash ................................................................................126,000

December 31
4. Parking Lot ...............................................................................
84,000
Environmental Liability................................................. 84,000

LO: 1, Bloom: AP, Difficulty: Simple, Time: 25-35, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-41
 PROBLEM 13.3

Entries for Payroll 1

Salaries and Wages Expense .................................................... 1,040.00*
Withholding Taxes Payable (10% X $1,040)* ............... 104.00
Social Security Taxes Payable (8% X $1,040) ............... 83.20
Union Dues Payable (2% X $1,040) ............................... 20.80
Cash ................................................................................. 832.00

*$200 + $150 + $110 + $250 + $330 = $1,040

Payroll Tax Expense ................................................................. 83.20

Social Security Taxes Payable (8% X $1,040) ............... 83.20

Entries for Payroll 2 and 3

Salaries and Wages Expense .................................................... 1,040.00*
Withholding Taxes Payable (10% X $1,040) ................. 104.00
Social Security Taxes Payable (8% X $1,040) ............... 83.20
Union Dues Payable (2% X $1,040) ............................... 20.80
Cash ................................................................................. 832.00

*The total salaries and wages for payroll 2 and 3 are the same, also the salaries and
wages paid for vacation time are considered payment of salaries and wages in those
two periods.

Payroll Tax Expense ................................................................. 83.20

Social Security Taxes Payable
(8% X $1,040) ............................................................... 83.20

13-42 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
PROBLEM 13.3 (Continued)

Entries for Payroll 4

Salaries and Wages Expense .................................................... 1,040.00
Withholding Taxes Payable (10% X $1,040) ................. 104.00
Social Security Taxes Payable (8% X $1,040) ............... 83.20
Union Dues Payable (2% X $1,040) ............................... 20.80
Cash ................................................................................. 832.00

Payroll Tax Expense ................................................................. 83.20

Social Security Taxes Payable (8% X $1,040) ............... 83.20

Monthly Payment of Payroll Liabilities

Withholding Taxes Payable ($104.00 X 4) ............................... 416.00
Social Security Taxes Payable ($83.20 X 8) ............................. 665.60
Union Dues Payable ($20.80 X 4) ............................................. 83.20
Cash ................................................................................. 1,164.80

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-43
 PROBLEM 13.4

(a)
Earnings to September Income Tax Social
Name Aug. 31 Earnings Withholding Security
B. D. Williams £ 6,800 £ 800 £ 80 £ 64
D. Raye 6,500 700 70 56
K. Baker 7,600 1,100 110 88
F. Lopez 13,600 1,900 190 152
A. Daniels 105,000 13,000 1,300 1,040
B. Kingston 112,000 16,000 1,600 1,280
Total £251,500 £33,500 £3,350 £2,680

Salaries and Wages Expense .................................................... 33,500

Withholding Taxes Payable ............................................ 3,350
Social Security Taxes Payable ........................................ 2,680
Cash ................................................................................. 27,470

(b) Payroll Tax Expense .................................................................2,680

Social Security Taxes Payable ........................................ 2,680

(c) Withholding Taxes Payable ......................................................3,350

Social Security Taxes Payable ..................................................5,360
Cash ................................................................................. 8,710

LO: 1, Bloom: AP, Difficulty: Simple, Time: 20-25, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-44 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 13.5

(a) Cash (400 X £2,500) ..................................................................

1,000,000
Warranty Expense (400 X [£155 + £185]) ............................... 136,000
Sales Revenue .................................................................. 1,000,000
Warranty Liability ......................................................... 136,000

(b) Current Liabilities:

Warranty Liability (£136,000 ÷ 2).................................. £68,000

Long-term Liabilities:
Warranty Liability (£136,000 ÷ 2).................................. £68,000

(c) Warranty Liability ....................................................................

61,300
Inventory ......................................................................... 21,400
Salaries and Wages Payable ........................................... 39,900

LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-45
 PROBLEM 13.6

(a) Cash ...........................................................................................

294,300
Sales Revenue (300 X R$900) ......................................... 270,000
Unearned Warranty Revenue (270 X $90) ........................ 24,300

(b) Current Liabilities:

Unearned Warranty Revenue (R$24,300/3) .................. R$ 8,100
(Note: Warranty costs assumed to be
incurred equally over the three-
year period)

Long-term Liabilities:
Unearned Warranty Revenue
(R$24,300 X 2/3) ........................................................... R$16,200

(c) Unearned Warranty Revenue ..................................................8,100

Warranty Revenue .......................................................... 8,100

Warranty Expense ....................................................................6,000

Inventory ......................................................................... 2,000
Salaries and Wages Payable ........................................... 4,000

(d) Current Liabilities:

Unearned Warranty Revenue ........................................ R$ 8,100

Long-term Liabilities:
Unearned Warranty Revenue ........................................ R$ 8,100
LO:2, Bloom: AP, Difficulty: Simple, Time: 10-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

13-46 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 13.7

(a) Cash ...........................................................................................

4,440,000
Sales Revenue (600 X $7,400) ........................................... 4,440,000

Warranty Expense ([600 X $390] / 2) .......................................

117,000
Inventory ($170 X 600 X 1/2) ............................................ 51,000
Salaries and Wages Payable
($220 X 600 X 1/2) ........................................................... 66,000

December 31, 2019

(b) Warranty Expense ....................................................................
117,000
Warranty Liability ........................................................... 117,000*
*(600 X $390) − $117,000

(c) Warranty Liability ....................................................................

117,000
Inventory 51,000
Salaries and Wages Payable ............................................. 66,000

(d) As of 12/31/19 the statement of financial position would disclose a current

liability in the amount of $117,000 for Warranty Liability.
LO: 2, Bloom: AP, Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-47
 PROBLEM 13.8

Inventory of Premiums ............................................................. 60,000

Cash ................................................................................. 60,000
(To record purchase of 40,000 puppets at
€1.50 each)

During 2020
Cash ........................................................................................... 1,800,000
Sales Revenue .................................................................. 1,800,000
(To record sales of 480,000 boxes at
€3.75 each)

Premium Expense ..................................................................... 34,500

Inventory of Premiums ................................................... 34,500
[To record redemption of 115,000 coupons.
Computation: (115,000 ÷ 5) X €1.50 = €34,500]

December 31, 2020

Premium Expense ..................................................................... 23,100
Premium Liability ........................................................... 23,100
[To record estimated liability for premium
claims outstanding at December 31, 2020.]

Computation: Total coupons issued in 2020 ............................ 480,000

Total estimated redemptions (40%) ......................................... 192,000

Coupons redeemed in 2020 ....................................................... 115,000
Estimated future redemptions .................................................. 77,000

Cost of estimated claims outstanding (77,000 ÷ 5) X €1.50 = €23,100

LO: 2, Bloom: AP, Moderate, Time: 15-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

13-48 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 13.9

During 2019
(a)
Inventory of Premiums ............................................................. 562,500
Cash ................................................................................. 562,500
(To record the purchase of 250,000
MP3 downloads at £2.25 each)

Cash ........................................................................................... 868,620

Sales Revenue .................................................................. 868,620
(To record the sale of 2,895,400 candy bars
at 30 pence each)

Cash [£600,000 – (240,000 X £.50)] .......................................... 480,000

Premium Expense ..................................................................... 60,000
Inventory of Premiums ................................................... 540,000
[To record the redemption of 1,200,000
wrappers, the receipt of £600,000
(1,200,000 ÷ 5) X £2.50, and the mailing
of 240,000 MP3 downloads]

Computation of premium expense:

240,000 Codes @ £2.25 each = ..................................... £540,000
Postage—240,000 X £.50 =........................................... 120,000
£660,000
Less: Cash received—
240,000 X £2.50 ................................................ 600,000
Premium expense for MP3 downloads
issued......................................................................... £ 60,000

December 31, 2019

Premium Expense ..................................................................... 14,500*
Premium Liability ........................................................... 14,500
(To record the estimated liability for
premium claims outstanding at 12/31/19)

*(290,000 ÷ 5) X (£2.25 + £.50 – £2.50) = £14,500

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-49
PROBLEM 13.9 (Continued)

During 2020

Inventory of Premiums ............................................................. 742,500

Cash ................................................................................. 742,500
(To record the purchase of 330,000 MP3
downloads at £2.25 each)

Cash ........................................................................................... 823,080

Sales Revenue .................................................................. 823,080
(To record the sale of 2,743,600 candy
bars at 30 pence each)

Cash (£750,000 – £150,000) ...................................................... 600,000

Premium Liability ..................................................................... 14,500
Premium Expense ..................................................................... 60,500
Inventory of Premiums ................................................... 675,000
(To record the redemption of 1,500,000
wrappers, the receipt of £750,000
[(1,500,000 ÷ 5) X £2.50], and the mailing
of 300,000 Codes.)

Computation of premium expense:

300,000 Codes @ £2.25 = ............................................. £675,000
Postage—300,000 @ £.50 = ........................................ 150,000
825,000
Less: Cash received—
(1,500,000 ÷ 5) X £2.50 ....................................... 750,000
Premium expense for Codes issued ................................ 75,000
Less: Outstanding claims at 12/31/19
charged to 2019 but redeemed in 2020 ............... 14,500
Premium expense chargeable to 2020 ............................ £ 60,500

December 31, 2020

Premium Expense ..................................................................... £ 17,500*
Premium Liability ........................................................... 17,500

*(350,000 ÷ 5) X (£2.25 + £.50 – £2.50) = £17,500

13-50 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
PROBLEM 13.9 (Continued)

(b) Amount
Account 2019 2020 Classification
Inventory of Premiums £22,500* £90,000** Current asset
Premium Liability 14,500 17,500 Current liability
Premium Expense 74,500*** 78,000**** Selling expense

* £2.25 (250,000 – 240,000)

** £2.25 (10,000 + 330,000 – 300,000)
*** £60,000 + £14,500
**** £60,500 + £17,500
LO: 2, 4, Bloom: AP, Moderate, Time: 30-45, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-51
 PROBLEM 13.10

(a) Because the cause for litigation occurred before the date of the financial
statements (that is, it is a present obligation as a result of past events) and
because it is probable that an outflow of resources will be required to settle the
obligation and a reliable estimate can be made, Wong Airlines should report a
loss and a liability in the December 31, 2018, financial statements. The loss and
liability might be recorded as follows:

Loss from Uninsured Accident

(NT$9,000,000 X 60%)...........................................................
5,400,000
Liability for Uninsured Accident ................................... 5,400,000

Note to the Financial Statements

Due to an accident which occurred during 2018, the Company is a defendant
in personal injury suits totaling NT$9,000,000. The Company is charging the
year of the casualty with NT$5,400,000 in estimated losses, which represents the
amount that the company legal counsel estimates will finally be awarded.

(b) Wong Airlines need not establish a liability for risk of loss from lack of
insurance coverage itself. IFRS does not require or allow the establishment of a
liability for expected future injury to others or damage to the property of others
even if the amount of the losses is reasonably estimable. The cause for a loss
must occur on or before the reporting date for a contingent liability to be
recorded. However, the fact that Wong is self-insured should be disclosed in a
note.

LO: 2,3, Bloom: AP, Difficulty: Simple, Time: 25-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-52 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 13.11

(a) 1. Loss from Uninsured Accident .................................................

250,000
Liability for Uninsured Accident ................................... 250,000

2. Loss from Expropriation ..........................................................

1,925,000
Allowance for Expropriation
[€5,725,000 – (40% X €9,500,000)] ............................... 1,925,000

3. No entry required.

4. Loss on Lease Contract.............................................................

950,000
Lease Contract Liability ................................................. 950,000

5. No entry required.

(b) 1. A loss and a liability have been recorded in the first case because (i) the
company has a present obligation as of the date of the financial statements
as the result of a past event, (ii) it is probable that an outflow will be
required to settle the obligation, and (iii) a reliable estimate can be made.
That is, the occurrence of the uninsured accidents during the year plus
the outstanding injury suits and the attorney’s estimate of probable loss
required recognition of a contingent liability.

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-53
PROBLEM 13.11 (Continued)
2. An entry to record a loss and establish an allowance due to threat of
expropriation is necessary because the expropriation is imminent as
evidenced by the foreign government’s communicated intent to
expropriate and the virtual certainty of a settlement from the
government. That is, enough evidence exists to reasonably estimate the
amount of the probable loss resulting from impairment of assets at the
reporting date. The amount of the loss is measured by the amount that
the carrying value (book value) of the assets exceeds the expected
compensation. At the time the expropriation occurs, the related assets are
written off against the allowance account. In this problem, we established
a valuation account because certain specific assets were impaired. A
valuation account was established rather than a liability account because
the net realizability of the assets affected has decreased. A more appro-
priate presentation would, therefore, be provided for statement of
financial position purposes on the realizability of the assets. It does not
seem appropriate at this point to write off the assets involved because it
may be difficult to determine all the specific assets involved, and because
the assets still have not been expropriated.

13-54 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
PROBLEM 13.11 (Continued)
3. Even though Polska’s chemical product division is uninsurable due to
high risk and has sustained repeated losses in the past, as of the reporting
date no assets have been impaired or liabilities incurred nor is an amount
reasonably estimable. Therefore, this situation does not satisfy the
criteria for recognition of a contingent liability. Also, unless a casualty has
occurred or there is some other evidence to indicate impairment of an asset
prior to the issuance of the financial statements, there is no disclosure
required relative to a contingent liability. The absence of insurance does not
of itself result in the impairment of assets or the incurrence of liabilities.
Expected future injuries to others or damage to the property of others, even
if the amount is reasonably estimable, does not require recording a loss or a
liability. The cause for loss or litigation or claim must have occurred on or
prior to the reporting date and the amount of the loss must be reasonably
estimable in order for a contingent liability to be recorded. Disclosure is
required when one or both of the criteria for a contingent liability are not
satisfied and there is a reasonable possibility that a liability may have been
incurred or an asset impaired, or, it is probable that a claim will be
asserted and there is a reasonable possibility of an unfavorable outcome.

4. By moving to another factory, Polska has a lease contract with

unavoidable costs of meeting the obligations that exceed the economic
benefits expected to be received. This is considered an onerous contract
and the expected costs to satisfy the onerous contract should be accrued.

5. Possible favorable outcomes from pending court cases are considered

contingent assets. Contingent assets are not recognized unless the outcome
is virtually certain. The outcome in Polska’s situation is not virtually
certain. The evidence provided does not even support that the outcome is
probable (an attorney opinion should be provided). Without evidence
that the outcome is probable, the litigation should not be disclosed.

LO: 2,3, Bloom: AP, Difficulty: Moderate, Time: 35-45, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-55
 PROBLEM 13.12

(a) Actual costs incurred ....................................................................... $94,000

Estimated costs at 12/31/19 .............................................................. 20,000*
Total Expense ...................................................................................
*([$5,700,000 X 2%] – $94,000) $ 114,000

(b) Estimated liability for warranties—1/1/19 ..................................... $ 136,000

2019 warranty expense accrual (Requirement a) ........................... 20,000
Subtotal .................................................................................. 156,000
Actual warranty costs during 2019 ................................................. (94,000)
Estimated liability from warranties—12/31/19 .............................. $ 62,000

(c) Coupons issued (1 coupon/$1 sale) .................................................. 1,500,000

Estimated redemption rate .............................................................. .60
Estimated number of coupons to be redeemed .............................. 900,000
Exchange rate (200 coupons for a player) ...................................... ÷ 200
Estimated number of premium players
to be issued .................................................................................... 4,500
Net cost of players ($32 – $20) ......................................................... X 12
Premium expense for 2019 .................................................... $ 54,000

(d) Inventory of premium players—1/1/19 ........................................... $ 37,600

Premium players purchased during 2019
(6,500 X $32) .................................................................................. 208,000
Premium players available .............................................................. 245,600
Premium players exchanged for coupons
during 2019 (1,200,000/200 X $32) ............................................... 192,000
Inventory of premium players—12/31/19 ....................................... $ 53,600

(e) Estimated liability for premiums—1/1/19 ...................................... $ 44,800

2019 premium expense (Requirement c) ........................................ 54,000
Subtotal .................................................................................. 98,800
Actual redemptions during 2019
[1,200,000/200 X ($32 – $20)] ........................................................ 72,000
Estimated liability for premiums—12/31/19................................... $ 26,800
LO: 2, Bloom: AP, Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

13-56 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 13.13

1. Memo prepared by:

Date:

Millay LTD
December 31, 2019

Recognition of Warranty Expense

During June of this year, the client began the manufacture and sale of a
new line of dishwasher. Sales of 120,000 dishwashers during this period amounted
to £60,000,000. These dishwashers were sold under a one-year assurance warranty,
and the client estimates warranty costs to be £25 per appliance.

As of the balance sheet date, the client paid out £1,000,000 in warranty expenses
which was also the amount expensed in its income statement. No recognition of any
further liability associated with the warranty had been made.

Millay must recognize warranty expense for both actual and expected warranty costs
in the year of sale. The client should have made the following journal entries:

Cash ........................................................................... 60,000,000

Sales Revenue (120,000 X £500) ...................... 60,000,000
(To record sale of 120,000 dishwashers)

Warranty Expense ..................................................... 1,000,000

Inventory .......................................................... 1,000,000
(To record warranty costs incurred)

Warranty Expense ..................................................... 2,000,000

Warranty Liability ........................................... 2,000,000*
(To accrue for future warranty costs)
*£3,000,000 (120,000 X £25) – £1,000,000

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-57
PROBLEM 13.13 (Continued)

2. Memo prepared by:

Date:

Millay LTD
December 31, 2019

Contingent Liability from Violation

Of EPA Regulations

I contacted the client’s counsel via a routine attorney letter, asking for information
about possible litigation in which the company might be involved. Morgan Chye,
Millay’s attorney, informed me about court action taken against Millay for dumping
toxic waste in the Loden River.

Although the litigation is pending, Chye believes that the suit will probably be lost.
A reliable estimate of clean up costs and fines is £2,750,000. The client neither
disclosed nor accrued this loss in the financial statements.

Because this obligation existed as of the date of the statement of financial position, it
is probable that resources will be used to settle the obligation, and an amount can be
reliably estimated, it must be accrued as a provision. I advised the client to record
the following entry to accrue this liability.

Loss from Environmental Cleanup ............................. 2,750,000

Environmental Liability .................................... 2,750,000

13-58 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
PROBLEM 13.13 (Continued)

3. Memo prepared by:

Date:

Millay LTD
December 31, 2019

Contingent Liability on
Patent Infringement Litigation

In answer to my attorney letter requesting information about any possible litigation

associated with the client, Morgan Chye informed me that the client is in the middle
of a patent infringement suit with Megan Drabek over a hydraulic compressor used
in several of Millay’s appliances. The loss of this suit is possible. Millay did not in
any way disclose this information.

Because the loss is possible, but not probable, and can be estimated at £5,000,000, it
should be disclosed in the notes to the financial statements.
I advised the client to include as a footnote to the financial statements a discussion of
this pending litigation along with the attorney’s assessment that the loss is possible.
In addition, I advised the client to disclose the estimated amount of this contingent
liability.

LO: 2,3,4, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-59
 PROBLEM 13.14

1. Estimated warranty costs:

On 2018 sales $ 800,000 X .10 ......................................... $ 80,000
On 2019 sales $1,100,000 X .10 ......................................... 110,000
On 2020 sales $1,200,000 X .10 ......................................... 120,000
Total estimated costs ................................................. 310,000
Total warranty expenditures .................................... (85,700*)
Balance of liability, 12/31/20 ....................................................... $224,300

*2018—$6,500; 2019—$17,200, and 2020—$62,000.

The liability account has a balance of $224,300 at 12/31/20 based on the

difference between the estimated warranty costs (totaling $310,000) for the
three years’ sales and the actual warranty expenditures (totaling $85,700)
during that same period.

2. Computation of liability for premium claims outstanding:

Unredeemed coupons for 2019
($9,000 – $8,000) ............................................................. $ 1,000
2019 coupons estimated to be redeemed
($30,000 X .40) ................................................................ 12,000
Total ........................................................................... $13,000

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

13-60 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
 TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS

CA 13.1 (Time 20–25 minutes)

Purpose—to provide the student with the opportunity to define a liability, to distinguish between current and non-
current liabilities, and to explain accrued liabilities. The student must also describe how liabilities are valued,
explain why notes payable are usually reported first in the current liabilities section, and to indicate the items that
may comprise “compensation to employees.”

CA 13.2 (Time 15–20 minutes)

Purpose—to provide the student with three situations that require the application of judgment about the current or
non-current nature of the items. The student must think about when typical short-term items might not be
classified as current.

CA 13.3 (Time 30–40 minutes)

Purpose—to provide the student with a comprehensive case covering refinancing of short-term debt. Four
situations are presented in which the student must determine the proper classification and disclosure of the debt in
the financial statements. In order to thoroughly resolve the issues presented, the student is expected to research the
IFRS.

CA 13.4 (Time 15–20 minutes)

Purpose—to provide the student with an opportunity to comment on the proper treatment in the financial
statements of a contingent liability incurred after the reporting date but before issuance of the financial statements.
In order to thoroughly answer the case the student will need to understand IAS 1.

CA 13.5 (Time 15–20 minutes)

Purpose—to provide the student with an opportunity to specify the conditions by which a contingent liability can
be recorded in the accounts. The student is also required to indicate the proper disclosure in the financial
statements of the situations where the amount of loss cannot be reliabily estimated.

CA 13.6 (Time 15–20 minutes)

Purpose—to provide the student with an opportunity to discuss how product warranty costs and the fact that a
company is being sued should be reported.

CA 13.7 (Time 20–25 minutes)

Purpose—to provide the student with an opportunity to examine the ethical issues related to estimates for bad
debts and warranty obligations.

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-61
 SOLUTIONS TO CONCEPTS FOR ANALYSIS

CA 13.1

(a) A liability is defined as a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic benefits. In
other words, it is an obligation to transfer some type of resource in the future as a result of a past transaction.

(b) Current liabilities are obligations that are (1) expected to be settled within its normal operating cycle; or (2)
expected to be settled within twelve months after the reporting date.

(c) Accrued liabilities (sometimes called accrued expenses) arise through accounting recognition of unpaid
expenses that come into existence as a result of past contractual commitments or past services received.
Examples are salaries and wages payable, interest payable, property taxes payable, income taxes payable,
payroll taxes payable, bonus payable, postretirement benefits payable, and so on.

(d) Theoretically, liabilities should be measured by the present value of the future outlay of cash required to
liquidate them. But in practice, current liabilities are usually recorded in accounting records and reported in
financial statements at their maturity value. Because of the short time periods involved—frequently less than
one year—the difference between the present value of a current liability and the maturity value is not large.
The slight overstatement of liabilities that results from carrying current liabilities at maturity value is
accepted on the grounds it is immaterial.

(e) Notes payable are listed first in the statement of financial position because in liquidation they would
probably be paid first.

(f) The item compensation to employees might include:

1. Wages, salaries, or bonuses payable.

2. Compensated absences payable.
3. Postretirement benefits payable.
LO: 1, Bloom: K, Difficulty: Moderate, Time: 20-25, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

CA 13.2
1. Since the notes payable are due in less than one year from the reporting date, they would generally be
reported as a current liability. The only situation in which this short-term obligation could possibly be
excluded from current liabilities is if Rodriguez Corp. intends to refinance it. For those notes to qualify for
exclusion from current liabilities, the company must meet the following criteria:

(1) It must intend to refinance the obligation on a long-term basis, and

(2) It must have an unconditional right as of the reporting date to defer settlement of the liability for at least
12 months after the reporting date.

Entering into a financing arrangement that clearly permits the company to refinance the debt on a long-term
basis on terms that are readily determinable before the next reporting date is one way to satisfy the second
condition.

13-62 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
CA 13.2 (Continued)
2. Generally, deposits from customers would be classified as a current liability. However, the classification of
deposits as current or non-current depends on the time involved between the date of deposit and the
termination of the relationship that required the deposit. In this case, the $6,250,000 would be excluded from
current liabilities only if the equipment would not be delivered for more than one year (or one operating
cycle).

3. Salaries payable is an accrued liability which in almost all circumstances would be reported as a current
liability (could not be excluded).
LO: 1, Bloom: K, Difficulty: Moderate, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

CA 13.3
(a) No. IFRS indicate that refinancing a short-term obligation on a long-term basis also requires that a company have an
unconditional right as of the reporting date to defer settlement of the liability for at least 12 months after the
reporting date.

(b) No. The events described will not have an impact on the financial statements. Since Kobayashi Ltd’s
refinancing of the long-term debt maturing in March 2019 does not meet the conditions set forth in IFRS that
obligation should be included in current liabilities. The ¥10,000,000 should continue to be classified as
current at December 31, 2018.

A short-term obligation, other than one classified as a current liability, shall be excluded from current
liabilities if the entity’s intent to refinance the short-term obligation on a long-term basis is supported by an
unconditional right to defer the settlement of the liability for at least 12 months after the reporting date.

(c) Yes. The debt should be included in current liabilities. The issuance of ordinary shares in January does not
meet the criteria to have an unconditional right to defer the settlement of the liability for at least 12 months
after the reporting date.

(d) Yes. The ¥10,000,000 should be shown as a current liability on the December 31, 2018 statement of
financial position. While the terms of the agreement permit management to refinance on a long-term basis,
the agreement was not in force at December 31, 2018.
LO: 1, Bloom: K, Difficulty: Moderate, Time: 30-40, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

CA 13.4
Because the casualty occurred subsequent to the reporting date, it meets the criteria of a contingent liability; that
is, an asset had not been impaired or a liability incurred at the reporting date. Contingent liabilities are not be
accrued by a charge to expense due to the explosion. However, because it had become known before the financial
statements were issued that assets were impaired and liabilities were incurred after the reporting date, disclosure is
necessary to keep the financial statements from being misleading. The financial statements should indicate the
nature of and an estimate of the loss to the company’s assets as a result of the explosion and the nature of and an
estimate of the contingent liability anticipated from suits that will be filed and claims asserted for injuries and
damages.

If the loss to assets or the liability incurrence can be reasonably estimated, disclosure may best be made by
supplementing the historical financial statements with pro forma financial data giving effect
to the loss as if it had occurred at the date of the financial statements.
LO: 3, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

CA 13.5

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-63
(a) Three conditions must exist before a provision is recorded:

1. A company has present obligation (legal or constructive) as a result of a past event.

2. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation;
3. A reliable estimate can be made of the amount of the obligation.

(b) When some amount within the range appears at the time to be a better estimate than any other amount within
the range, that amount is accrued. When no amount within the range is a better estimate than any other
amount, the expected dollar amount (the midpoint) of the range is accrued.

(c) The following disclosure in the notes is required:

1. The nature of the contingent liability.

2. An estimate of the possible loss or range of loss or a statement that an estimate cannot be made.
3. An estimate of its financial effect.
4. An indication of uncertainties related to the amount or timing of payment; and
5. The possibility of any reimbursement.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

CA 13.6
Part 1. For Product Grey, the estimated product warranty costs should be accrued by a charge to expense and a
credit to a liability because the following conditions were met:

1. A company has a present obligation (legal or constructive) as a result of a past event;

2. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation;
3. A reliable estimate can be made of the amount of the obligation (1% of sales).

For Product Yellow, the estimated product warranty costs should not be accrued by a charge to income because
the amount of loss cannot be reliably estimated. Since only two of the conditions are satisfied, a disclosure by
means of a note should be made.

Part 2. The probable judgment (£1,000,000) should be accrued by a charge to expense and a credit to a liability
because the following conditions were met.

1. A company has a present obligation (legal or constructive) as a result of a past event.

2. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation because Constantine’s lawyer states that it is probable that Constantine will lose the suit.
3. A reliable estimate can be made of the amount of the obligation because Constantine’s lawyer states that
the most probable judgment is £1,000,000.

Constantine should disclose in its financial statements or notes the following:

The amount of the suit (£4,000,000).

The nature of the accrual.
The nature of the provision.
The range of possible loss (£400,000 to £2,000,000).
LO: 2, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

CA 13.7

13-64 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
(a) No, Hamilton should not follow his owner’s directive if his (Hamilton’s) original estimates are reasonable.

(b) Rich Clothing Store benefits in lower rental expense. The Dotson Company is harmed because the
misleading financial statement deprives it of its rightful rental fees. In addition, the current shareholders of
Rich Clothing Store are harmed because the lower net income reduces the current value of their holdings.

(c) Rich is acting unethically to avoid the terms of his rental agreement at the expense of his landlord and his
own shareholders.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, Professional Demeanor

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-65
 FINANCIAL REPORTING PROBLEM

(a) M&S’s short-term borrowings were £297.5 million at April 2, 2016.

2016
£m
Current
Bank loans and overdrafts1 297.1
Finance lease liabilities 0.4
297.5

(b) 1. Working capital = Current assets less current liabilities.

(£643,400,000) = (£1,461,400,000 – £2,104,800,000)

Current assets
2. Current ratio =
Current liabilities

£1,461,400,000
0.69 times =
£2,104,800,000

While M&S’s working capital and current ratios are low, this may not
indicate a weak liquidity position. Many large companies carry relatively high
levels of accounts payable, which charge no interest. For example, M&S has over
£1.5 billion of these short-term obligations, which can be viewed as very cheap
forms of financing. Nonetheless, the negative working capital and a current ratio
below 1 indicate that liquidity may be a problem. Comparisons to industry are
required to fully assess liquidity.

13-66 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
FINANCIAL REPORTING PROBLEM (Continued)

(c) 26 Contingencies and commitments

A. Capital commitments

2016
£m
Commitments in respect of properties in the course of
construction 129.2
Software capital commitments 17.1
146.3

B. Other material contracts

In the event of a material change in the trading arrangements with certain

warehouse operators, the Group has a commitment to purchase property, plant
and equipment which is currently owned and operated by the warehouse
operators on the Group’s behalf (at values ranging from historical net book value
to market value).

C. Commitments under operating leases

The Group leases various stores, offices, warehouses and equipment under non-
cancellable operating lease agreements. The leases have varying terms, escalation
clauses and renewal rights.

2016
£m
Total future minimum rentals payable under non-cancellable
operating leases are as follows:
Within one year 311.3
Later than one year and not later than five years 1,108.4
Later than five years and not later than ten years 1,099.4
Later than ten years and not later than 15 years 542.8
Later than 15 years and not later than 20 years 351.9
Later than 20 years and not later than 25 years 225.8
Later than 25 years 970.3
Total 4,609.9

The total future sublease payments to be received are £36.1m (last year £41.2m).

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-67
 COMPARATIVE ANALYSIS CASE

(a) The working capital position of the two companies is as follows:

adidas
Current assets ............................................. € 7,497
Current liabilities ....................................... (5,364)
Working capital .......................................... € 2,133

Puma
Current assets ............................................. €1,684.8
Current liabilities ....................................... (880.0)
Working capital .......................................... € 804.8

13-68 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
COMPARATIVE ANALYSIS CASE (Continued)

(b) The overall liquidity of both companies is good as indicated from the ratio
analysis provided below (all computations in millions). Note that Puma’s cash
coverage ratios are negative. This is due to a build up inventories in 2015,
which can be followed using the inventory turnover ratio.

adidas Puma
Current cash debt €1,090 €–37.1
= .22 = <0
coverage €5,364 + €4,378 €880.0 + €822.6
2 2

Cash debt €1,090 €–37.1

= .15 = <0
coverage €7,696 + €6,800 €1,001.0 + €931.6
2 2

€7,497 €1,684.8
Current ratio = 1.40 = 1.91
€5,364 €880.0

Acid-test €7,497 – €3,113 €1,684.8 – €657.0

= .82 = 1.17
ratio €5,364 €880.0

Accounts receivables €16,915 €3,387.4

= 8.47 = 7.27
turnover €2,049 + €1,946 €483.1 + €449.2
2 2

Inventory €8,748 €1,847.2

= 3.10 = 3.01
turnover €3,113 + €2,526 €657.0 + €571.5
2 2

Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 13-69
COMPARATIVE ANALYSIS CASE (Continued)

(c) adidas discusses its contingencies in the following notes:

38 Commitments and contingencies

Other financial commitments

The Group has other financial commitments (continuing operations) for

promotion and advertising contracts, which mature as follows:

Financial commitments for promotion and advertising

(€ in millions)

Dec. 31, 2015 Dec. 31, 2014

Within 1 year 982 836
Between 1 and 5 years 2,593 2,590
After 5 years 2,204 1,766
Total 5,779 5,192

Commitments with respect to promotion and advertising contracts maturing

after five years have remaining terms of up to 15 years from December 31, 2015.

Information regarding commitments under lease and service contracts is

also included in these Notes / SEE NOTE 28.

Litigation and other legal risks

The Group is currently engaged in various lawsuits resulting from the normal
course of business, mainly in connection with distribution agreements as well as
intellectual property rights. The risks regarding these lawsuits are covered by
provisions when a reliable estimate of the amount of the obligation can be made /
SEE NOTE 20. In the opinion of Management, the ultimate liabilities resulting
from such claims will not materially affect the assets, liabilities, financial position
and profit or loss of the Group.

In connection with the financial irregularities at Reebok India Company in

2012, various legal uncertainties were identified. The risks cannot be assessed
conclusively. However, based on legal opinions and internal assessments,
Management assumes that the effects will

COMPARATIVE ANALYSIS CASE (Continued)

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 not have any material influence on the assets, liabilities, financial position and
profit or loss of the Group.

28 Leasing and service arrangements

Operating leases

The Group leases primarily retail stores as well as offices, warehouses and
equipment. The contracts regarding these leases with expiration dates of
between 1 and 22 years partly include renewal options and escalation clauses.
Rent expenses (continuing operations), which partly depend on net sales,
amounted to €680 million and €643 million for the years ending December 31,
2015 and 2014, respectively.

Future minimum lease payments for minimum lease durations on a nominal

basis are as follows:

Minimum lease payments for operating leases (€ in millions)

Dec. 31, 2015 Dec. 31, 2014

Within 1 year 516 476
Between 1 and 5 years 1,143 959
After 5 years 540 277
Total 2,199 1,712

Finance leases

The Group also leases various premises for administration and warehousing
which are classified as finance leases.

The net carrying amount of these assets of €8 million and

€10 million was included in property, plant and equipment as of December 31,
2015 and 2014, respectively. For the year ending December 31, 2015, interest
expenses (continuing operations) were
€0 million (2014: €0 million) and depreciation expenses (continuing operations)
were €4 million (2014: €4 million).

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COMPARATIVE ANALYSIS CASE (Continued)

Minimum lease payments for finance leases in 2015 include land leases with
a remaining lease term of 97 years. The minimum lease payments under these
contracts amount to €12 million. The estimated amount representing interest is
€9 million and the present value amounts to €2 million.
The net present values and the minimum lease payments under these
contracts over their remaining terms up to 2018 and the land leases with a
remaining term of 97 years are as follows:

Minimum lease payments for finance leases (€ in millions)

Dec. 31, 2015 Dec. 31, 2014

Lease payments falling due:
Within 1 year 3 3
Between 1 and 5 years 3 5
After 5 years 12 11
Total minimum lease payments 18 19
Less: estimated amount representing
interest (9) (9)
Present value of minimum lease
payments 9 10
There of falling due:
Within 1 year 3 3
Between 1 and 5 years 3 4
After 5 years 3 3

Service arrangements

The Group has outsourced certain logistics and information technology

functions, for which it has entered into long-term contracts. Financial
commitments under these contracts mature as follows:

Financial commitments for service arrangements (€ in millions]

Dec. 31, 2015 Dec. 31, 2014

Within 1 year 97 75
Between 1 and 5 years 253 101
After 5 years — 18
Total 350 194
COMPARATIVE ANALYSIS CASE (Continued)
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 20 Other provisions
Other provisions consist of the following:
Other provisions (€ in millions)
Currency
Jan.1, translation Dec.31, There of
2015 differences Usage Reversals Additions Transfers 2015 non-current
Marketing 79 0 (77) (0) 20 — 21 —
Personnel 48 2 (31) (2) 44 (2) 59 5
Returns, allowances
and warranty 200 6 (145) (2) 141 (12) 189 —
Taxes, other than
income taxes 27 0 (7) (0) 9 — 29 0
Sundry 154 (1) (46) (22) 122 — 207 45
Other provisions 508 7 (306) (26) 336 (14) 505 50

Marketing provisions mainly consist of provisions for promotion contracts.

Provisions for personnel mainly consist of provisions for short-and long-
term variable compensation components as well as of provisions for social plans
relating to restructuring measures. With regard to provisions for early
retirement, claims for reimbursement in an amount of €0 million (2014: €0
million) are shown under other non-current assets.
Provisions for returns, allowances and warranty primarily arise due to
bonus agreements with customers and the obligation of fulfilling customer claims
with regard to the return of products sold by the Group. The amount of the
provision follows the historical development of returns, allowances and warranty
as well as current agreements.
Provisions for taxes other than income taxes mainly relate to value added tax,
real estate tax and motor vehicle tax.
Sundry provisions mainly include provisions for customs risks, earn-out
components for Runtastic as well as provisions for litigation and other legal
risks.

The reversal of sundry provisions in 2015 is mainly related to the completion

of customs audits and a risk reassessment.

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COMPARATIVE ANALYSIS CASE (Continued)
Management follows past experience from similar transactions when
assessing the recognition and measurement of other provisions; in particular
external legal opinions are considered for provisions for

customs risks and for litigation and other legal risks. All evidence from events
until the preparation of the consolidated financial statements is taken into
account.

Puma discusses its contingencies in the following notes:

27. Contingencies and Contingent Liabilities

Contingencies
As in the previous year, there were no reportable contingencies.

Contingent Liabilities
As in the previous year, there were no reportable contingent liabilities.

28. Other Financial Obligations

Obligations From Operating Lease

The Group rents and leases offices, warehouses, facilities and fleets of vehicles, as
well as selling space for the Company’s own retail stores. Rental agreements for
the retail business are concluded for terms of between five and fifteen years. The
remaining rental and lease agreements have residual terms of between one and
five years. Some agreements include options to renew and price adjustment
clauses.

Total expenses resulting from these agreements amounted in 2015 to €143.3

million (previous year: €123.5 million). Some of the expenses are dependent on
sales.

As of the balance sheet date, the obligations from future minimum rental
payments for operating lease agreements are as follows:

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 COMPARATIVE ANALYSIS CASE (Continued)

2015 2014
€ million € million
Under rental and lease agreements:
2016 (2015) 119.6 103.4
2017–2020 (2016–2019) 253.4 215.5
from 2021 (from 2020) 124.9 63.3
Further Other Financial Obligations
Furthermore, the Company has other financial obligations associated with
license, promotional and advertising agreements, which give rise to the following
financial obligations as of the balance sheet date:

2015 2014
€ million € million
Under license, promotional and advertising
agreements:
2016 (2015) 157.4 135.6
2017–2020 (2016–2019) 366.3 388.1
from 2021 (from 2020) 68.4 93.9

In addition, there are industry-standard obligations concerning the provision of

sports equipment under sponsoring agreements.

As customary in the industry, the promotional and advertising agreements

provide for additional payments upon the reaching of
pre-defined goals (e.g. medals, championships). Although these are contractually
agreed upon, they naturally cannot be exactly foreseen in terms of their timing
and amount.

In addition, there are other financial obligations totaling €6.7 million, of which
€1.3 million relate to the years from 2017. These include service agreements of
€5.7 million and obligations associated with the construction of a building costing
€1.0 million.

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 FINANCIAL STATEMENT ANALYSIS CASE 1

NORTHLAND CRANBERRIES

(a) Working capital is calculated as current assets—current liabilities, while the

current ratio is calculated as current assets/current liabilities. For Northland
Cranberries these ratios are calculated as follows:

Current year Prior year

Working capital $6,745,759 – $10,168,685 = $–3,422,926 $5,598,054 – $4,484,687 = $1,113,367
Current ratio ($6,745,759/$10,168,685) = .66 ($5,598,054/$4,484,687) = 1.25

Historically, it was generally believed that a company should maintain a

current ratio of at least 2.0. In recent years, because companies have been able
to better maintain their inventory, receivables and cash, many healthy
companies have ratios well below 2.0. However, Northland Cranberries has
negative working capital in the current year, and current ratios in both years
are extremely low. This would be cause for concern and additional
investigation. As you will see in the next discussion point, there may well be a
reasonable explanation.

(b) This illustrates a potential problem with ratios like the current ratio, that rely
on statement of financial condition numbers that present a company’s
financial position at a particular point in time. That point in time may not be
representative of the average position of the company during the course of the
year, and also, that point in time may not be the most relevant point for
evaluating the financial position of the company. If the company does not like the
representation that these commonly used measures give of the company’s
position, it could change its year-end or suggest other measures that it considers
to be more relevant for a company in this business. Also, it is possible that by
using averages calculated across quarterly data some of this problem might be
alleviated. As discussed in Chapter 5, there are measures that employ cash
flows, which addresses at least part of the point-in-time problem of statement
of financial position ratios.

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 FINANCIAL STATEMENT ANALYSIS CASE 2

SUZUKI GROUP

(a) It appears that the Suzuki warranty is an assurance-type. If it is probable that

customers will make claims under warranties relating to goods or services
that have been sold, and a reasonable estimate of the costs involved can be
made, the accrual method must be used. Under the accrual method, a
provision for warranty costs is made in the year of sale or in the year that the
productive activity takes place.

(b) When the warranty is sold separately from the product (a service-type
warranty), a deferred revenue approach is employed. Revenue on the sale of
the extended warranty is deferred and is generally recognized on a straight-line
basis over the life of the contract. Revenue is deferred because the seller of the
warranty has an obligation to perform services over the life of the contract.

(c) The general approach is to use the straight-line method to recognize deferred
revenue on warranty contracts. If historical evidence indicates that costs
incurred do not follow a straight-line approach, then revenue should be
recognized over the contract period in proportion to the costs expected to be
incurred in performing services under the contract. Only costs that vary with
and are directly related to the acquisition of the contracts (mainly commissions)
should be deferred and amortized. Costs such as employee’s salaries, advertising,
and general and administrative expenses that would have been incurred even if
no contract were acquired should be expensed as incurred.

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 FINANCIAL STATEMENT ANALYSIS CASE 3

(a) BOP’s working capital and current ratio have declined in 2019 compared to
2018. While this would appear to be bad news, the acid test ratio has
improved. This is due to BOP carrying relatively more liquid receivables in
2019 (receivable days has increased.) And while working capital has declined,
the amount of the operating cycle that must be financed with more costly
borrowing has declined. That is, BOP is using relatively inexpensive accounts
payable to finance its operating cycle. Note that the overall operating cycle has
declined because inventory is being managed at a lower level (inventory days
has declined by more than 60 days.)

(b) Answers will vary depending on the companies selected. This activity is a
great spreadsheet exercise.

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 ACCOUNTING, ANALYSIS, AND PRINCIPLES

ACCOUNTING

During 2019
1. Warranty Expense ...................................................... 6,000
Cash ........................................................................ 6,000

December 31, 2019

Warranty Expense ...................................................... 39,000

Warranty Liability ................................................. 39,000

February 28, 2019

2. Interest Expense .......................................................... 3,333
Interest Payable .......................................................... 1,667
Cash ........................................................................ 5,000

€1,667 = (€200,000 X .10) X 1/12

€3,333 = (€200,000 X .10) X 2/12

May 31, 2019

Interest Expense .......................................................... 5,000
Cash [(€200,000 X .10) X 3/12] .............................. 5,000

August 31, 2019

Interest Expense .......................................................... 5,000
Cash ........................................................................ 5,000

November 30, 2019

Interest Expense .......................................................... 5,000
Cash ........................................................................ 5,000

December 31, 2019

Interest Expense .......................................................... 1,667
Interest Payable [(€200,000 X .10) X 1/12]............ 1,667

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ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
01/01/19
Manufacturing Facility (PPE) .................................... 5,192,770
Cash ........................................................................ 5,000,000
Environmental Liability
(€500,000 X 0.38554) ........................................... 192,770
12/31/19
Depreciation Expense ................................................. 51,928
Accumulated Depreciation .................................... 51,928
Interest Expense .......................................................... 19,277
Environmental Liability......................................... 19,277
ANALYSIS
The warranty liability and the interest payable are current liabilities, so all
else being equal, these will decrease both the current and acid-test ratios.
Because of the commitment letter from UBS, the €200,000 loan can be
classified as a non-current liability. Without this letter, YellowCard would
likely not be able to demonstrate the ability to defer settlement of the liability
for at least 12 months. This would mean the €200,000 loan would have to be
classified as a current liability, further depressing YellowCard’s current and
acid-test ratios. The environmental liability can be classified as a non-current
liability, so it will not affect the current and acid-test ratios.
PRINCIPLES
According to the IASB Framework, liabilities are probable future sacrifices of
economic benefits arising from present obligations of a particular entity to
transfer assets or provide services to other entities in the future as a result of past
transactions or events. With respect to the new warranty plan, YellowCard
would be currently obligated to provide repair service to its customers, arising
from the prior sales of its products. So even though customers are making an
upfront payment, YellowCard still has an obligation to provide services in the
future. Thus the company should record the payments as unearned revenue until
it is no longer obligated to make repairs. The new plan would be accounted for
as an extended warranty, which defers a certain percentage of the original sales
price until some future time when the company incurs actual costs or the
warranty expires.

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 RESEARCH CASE

(a) IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

(b) Recognizing a liability from restructuring (IAS 37, 72 – 79)

A constructive obligation to restructure arises only when an entity:

(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned; (ii) the principal locations
affected; (iii) the location, function, and approximate number of employees
who will be compensated for terminating their services; (iv) the
expenditures that will be undertaken; and (v) when the plan will be
implemented; and

(b) has raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its main
features to those affected by it.

Evidence that an entity has started to implement a restructuring plan would be

provided, for example, by dismantling plant or selling assets or by the public
announcement of the main features of the plan.
A public announcement of a detailed plan to restructure constitutes a
constructive obligation to restructure only if it is made in such a way and in
sufficient detail (i.e. setting out the main features of the plan) that it gives rise to
valid expectations in other parties such as customers, suppliers and employees
(or their representatives) that the entity will carry out the restructuring.

For a plan to be sufficient to give rise to a constructive obligation when

communicated to those affected by it, its implementation needs to be planned to
begin as soon as possible and to be completed in a timeframe that makes
significant changes to the plan unlikely. If it is expected that there will be a long
delay before the restructuring begins or that the restructuring will take an
unreasonably long time, it is unlikely that the plan will raise a valid expectation
on the part of others that the entity is at present committed to restructuring,
because the timeframe allows opportunities for the entity to change its plans.

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RESEARCH CASE (Continued)
A management or board decision to restructure taken before the end of the
reporting period does not give rise to a constructive obligation
at the end of the reporting period unless the entity has, before the end of the
reporting period: (a) started to implement the restructuring plan; or (b)
announced the main features of the restructuring plan to those affected by it in a
sufficiently specific manner to raise a valid expectation in them that the entity will
carry out the restructuring. If an entity starts to implement a restructuring plan,
or announces its main features to those affected, only after the reporting period,
disclosure is required under IAS 10 Events after the Reporting Period, if the
restructuring is material and non-disclosure could influence the economic decisions
that users make on the basis of the financial statements.
Although a constructive obligation is not created solely by a management decision,
an obligation may result from other earlier events together with such a decision.
For example, negotiations with employee representatives for termination
payments, or with purchasers for the sale of an operation, may have been
concluded subject only to board approval. Once that approval has been obtained
and communicated to the other parties, the entity has a constructive obligation to
restructure, if the conditions of paragraph 72 are met.
In some countries, the ultimate authority is vested in a board whose membership
includes representatives of interest other than those of management (e.g.
employees) or notification to such representatives may be necessary before the
board decision is taken. Because a decision by such a board involves
communication to these representatives, it may result in a constructive obligation
to restructure.
No obligation arises for the sale of an operation until the entity is committed to the
sale, i.e., there is a binding sale agreement.
Even when an entity has taken a decision to sell an operation and announced
that decision publicly, it cannot be committed to the sale until a purchaser has
been identified and there is a binding sale agreement. Until there is a binding
sale agreement, the entity will be able to change its mind and indeed will have to
take another course of action if a purchaser cannot be found on acceptable
terms. When the sale of an operation is envisaged as part of a restructuring, the
assets of the operation are reviewed for impairment, under IAS 36. When a sale
is only part of a restructuring, a constructive obligation can arise for the other
parts of the restructuring before a binding sale agreement exists.

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RESEARCH CASE (Continued)

Costs to include (IAS 37, 80)

A restructuring provision shall include only the direct expenditures arising from
the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and (b) not associated with the
ongoing activities of the entity.

Costs to exclude (IAS 37, 81 – 82)

A restructuring provision does not include such costs as: (a) retraining or
relocating continuing staff; (b) marketing; or (c) investment in new systems and
distribution networks. These expenditures relate to the future conduct of the
business and are not liabilities for restructuring at the end of the reporting
period. Such expenditures are recognised on the same basis as if they arose
independently of a restructuring.

Identifiable future operating losses up to the date of a restructuring are not

included in a provision, unless they relate to an onerous contract as defined in
paragraph 10.

As required by paragraph 51, gains on the expected disposal of assets are not
taken into account in measuring a restructuring provision, even if the sale of
assets is envisaged as part of the restructuring.

(c) The current warranty contract is considered an onerous contract. The required
accounting related to an onerous contract is in IAS 37, 81 – 82.

If an entity has a contract that is onerous, the present obligation under the
contract shall be recognised and measured as a provision.

Many contracts (for example, some routine purchase orders) can be cancelled
without paying compensation to the other party, and therefore there is no
obligation. Other contracts establish both rights and obligations for each of the
contracting parties. Where events make such a contract onerous, the contract
falls within the scope of this Standard and a liability exists which is recognised.
Executory contracts that are not onerous fall outside the scope of this Standard.

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RESEARCH CASE (Continued)

This Standard defines an onerous contract as a contract in which the unavoidable

costs of meeting the obligations under the contract exceed the economic benefits
expected to be received under it. The unavoidable costs under a contract reflect the
least net cost of exiting from the contract, which is the lower of the cost of fulfilling
it and any compensation or penalties arising from failure to fulfil it.

Before a separate provision for an onerous contract is established, an entity

recognises any impairment loss that has occurred on assets dedicated to that
contract (see IAS 36).

Hincapie should therefore record a liability for the service contract at €75,000,
the amount of the termination fee.

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